Gulf states exercise fiscal restraint despite oil windfall

Al-Monitor Pro Members

Dr. Robert Mogielnicki 

Senior Resident Scholar, Arab Gulf States Institute in Washington 

Sept. 6, 2022

Governments in Gulf Cooperation Council (GCC) member states are in strong fiscal positions owing to elevated energy prices. Most regional states are poised to enjoy their first annual budget surplus in several years. Having recently emerged from the coronavirus-induced economic downturn, all GCC states will be cautious in their spending, preferring to double down on existing initiatives, strategies and projects.

The utilization of newfound financial resources will range from boring and practical (Oman and Bahrain) to slightly more experimental and riskier (Saudi Arabia and the UAE). Spending increases will be targeted, such as policies to ease inflationary pressure. Much of the surplus revenue will flow to or through sovereign wealth funds, while the digital economy and technology-oriented initiatives are likely to serve as key destinations for newfound financial resources.

​​​​​​Scenario 1: Gulf governments stick closely to their conservative 2022 budgets and stash away surpluses in rainy day funds for future generations.

• GCC governments want to convey a sense of fiscal prudence, ensuring that hard-fought gains in fiscal consolidation and other economic reforms over the past couple of years do not dissipate amid this period of higher energy prices. The Saudi Minister of Finance indicated that an allocation of any surplus would not happen until the beginning of 2023. Several GCC governments plan to replenish wealth and development funds — presumably to reserve funds for the longer-term and future generations.
• Yet regional governments will face pressure to share the wealth. Countries like the UAE, Saudi Arabia and Bahrain have already expanded welfare benefits for low-income citizens and made it easier for families to find housing and purchase homes. Capital and overall spending in Saudi Arabia has been higher than the initial 2022 budget forecasted. Sovereign wealth funds receiving cash injections may need to spend it sooner rather than later to meet local investment commitments (the Saudi Public Investment Fund) or given a lack of readily available fiscal policy alternatives (Kuwait Investment Authority). Countries like Qatar face increased spending needs over the short term, owing to natural gas production expansion plans and to encourage post-FIFA World Cup development momentum.

​​​​​​Scenario 2: Gulf governments shower generous financial incentives upon their citizens and boost spending across many segments of their economy.

• GCC countries have a mixed historical track record of adhering to fiscal consolidation efforts and austerity programs. GCC regions have taken recent steps to insulate their citizens and residents from inflationary pressures, and other policy announcements seek to attract high-net-worth individuals and skilled professionals. All of these initiatives entail costs. After years of austerity measures following the 2014-15 oil price slide and urgent coronavirus-induced budget cuts in 2020, many citizens and expatriates now expect a fiscal boost, adding pressure on regional governments.
• Yet the overall trend in the region is toward less — not more — state support. Gulf citizens already enjoy relatively strong social safety nets. GCC governments also possess increasingly flexible economic policy tools, such as new taxes, to adjust according to changing economic environments. Allocating resources toward initiatives and segments of the population that help recycle investments domestically and over the long term is now a key policy objective. Rather than wide-ranging spending initiatives, governments are likely to prioritize state support for a narrower set of industries that can help future-proof their economies.

Dr. Robert Mogielnicki’s professional affiliations span top-tier research institutes, academic institutions, NGOs and consultancies. He is a Senior Resident Scholar at the Arab Gulf States Institute as well as an Adjunct Assistant Professor at Georgetown University and a Professorial Lecturer at George Washington University. He serves as an Adviser with Freedom House and an External Consultant with Eurasia Group. Dr. Mogielnicki is the author of "A Political Economy of Free Zones in Gulf Arab States" (Palgrave Macmillan 2021), and he is currently working on an edited volume about the political economy of sovereign wealth funds in the Middle East and Asia. He is a Term Member at the Council on Foreign Relations and a member of the Board of Advisers at Henley & Partners, an investment migration firm. The Middle East Policy Council listed Dr. Mogielnicki in their inaugural 40 Under 40 awards for influential Middle East experts. He holds a DPhil from Magdalen College, University of Oxford.