As GCC economies recover, doubling down on transformational reforms is imperative

The pandemic has accelerated digital transformation and benefitted those who invested in technology; it opens the window for further economic transformation with the right efforts of reforms, the IMF's Jihad Azour writes

GCC economies were quick to act when the Covid-19 pandemic struck, but as the global health crisis eases, reform measures need to be accelerated, according to the IMF. AP

When Covid-19 first spread to the countries of the Gulf Co-operation Council in 2020, well-co-ordinated policy responses helped to contain the virus, delivered rapid and widespread access to vaccines, and provided a range of support to stricken businesses and sectors.

These bold moves paved the way for the region’s ongoing gradual economic recovery: non-oil gross domestic product in the GCC is expected to grow by 3.8 per cent in 2021 and inflation pressures are contained. But as the virus retreats and a rebound in oil prices eases pressure on external accounts and supports public balance sheets, policymakers need to show the same determination as they did in the early stages of the pandemic and move decisively enough to ensure a transformational recovery.

Last week GCC finance ministers sat down together in Manama for the first face-to-face meeting since the Covid-19 outbreak, at a pivotal moment when the region is weighing up post-crisis recovery priorities.

Well-calibrated policies are still needed to ensure the recovery is firmly established. Protecting public health and supporting the most vulnerable remain the top priorities. Near-term economic policies should remain accommodative until the recovery takes hold.

Policy support must be focused on upholding hard-hit sectors and vulnerable groups; its withdrawal should be carefully calibrated and communicated. Where policy space is more limited, fiscal savings should be identified. In addition, financial policies to ensure liquidity and spur credit growth should minimise the potential build-up of risks in the financial system.

The global health crisis has also brought forward the imperative of lifting potential growth, while securing fiscal sustainability and preserving financial stability. The resumption of economic activity and higher oil prices provide a golden opportunity to replenish policy buffers and further diversify economies.

As the pandemic recedes and economic recoveries become more established, policies must address medium-term challenges that the pandemic made more pressing: securing fiscal sustainability, ensuring sound yet dynamic financial sectors, and raising potential growth and competitiveness. These forward-looking policies would reinforce credibility and put economies in a position of strength should there be a rapid change in the global environment and risk sentiment.

Looking ahead, sustained and inclusive economic growth, competitiveness, and diversification will be central to support the region’s economy, overcome the risks of substantial lasting negative effects on productive capacity, and prepare for the global energy transition.

Reform priorities include further boosting labour force participation of citizens, particularly women; implementing more flexible policies for expatriates to enhance their contributions to GCC economies; improving the quality of education and training to transform the labour force for future needs; enhancing regulatory frameworks and governance to further mobilise private sector and foreign direct investment and raise productivity; and promoting digitalisation to prepare for the future of work and expand social services.

Recently, encouraging reforms have taken place in all these areas. For example, GCC countries acted swiftly to accelerate digitalisation during the pandemic, and reforms to the Kafala sponsorship system were introduced to enhance expatriate labour’s job mobility. Saudi Arabia also implemented reforms to raise female labour market participation, and the UAE is boosting private sector employment among citizens and attracting highly skilled expatriate professionals through a number of reforms.

The digital transformation accelerated by the pandemic will benefit countries, sectors, and companies that invested in technology. Developments in fintech, central bank digital currencies, and the sweeping shift of activities online create opportunities and foster competition. Efforts in these directions should continue to reap the benefits from digitalisation for productivity growth and broad economic and financial development while minimising any potential risks.

The transition toward environmentally sustainable growth – with mounting concerns about climate change – has become even more urgent. A range of actions are to be taken to address climate change and its impact and foster resilience. These include reforms of the energy sector to increase the share of cleaner energy sources, energy efficiency, water management actions to develop new sources of freshwater and optimise its use, policies to fight land degradation, coastal marine management, and investment in carbon capture, use, and storage. The recent green initiatives by several GCC countries are a very welcome first step. More efforts are needed to deliver the objectives.

Continued GCC integration will support economic and financial development, and better leverage global trends in digitalisation and climate actions. The Al-Ula Declaration from January of this year should boost intra-regional trade, tourism, and financial flows, with potentially substantial longer-term growth gains if integration progresses further. Paired with further improvements in the business environment, closer integration could also attract additional FDI inflows to the region. Regional co-operation in digitalisation and energy transition could generate positive spill-overs across countries and allow the GCC to fully reap the benefits of these global trends.

Even as the GCC region starts to look beyond the pandemic, the extent and pace of the recovery varies across countries, with some facing long-lasing scarring effects. New risks are also emerging alongside rising inflation globally and a potential tightening in financial conditions. Now is not the time to draw back from reform: it is time to double down on it.

Jihad Azour is the director of the IMF’s Middle East and Central Asia Department