GCC States: Reforms and Stability

17.10.2016 Author: Pogos Anastasov

2341232131231The last 10-15 years have been characterized by a successful development of the economies of the Gulf States, which have consistently been included in the Top-35 wealthiest nations in terms of the standard of living of their citizens. The income per capita in Qatar (the richest country in the world) has reached 105 thousand US dollars, while in Oman (the poorest state) it has amounted to about 30 thousand dollars. Despite a more than threefold gap in wealth between Qatar and Oman, most states in the world, even those considered to be among the wealthiest, can only dream about it. Many Arab states in the Persian Gulf are enjoying a standard of living higher than in Switzerland, Australia and Canada! Over the past 15 years, the citizens’ welfare of these Arab states has increased more than 1.5 times, while the total GDP amounted to 1.6 trillion dollars in 2014.

The welfare growth in these countries directly correlated with the economic growth, which ranged from 4.2% in the UAE to 14% in Qatar for the last fifteen years. Even in 2014, when the prices of oil, which is the main source of wealth, dropped, the region demonstrated a 4.2% growth while the global economy slowed down to about 2.5%.

Before the sharp reduction of oil prices, all other indicators had demonstrated the financial and economic soundness of the Cooperation Council for the Arab States of the Gulf (GCC) countries. These indicators include high surplus on balance of payments, with the volume of gold and currency reserves for Saudi Arabia only at the beginning of the oil price reduction amounting to more than USD756 billion while the total gold and currency reserves of the six countries exceeded USD940 billion in late 2014. This was 20% higher than in 2012. At the same time, these countries formed the world’s largest share of the gross national income (out of consumption), which exceed 50% of GDP in Kuwait and Qatar, for example. This fact has allowed and continues to allow these countries to spend a great deal of money on both economic development and the expansion of their investment portfolio abroad.

The six-nation group has managed to make progress in diversifying their economies, even though there are significant gaps among the nations themselves. Thus, according to IMF, 70% of the UAE GDP is unrelated to oil extraction and refining, while oil and gas production is ranked the first in Saudi Arabia’ GDP (45% of GDP).

However, the 2014-2016 almost threefold drop in oil prices revealed some old and still unsolved problems the Gulf States are facing, which are exacerbated by an increasing pressure being imposed by means of a series of externally stimulated (not without their participation) “color-coded” revolutions in the Arab states, as well as the wars in Yemen and Syria, which have become a serious burden for the budgets of these countries. According to some unconfirmed sources, the war in Yemen, launched in March 2015 by a coalition that primarily consisted of Gulf State monarchies, cost Saudi Arabia 230 billion dollars. All for just one and a half years of fighting! In addition, these states, especially the Kingdom of Saudi Arabia and Qatar, are spending a lot of money in financing the Syrian opposition; supporting the A. el-Sisi regime in Egypt is costing Riyadh and Abu Dhabi tens of billions a year.

These facts are fast cutting on the opportunities for the GCC states to make a financial manoeuvre in order to promote their economic growth and allocate investment for structural reforms, which are becoming increasingly urgent. All the economic indicators are switching from the green light to red. For example, Saudi Arabia is the largest economy amongst the Gulf and Arab states (it accounts for 25% of GDP of all the Arab states). In 2016, its gold and currency reserves shrunk to 523 billion dollars (having dropped by 233 billion dollars over two years–the same amount of expenses on the war in Yemen), to 21,390 dollars per capita GDP. According to various estimates, the budget deficit will amount to 12-14% GDP by the end of the year.

UAE’s indicators are better due to a higher diversification of its economy. However, it also has a budget deficit. According to the Middle East Monitor, this deficit will amount to 7.6% of GDP in autumn 2016, while per capita GDP will shrink from 40,560 dollars to 39,995 dollars.

However, the decline of economic indicators is not the major problem, though this is important. The most important thing is that, for various reasons (from the reduction of oil and gas revenues to the population boom and entering of a large number of young people onto the labour market) the “life cycle” of the economic model of development of the GCC countries is coming to an end. Until recently, this model has included extremely low taxes, free education and free medical service for all citizens, generous subsidies on water, electricity, and fuel, all made possible due to the high oil revenues. Up to two thirds of the native population have been working in the public sector, which is characterized by low efficiency, a high level of bureaucratization and corruption. A huge army of foreign workers who solve all the pressing problems and are engaged in the construction, industrial and service sectors have supported carefree and even idle living standards.

Today, most of the monarchical families in the Gulf States (perhaps except for Qatar) understand that this situation cannot last any more.

In addition, young people completely immersed in the Internet are much better-informed than ever before on important issues like how the rest of the world lives, and thus are pushing for reforms not only on economic issues, but also on the equally important social, cultural and political spheres. As they account for 69% of the population of the region’s countries, these requests cannot be ignored. Moreover, the novelty of the situation is that even if the oil price returns to high levels in the coming years, it will not eliminate the requirements of a large part of the population, including women, for the societal transformation.

Indeed, the GCC countries are trying to adapt to the prevailing circumstances. Almost everywhere, quotas on various positions in the private sector have been introduced for the native people. The more prestigious the sector, the larger the number of nationals to be employed by the authorities. For example, Bahrain’s banking sector is ready to hire up to 50% of “insiders”, while the construction industry chooses not to impose requirements as they know that the natives will not be willing to work in this sector. Actually, these economies are pushing young people into the private sector, as these states no longer have the capital to expand the public sector. However, the heads of the private sector will require high labour efficiency, expertise, and commitment. Will the local youth always comply with these requirements?

Experience has shown that this has not always been the case; it actually causes unemployment, which is at 11.5% in the Kingdom of Saudi Arabia, for example. This indicator is not critical. However, it raises concerns in respect of the maintenance of social stability. The situation with women unemployment is even grimmer. Women are actively pushing to enter the labour market. However, religious and traditional taboos make the search for their places under the sun very difficult. The authorities have to introduce severe penalties against companies that refuse to hire women. Saudi Arabia, which practices this, recently introduced very high tariffs on entrance visas, including visas for foreign workers, which should open the labour market for the local young people. Will they work at positions where only expatriates have been working, and at places where manual labour is required?

In other words, the reforms are facing a strong resistance from both religious communities, a traditional society arranged according to tribal principles, and a bureaucracy that does not want to change. However, certain reforms are already indispensable. Eventually, societies that have remained stable for decades under pressure from various problems, on the one hand, and pressure from the authorities that promote reforms, on the other hand, will enter a stage of turbulence. States like Qatar and Kuwait have a sufficient financial cushion in order to overcome a difficult period and allow time for reforms.

It will be more difficult for such countries as Bahrain, where the society is divided along confessional lines, and Oman, where the standard of living is the lowest of all the GCC states. However, the fate of reforms on the Arab Peninsula does not ultimately depend on them. Whether these reforms will be successful or not greatly depends on their efficiency in Saudi Arabia–the largest country of the region.

However, the problems may appear here, if the Western countries, primarily the USA, decide to interfere in the process of reforms and try to “accelerate” it under the slogans of democracy and liberalism or “the lack of will” to combat terrorism, as they have already done several times in other Arab states. As the adoption of the Justice Against Sponsors of Terrorism Act (JASTA) by the US Congress in September 2016 has shown, such a situation is currently quite risky. Repeated statements (behind the closed doors) have also confirmed that the main contender for the post of the US President, Hillary Clinton, is discontent with the KSA role in the spread of extremist ideology.

The adoption of this Act may trigger destabilization in Saudi Arabia, which has already caused discontent in Washington due to its intensifying efforts to behave more independent in regional and international affairs. Just one lawsuit on the part of the victims of the terrorist attack on September 11, 2001 is enough to freeze the Saudi Arabian assets in American banks without mentioning the other sanction measures such as disconnection from the SWIFT system or GPS. According to some estimates, the total amount of lawsuits against the Kingdom of Saudi Arabia may reach up to 1.5 trillion dollars, which will shatter the Saudi economy, as well as drown its image down the drain.

This fact will put an end to any of Saudi Arabia’s reforms, which are being carried out with great difficulty and with the signs of public discontent with the recent reduction of public sector wages by 20%. The entire country’s survival will be at threat.

In fact, using JASTA, Washington has made a stranglehold over the Saudi authorities, which it may tighten at any moment when it decides that Riyadh has acted too independently. Thus, the Saudi authorities should determine immediately with whom they must work together to avoid the American roller. Are they brave enough to make the right conclusions?

Pogos Anastasov, Political Scientist and Orientalist, exclusively for the online magazine “New Eastern Outlook.