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GCC’s economic diversification is urgent considering their reliance on oil sales revenues and predictions of declining global oil demand.
This article was translated from Arabic to English
The comprehensive economic visions forged by Gulf nations to guide their development programs in the long-term include Qatar’s National Vision 2030, the “New Kuwait 2035″ plan, the “We The UAE 2031″ document, the “Bahrain Economic Vision 2030,” the “Oman Vision 2040″ project, and “Saudi Vision 2030.”
Each nation has included a specific year in the heading of its unique vision or plan in an effort to meet the target date for achieving its economic and developmental goals.
Economic diversification as a common goal
Examining these documents in greater detail reveals the goals and aims of the aforementioned countries and how they differ as a result of their distinct capacities, resources, varied ambitions, and the roles they hope to play at the regional and global levels.
Despite these differences, all of these countries share a strong commitment to achieving a single goal: diversifying their local economies so that they reduce reliance on oil and gas exports, and develop instead non-oil economic sectors.
To achieve this goal, the Gulf economic visions and plans outline concrete targets, such as reducing the share of oil activities in the GDP, increasing the proportion of employment in non-oil sectors and developing specific industrial, agricultural or tourism sectors, in addition to reducing the proportion of oil revenues in general budgets.
In essence, the imperative lies in preparing GCC nations for the post-oil era and mitigating the risks associated with their dependence on oil and gas export earnings.
The need for economic diversification
Gulf countries have compelling reasons to pursue alternative directions and express concern over their current reliance on oil-based economic activities.
The COVID-19 pandemic revealed how susceptible Gulf countries were to the swings in oil prices that were happening at the time. Due to the drop in oil prices, ratings agency S&P projected a staggering $180 billion deficit in the overall public budget of GCC countries in 2020. Additionally, the agency predicted a $490 billion budget deficit in the Gulf over the three years following the outbreak of the pandemic.
Fortunately, GCC nations managed to navigate the challenges, thanks to substantial reserves held in central banks, as well as sovereign funds. Nevertheless, this experience served as a warning, especially since the public budgets of the Gulf States remain susceptible to potential weaknesses triggered by fluctuations in global oil prices. Such uncertainties could restrict their capacity to finance public sector expenditures.
Apart from the risks posed to public budgets, Gulf countries are also aware of the dangers associated with relying heavily on oil for private sector activity and job creation. The oil sector still accounts for half of the GDP in GCC countries, thereby tying economic growth rates directly to the size of oil revenues.
Consequently, Gulf countries experienced a 4.8 per cent contraction in GDP in 2020, as per World Bank data, primarily due to the decline in oil prices that year.
Furthermore, Gulf countries are already anticipating a future decline in global oil demand, which will gradually diminish their oil export revenues. The International Energy Agency forecasts the peak year for fossil energy demand to be 2028, with demand growth ceasing entirely by 2030.
Subsequently, a gradual decline in oil and gas consumption is expected. These estimates were derived from an analysis of government initiatives and current investments in renewable energy markets, which are anticipated to gradually replace fossil energy sources over the long term.
Most importantly, Gulf countries are aware that their oil reserves will inevitably be depleted in the coming decades. It is imperative for the present generation to consider this fact if they wish to safeguard the prosperity of future generations and the future economic standing of their countries.
Determining the precise timeline for the depletion of Gulf oil reserves is challenging due to the uncertainties surrounding production rates and new discoveries, making accurate predictions difficult. However, existing studies suggest that Oman and Bahrain will be at the forefront of Gulf countries that will completely deplete their oil reserves within a period ranging from 10 to 25 years due to their limited reserves.
Current economic diversification plans
Each Gulf country is betting, within the framework of its economic vision, on specific policies to strengthen its productive sectors and promote economic diversification.
For instance, the Kingdom of Saudi Arabia envisions transforming itself into a prominent financial hub within the Gulf region with the goal of increasing the financial sector’s contribution to the country’s gross domestic product.
To achieve this goal, the Kingdom is dedicated to adopting an open and business-friendly market model, facilitated by substantial tax incentives and streamlined administrative processes. Saudi Arabia is also pinning its hopes on the capital, Riyadh, assuming the role of a regional financial center in the Middle East.
At the same time, Saudi Arabia is leveraging its current oil revenues to expand investments in industrial infrastructure, thereby augmenting the industrial sector’s contribution to the domestic economy.
To this end, Crown Prince Mohammed bin Salman has proposed establishing the world’s largest floating industrial city, alongside the ambitious “NEOM” project situated on the Red Sea coast. Furthermore, Saudi Arabia has initiated the implementation of an ambitious plan to build the world’s largest green hydrogen plant in the same region, with production slated to commence by 2026.
Qatar, meanwhile, aims to increase the tourism sector’s share of its GDP to 12 per cent by 2030. To achieve this objective, the country has been proactively investing in the hotel sector, resulting in a surge in the number of rooms to 45,000 by 2022.
In order to attract a greater number of tourists, Qatar is diversifying its tourism export markets by targeting Indian and Chinese visitors seeking destinations in close proximity to their home countries. Notably, hosting the 2022 World Cup is part of Qatar’s broader efforts to position itself as a premier tourist destination, aligning with the objectives of the “Qatar 2030” vision.
Kuwait’s economic diversification project, known as the “New Kuwait 2035” plan, aims to restructure government procedures to enhance their effectiveness and efficiency. The goal is to attract foreign investment in the knowledge, industry, and trade sectors while developing the available human capital to drive progress in these areas.
However, despite seven years having passed since the plan’s approval, Kuwait has yet to initiate the implementation of its key provisions due to the recurring political turmoil in the country which has led to frequent and rapid changes in government. Unfortunately, Kuwait’s heavy reliance on the oil sector persists, accounting for more than half of its GDP, and indicating a failure to achieve the objectives outlined in the diversification plan.
In Oman, the Ministry of Economy is actively pursuing the “Oman 2040” project, which focuses on advancing sectors such as mining, food industries, logistics and manufacturing. Leveraging existing production bases in these sectors, the ministry aims to foster integration through joint supply and production chains in a bid to reduce production costs and enhance the competitiveness of local industries.
Bahrain, given its limited ability to expand in other productive sectors due to its small size, seeks to facilitate government and tax procedures to bolster its commercial sector by taking advantage of its advantageous location.
Over the past two decades, Bahrain has made significant progress in diversifying its domestic economy by increasing the share of non-oil sectors in its GDP from 57.9 per cent in 2002 to 83.1 per cent in 2022.
Among Gulf countries, the United Arab Emirates stands out as having the most successful economic diversification model after it raised the contribution of non-oil sectors to its GDP to 73.5 per cent in 2022, a remarkable increase from the initial rate of less than 10 per cent when the UAE was established in 1971.
These advancemnets were fueld by the steady growth of the state’s non-oil foreign trade, which reached a remarkable milestone of $608.44 billion in 2022, a significant growth rate of almost 17 per cent when compared to the previous year.
The UAE has a rich history of fostering a conducive investment environment, implementing effective government regulations, and enacting local laws to support an open and organized economy. This approach has been instrumental in accommodating the rapid growth of the commercial sector, capitalizing on the strategic location of the country at the crossroads of East Asia, Europe and the Middle East.
Moreover, this remarkable success has further bolstered the development of the struggling financial sector, enabling it to facilitate the necessary financing for the revitalization of non-oil industries.
More economic diversification is needed
A review of economic diversification in the Gulf countries reveals varying degrees of progress achieved by each state. However, it is evident that there is an urgent need for further advancements in this area across all Gulf countries.
Currently, the main determinant of the annual budget deficit in the Gulf states remains the revenues from oil and gas which are heavily influenced by energy market prices.
Based on current projections, the collective deficit of the Gulf public budgets in 2023 is estimated to reach $13.5 billion, reflecting a decline in the price of oil compared to the previous year, which saw a total surplus of nearly $27.9 billion.
These figures indicate that oil and gas sales still account for a significant portion of treasury revenues, with Kuwait relying on them for 88.3 per cent of revenues and Qatar for 81.6 per cent. In Saudi Arabia, although non-oil economic activities experienced a 36 per cent growth in the first quarter of 2023, oil export revenues alone still contribute 64 per cent to the general budget.
Even for Oman, a country with limited oil reserves compared to its Gulf counterparts, oil exports are responsible for 53 per cent of treasury revenues. In the United Arab Emirates, despite remarkable expansion in non-oil sectors, oil revenues alone represent approximately 45 per cent of public treasury revenues.
Clearly, not all Gulf countries, even those that have made progress in economic diversification, have achieved the goals outlined in their development plans. This situation underscores the need to accelerate efforts to reduce the heavy reliance on oil sales revenues in Gulf countries, especially considering predictions of declining global oil demand in the coming years.
Therefore, it would be advantageous for Gulf countries to prioritize diversification policies now, rather than face an unpredictable storm that’ll come with the drop in demand for oil and gas.