Gulf economic outlook positive despite Middle East conflicts, IMF staff report says

Economists lay out policy priorities for region within context of geoeconomic fragmentation

A robot at Expo 2020 Dubai. Digitalisation and AI are to play an increasingly pivotal role in the region's economic diversification, an IMF report says. Photo: Expo 2020 Dubai

Strong non-oil activity and continued reforms have helped to bolster economic activity across the Gulf Co-operation Council, despite conflicts in the wider Middle East, a report by International Monetary Fund staff has shown.

The region has "successfully weathered recent turbulence" and its economic prospects remain favourable, although medium-term risks remain within the context of fragmentation, the paper's co-author Ken Miyajima said during a round-table at the Arab Gulf States Institute in Washington.

The region's non-hydrocarbon economy has been supported by strong project and reform implementation as well as broader diversification efforts, they added. Meanwhile, it is expected that the easing of oil production cuts and expansion of natural gas will strengthen the hydrocarbon sector.

Projections released by the IMF in October showed the Gulf region's economies were expected to grow by an average of 1.8 per cent this year before accelerating to 4.2 per cent in 2025. In its Regional Economic Outlook, the IMF had forecast the UAE's economy to grow by 5.1 per cent next year, with Saudi Arabia and Qatar's economies expected to expand by 4.6 per cent and 1.9 per cent in 2025, respectively. Bahrain, Kuwait and Oman are expected to boost their gross domestic product growth by 3.2 per cent, 3.3 per cent and 3.1 per cent, respectively.

In the latest report, IMF staff reduced their estimates for real GDP growth in the GCC to about 1.4 per cent this year and 3.5 per cent in 2025.

The continuing Gaza war has had little impact on the Gulf's economic outlook due to the region's limited trade and financial links with the Palestinian territory and Israel, the IMF staff said. Trade, investment and tourism flows thus far have been unaffected by tensions in the Red Sea as well.

"Spillovers from regional conflicts on the GCC countries have been limited with trades, tourism and the investment flows remaining largely unaffected," Mr Miyajima said.

In the short term, fiscal policy should remain prudent, monetary policy should be consistent with the currency pegs and financial sector policies should monitor and respond to emerging risks, the authors said.

"In the medium term, fiscal consolidation, with a focus on non-hydrocarbon revenue mobilisation (especially in the context of global corporate taxation initiatives), is needed to ensure stability and sustainability and to boost space for growth-enhancing investments," the report said.

Digitalisation and artificial intelligence could also play an increasingly pivotal role in the region's economic diversification efforts. With regard to AI in particular, the study said the burgeoning sector could help to boost GDP by as much as 35 per cent in the UAE by 2030, and that AI could make up at least 12 per cent of Saudi Arabia's GDP as well.

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Yet AI could also be a knife that cuts both ways, the report's authors say.

“There are also potential major challenges, especially the exposure of almost 40 per cent of global employment to AI,” the report said. "As such, it remains crucial to upgrade skills in the labour market, as well as to conduct careful risk assessment to ensure ethical and responsible AI practices and to regularly evaluate the effectiveness of implementation strategies."

Yet the upside of AI overshadowed the potential negatives, the report added, with the UAE poised to lead efforts in making the most of AI research and development.

“It's well-positioned to become a hub for AI and digital innovation supported by the AI and digital economy strategies, the national programme for AI, and the establishment of both the Ministry of AI, the first in the GCC and the UAE AI Council,” the report said.

Microsoft's recent investment in the UAE's G42 was cited as just one example of how AI could continue to help the region to make the most of its post-industrial and post-oil aspirations.

Despite the favourable outlook, the report's authors noted medium-term risks remain a challenge within the context of fragmentation.

They said fiscal, monetary, financial sector and structural policies should all remain priorities for the region.

The report added fiscal consolidation should be supported by appropriate fiscal rules to help ensure stability and sustainability, and to increase growth-enhancing investments.

The authors also said the region's “ambitious reform agendas” should be fully implemented, while trade and financial integration should remain a priority.