Thursday 16, March 2017 by Nabilah Annuar

The role of fiscal policies on growth in the GCC

The challenges facing GCC oil exporters are high in light of their drive to deliver on key economic diversification and social development targets, conveyed Emirates NBD Research in a recent research note.

A prolonged stretch of low oil prices, follows years of high ones that saw budget spending levels reach record highs. Throughout, fiscal policy has been largely pro-cyclical amplifying growth during high oil price years and detracting from growth dynamics during weak oil price years. Underlying that cycle, especially during upturns, is a need to invest and change the structure of the region’s economies to ones less dependent on oil. So far the region has gone a long way with polices are geared to delivering substantial social and economic development goals.

While resultant growth levels have been volatile, these need to be placed in context of achieving long run development goals. This means growth levels in the short run are likely to be volatile, as good times allow for the easy financing to fast track those goals. However in the medium run, as the economies mature, engaging fiscal stabilisation policies that smooth out growth levels through the years becomes increasingly important. Those need to be applied with equal determination during both upturns and downturns. That will allow economies to build buffers and keep public debt in check while reducing the risks of overheating.

So far this transition is gradually taking place with infrastructure and economic diversification moving in lockstep with key reforms to fiscal policy on areas ranging from revenues to public debt management. This is allowing for the required maturity needed of these economies to be able to apply fiscal stabilisation with a high degree of effectiveness. That stabilisation will reduce uncertainty thus having positive long term growth repercussions for the region.

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