Diversification is key to springtime being less taxing

Spring in the Arab World will be forever associated with revolution and civil unrest after the events of last year but in the west it means only one thing: Tax season.

Projects such as Kizad are key to the well-being of regional economies. Courtesy: ADPC
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Springtime in the Arab world will be forever associated with revolution and civil unrest after the events of last year but in the West it means only one thing: tax season.

The rest of the world barely notices the marvels of nature reawakened for piles of receipts overflowing from shoeboxes and old plastic bags. Choruses of newly hatched chicks are drowned out by the thumping of calculator keys and anguished groans accompanying yet another spreadsheet that refuses to add up.

But even though most are hardly burdened with such trials in the UAE, reviewing the past year's finances when the days start to lengthen is a hard habit to break - for me at least.

Last year should have been a great one for Middle East and North African economies. And it was for some of those that depend on oil and gas.

The average price of Brent crude hit a 150-year high last year of US$111.26, up about 30 per cent on 2010.

Never before in a century and a half of oil production has the annual average price ended above $100, according to records kept by the US Energy Information Administration.

But, as is always the case with finances, the huge boost to revenues and the value of energy assets across the Middle East and North Africa is only half the picture.

Liabilities also hit new highs.

The world's thirst for oil might have grown at an average 1.2 per cent, with demand rising by about 4 per cent in China alone, but it was supply, or rather the fear of a lack of supply, that forced oil prices so high for so long last year.

It was the Arab Spring, chiefly the civil war in Libya, that sparked much of the panic.

In less than two weeks in February and March last year when fighting intensified across the country controlled for four decades by Colonel Muammar Qaddafi, the spot price of Brent crude rose by $15 as about 1.5 million barrels per day of Libyan oil were lost from the market.

While that rapid price rise reaped dividends for other oil producers, such as the UAE and Saudi Arabia, it wreaked havoc on most other economies in the region, especially the non-oil and gas exporters who ought to be among the Emirates' closest and most dependable trading partners.

A recent study of IMF data by Geopolicity, a UAE-based economic think tank, showed that the events of the Arab Spring led to more than $20.5 billion (Dh75.2bn) in losses to GDP in Libya, Egypt, Tunisia, Syria, Yemen and Bahrain last year alone.

The same data shows losses to public finances would be in the region of $35.2bn for a total hit from the Arab Spring of more than $55bn. Never mind the almost unquantifiable socio-economic losses to productivity and infrastructure, which would doubtless add up to tens of billions of dollars more across the same countries.

Opec countries, meanwhile, are estimated by the International Energy Agency to have made oil revenues of about $1 trillion last year, with those in the Middle East accounting for about $700bn to $800bn of that total.

The liabilities associated with the Arab Spring, therefore, could easily amount to 10 per cent of that regional total, wiping out a good third of the annual average gain they helped to build.

Back of the envelope accounting such as this may seem simplistic to macroeconomists but it does serve one important purpose.

The simple accounting of these headline gains and liabilities shows clearly that a dependence on too few sources of revenue leads to unhealthy fluctuations in markets and economies.

This is why projects such as Kizad, the UAE's Khalifa Industrial Zone Abu Dhabi - a man-made island two-thirds the size of Singapore just off the capital's coast - is so vital to the development of the nation and the region.

The giant international trade hub is designed to dilute the country's dependence on oil revenue and fuel the next stage of development to create opportunities for jobs and wealth across society.

A similar policy of diversification should be a priority for all the region's developing economies if springtime is to become a less taxing time of year in future.