Oil prices seem to be rebounding this year, up from the doom and gloom of 2016. They are expected to rally to the mid-$60s by the end of 2017. Until that happens, we will continue to see most, if not all, Gulf Cooperation Council (GCC) countries reporting a deficit in their annual budgets.
In the past two years, with oil prices much lower, GCC governments have dramatically cut back investments in projects, as well as all types of subsidies and other forms of government support, as part of sweeping “reforms.” They have also announced plans for direct and indirect taxes, including value-added tax (VAT) effective 2018, further reducing the purchasing power of individuals who are already stretched too thin.
This is dangerously short-sighted, and risks making a bad situation worse. We are already grappling with an outrageous distribution of wealth globally. An Oxfam report in January, entitled “An economy for the 99 percent,” said eight men own as much wealth as the 3.6 billion people who make up the poorest half of humanity.
The report, which presumably considered only publically disclosed wealth, shows that the gap between rich and poor is far greater than had been feared. It calls for a fundamental change in how we manage our economies so they work for all people, not just a fortunate few.
“Our broken economies are funnelling wealth to a rich elite at the expense of the poorest in society, the majority of whom are women. The richest are accumulating wealth at such an astonishing rate that the world could see its first trillionaire in just 25 years,” Oxfam said.
“Public anger with inequality is already creating political shockwaves across the globe,” and “seven out of 10 people live in a country that has seen a rise in inequality in the last 30 years. Between 1988 and 2011 the incomes of the poorest 10 percent increased by just $65 per person, while the incomes of the richest 1 percent grew by $11,800 per person — 182 times as much.”
It is a world problem, and we in the GCC are part of this world. We are part of the problem, and we need to work together to figure out how to be part of the solution. Our current thinking is not helping. For millions of people across the Middle East, it is only exasperating an extremely frustrating situation. Over the past 25 years, we have watched our middle class shrink year after year, almost to the point of extinction.
This is a serious problem because the middle class is the backbone of any economy, and the only real path to sustainable development and, consequently, stability. Eroding the middle class translates to eliminating sustainable development, which makes stability all but impossible. This is as true in the Middle East as it is anywhere else in the world.
Unfortunately, in the GCC our current approach further stresses the already-stressed middle class, reducing individual purchasing power in the immediate term by lifting subsidies as part of so-called reforms and introducing taxation, while hurting long-term prospects by reducing infrastructure investments. This could lead to social disenchantment, and in turn to unrest.
If everyone in the GCC with a net worth of more than $5 million paid a 1 percent tax, we would go a long way to balancing our budgets without further stressing the masses.
We should seriously consider introducing a wealth tax for all eligible individuals, whether citizens or residents. This is entirely different from Zakat; we must never confuse the two. Zakat, one of the five pillars of Islam, is a theological construct, a sacred and deeply religious duty that is by definition a private matter between an individual and God.
The wealth tax is a financial instrument designed to force better use of wealth. If everyone in the GCC with a net worth of more than $5 million paid a 1 percent tax, we would go a long way to balancing our budgets without further stressing the masses.
A lot of the wealth of the Gulf’s so-called new bourgeois was created two or three generations ago, almost exclusively due to a close association with the ruling regime at the time. In most cases, the first generation was granted exclusive privileges by the people in power, which was monopolized to generate tremendous wealth. This was passed down, sometimes creating a convincing illusion of entrepreneurial spirit and competitive markets.
But much of this was national wealth assigned for personal gain. It is time to bring some of it back by introducing a wealth tax. This is not popular thinking, but the fact is a lot of wealth has been created over the past few decades, and many in the GCC — citizens and residents — have grown immensely wealthy very quickly. Some countries in the region have seen an explosion in the number of billionaires from the subcontinent over the past three decades.
A wealth tax, if properly applied, could prove an ideal solution to our current challenges both regionally and internationally. We might not want to step on rich toes, but we cannot afford to further stress the masses by further reducing their purchasing power, and we cannot afford not to invest in quality education. Nor can we afford to wait, hoping things will go back to the way they were.
We have been here before, but those of us who witnessed the 1985 oil price crash recognize that this time things are fundamentally different, not least because of shale oil, fast-developing alternative energy sources and new global realities, including a rise in the GCC’s population from about 14.5 million in 1985 to about 51.5 million in 2016. This time, there is no going back.
• Khalid Abdulla-Janahi is the group chief executive of Dar Al-Mal Al-Islami Trust (DMI Trust), with over 30 years of experience in banking and financial services.