Inflation remains a major challenge for many countries in the world. As for the Gulf region, although it recorded last July its highest level in 11 years at 4.8%, the inflation rate fell to 4% in November, and is expected to continue its decline to 2.7% in 2023.
PwC says that there are many reasons behind this decline, the most important of which are:The suffering and control of fuel, electricity and foodstuff prices, as well as the strength of the US dollar, to which most of the currencies of the Gulf countries are pegged, have curbed import price inflation in a region that is largely dependent on imported goods.
Modest inflation rates in the Gulf region indicate that there is no urgent need to mitigate this inflation through monetary policy interventions. Nevertheless, pegging currencies to the dollar means that the Gulf countries must keep pace with raising US interest rates, so as not to face the risk of capital inflows. money abroad.
The growth of the non-oil sectors
With regard to growth trends during 2023, the “PwC” report stated that the recent data available for the third quarter of 2022 show solid growth for the non-oil sectors in Saudi Arabia, Dubai and Bahrain, while Oman witnessed a contraction of -1% on an annual basis. , as a result of the weakness in the construction sector (which fell by -22% y/y) since the beginning of the year. Excluding this sector, the other non-oil sectors grew by 4.2%.
The report pointed out that Saudi Arabia, in particular, has a strong momentum reinforced by government expenditures and economic reforms, as each of the sectors returned in the third quarter to the levels that prevailed before the Corona pandemic, while the non-oil sectors as a whole achieved a growth of 8.4%. Although some sectors, particularly transportation and hospitality, have not yet fully recovered in other Gulf countries, these sectors are making significant progress.
After the Gulf states recorded a deficit of 10% of GDP in 2022, which was considered their worst year since the oil price slump in the early 1990s – and it was the seventh consecutive annual regional deficit – the pace of recovery was very fast, as the deficit decreased significantly to reach 1% of GDP in 2021, before the deficit turns into a surplus of about 3% in 2022.
Saudi Arabia, within the framework of the fiscal balance program, managed to achieve its first budget surplus in 9 years, amounting to 102 billion riyals ($27.1 billion), equivalent to 2.6% of GDP in 2022.
As for this shift, according to the “PwC” report, it is largely due to the continuous control of expenditures. The report indicated that One of the reasons for optimism is that Gulf governments adhere to constraints at the level of basic areas of inflexible spending, and that it is difficult to undo them. For example, salaries in Saudi Arabia increased by only 2% over the past year, returning to 2019 levels, while in Oman current basic expenditures (excluding subsidies and gas purchases) increased by only 2%.
Stable tax policies
like that, The budgets published so far have shown another positive side on the fiscal level, which is the absence of fluctuations in tax policy or even some significant new measures, which is unprecedented during the oil boom. Saudi Arabia has maintained a value-added tax rate of 15 percent, although Crown Prince Mohammed bin Salman indicated in 2021 that this rate will be reduced at some point. For its part, Bahrain doubled the value-added tax rate to 10%, while the UAE issued a law last December stipulating the application of a 9% tax on companies, which will enter into force in June 2023. As for Oman, parliament has begun discussing a draft income tax law. personal, which is the first of its kind in the region.