A much bigger challenge is to ensure that the middle class is not entirely destroyed in an attempt to cushion the landing. Unfortunately, current indicators point to just that, with direct and indirect taxation, coupled with subsidy reductions, promising to hit the middle class and further reduce its already eroded spending power. This is a sure-fire recipe for disaster.
To address the immediate challenge, the region needs to first come to terms with some harsh realities, including the threat of a full-on crash.
These are spelt out in a succession of damning reports by international bankers, analysts, economists and even the financial media. The region’s elite ignore these at their peril, even if some make for painful, awkward, and even embarrassing, reading.
In a paper published late last year, the International Monetary Fund (IMF), said the “large and rapid decline in oil prices has led to sharp cuts in GCC government spending and a slowdown in economic activity since 2015.”
The uncertainty about oil prices cannot be overstated, but one thing already seems certain: the GCC can no longer afford on rely exclusively on oil revenues.
Shale oil alone, coupled with lowered costs and improved technology, as well as shifting supply-and-demand curves, has irreversibly changed the global oil market.
So even if oil prices begin to recover, the region is never going back to its previous wealth.
Collectively, and individually, economies must be prepared to make difficult, unpopular decisions.
I am not being dramatic or alarmist – current realities have spurred Saudi Arabia, the largest economy in the region, to unveil previously unthinkable economic reform plans.
Their implementation is already underway, catching many off-guard by the speed and size of the transformation. This is powerful testimony both to how serious the economic challenges are and, reassuringly, to how serious the decision makers are about addressing them. This, in turn, could bode extremely well for the region’s future, promising great things after the next 13 years.
In the meantime, the foreign investment bankers, corporate lawyers, accountants, consultants and public relations advisers traipsing in and out of Riyadh every week are profiting, not the region’s middle class.
The money that is being spent on international advisers is, possibly, a great investment – but none of it will trickle down to them.
Instead, they face increasingly challenging economic conditions in the immediate future with the introduction of direct taxes including Value Added Tax (VAT), increased indirect taxation and reduced subsidies.
This is making a difficult situation significantly worse.
Only time will tell if Saudi Arabia, like many others in the region, will be able to translate its ambitious Vision 2030 into reality – but, in the meanwhile, it is important that challenges are confronted head on.
Chief among these is the region’s ability to develop the private sector into playing a bigger, more prominent role. This is Economics 101, and an almost standard fixture in most of the region’s various strategic plans.
Bahrain’s Vision 2030, for example, has long called for the private sector to be the key driver for economic growth. This has been a recurring theme in Bahrain’s economic narrative since at least 2008 — yet, almost ten years later, the IMF points to public sector wages as a key component of the major fiscal adjustment that is urgently needed.
The Middle East’s youth represent a massive opportunity of historic proportions but, if that opportunity is not realized today, it risks turning into an equally significant threat tomorrow. Crashing the economy would be painful for the Middle East, but crashing the middle class would be absolute devastation.
Similarly, the current focus on lifting subsidies is remarkably short sighted, even by Middle East standards — yet it seems to be the only solution currently being considered.
It is, of course, a necessary evil — but the emphasis should always be on subsidy reform, not on trying to generate funds to bridge a gap in the budget.
The current approach of trying to balance budgets by lifting subsidies and introducing taxes is not only ineffective, but dangerous.
Increasing spend on some big-ticket items, negates reductions in others, including subsidies. Necessity, real or perceived, ultimately dictates how money is spent, and decreasing some components while increasing others will have a negligible overall effect on any budget.
The current approach is also dangerous because it risks reducing the region’s competitive advantage while also further alienating the working middle class. This is a recipe for disaster, as history keeps reminding us.
Instead, perhaps it is now time for the region’s wealthy to begin paying back some of their debt to society. The wealth created by both citizens and residents of the region is, in many cases, largely a result of close alliances, sometimes dating back two or three generations, with the ruling regimes. Much of what is considered today to be private wealth is, in fact, national wealth that was assigned for personal gain. It is now time to bring some of it back into the national economy.
One way to do so is with the introduction of a wealth tax. This is, of course, extremely unpopular thinking but it does eliminate the risks of further stressing the region’s poor and middle classes.
Perhaps some of the countries can even use some of the surplus to invest in their youth, who represent our greatest opportunity.
The youth have always been the biggest, most powerful drivers of any economy, and while Europe struggles with an aging population that might soon be unable to sustain economic growth, the Middle East is blessed with a young, growing population.
People aged between 15 and 29 make up nearly a third of the region’s population, and another third are below the age of 15, according to UN statistics.
But unemployment among Arab youth is the highest in the world – in 2014, it exceeded twice the global average, and by 2020 the region will need to create more than 60 million new jobs to absorb the number of workforce entrants and stabilize youth employment.
The Middle East’s youth represent a massive opportunity of historic proportions but, if that opportunity is not realized today, it risks turning into an equally significant threat tomorrow.
Crashing the economy would be painful for the Middle East, but crashing the middle class would be absolute devastation. The middle class is the backbone of any economy and the very fabric of any community – sacrificing, or even risking, the working middle class in an attempt to cushion an economic crash simply defeats the purpose.
• Khalid Abdulla-Janahi is the chairman of Vision3, and has over 30 years of experience in banking and financial services.