IMF leader tells Arabian Gulf states to raise taxes and cut spending after fall in oil prices

Christine Lagarde gives The National her assessment of Middle East economies, including the direction the UAE should take amid the continuing low oil prices.

IMF managing director Christine Lagarde has urged the UAE to 'continue consolidating its finances at a pace that minimises the impact on growth.' Stephan Jaffe / EPA
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Arabian Gulf states must raise taxes, cut spending and increase gender equality to prevail through an era of low oil prices, according to the IMF managing director.

Christine Lagarde is making her first visit to the country as head of the fund this week.

"My message to the UAE is to continue consolidating its fin­ances at a pace that minimises the impact on growth," she told The National.

As for Saudi Arabia, “more will need to be done to curb spending and raise revenue to reduce the fiscal deficit”.

That includes “further gradual increases in energy and water prices, accompanied by compensation to protect the most vulnerable”.

New taxes will be needed across the Gulf if nation states are to survive the era of low oil prices.

“The authorities need to raise non-oil revenues … through the introduction of a Value Added Tax and excise taxes,” said the IMF chief.

The collapse in oil prices has had a massive effect on budgets throughout the region.

The IMF estimates that Gulf states lost about $285 billion in revenues from oil exports last year, equivalent to a fifth of the region’s GDP.

Moody’s expects that the UAE will run a budget deficit of 14 per cent of GDP this year. Saudi Arabia plans to run a deficit of $87bn in 2016 – equivalent to about 11 per cent of GDP – but the kingdom has regularly overshot its spending targets in recent years.

Ms Lagarde also called on the UAE to introduce a raft of liberalising measures “to accelerate diversified growth led by the private sector”.

She said: “These reforms include opening up for foreign dir­ect investment, and improv­ing specific areas of the business environment – easing SMEs’ and start-ups’ access to finance, and enhancing incentives to [work in the] private sector – while continuing to improve the overall quality and relevance of education and training.”

The Gulf must make more progress on achieving gender equality, Ms Lagarde said. “If reforms continue to open job opportunities for women, more well-educated and motivated workers will enter the labour force. This is a point that applies to all the Gulf countries.”

In the UAE, 93 per cent of men are part of the labour force, compared to only 46 per cent of women, World Bank data shows. That is despite women being significantly more likely to have a university degree.

Ms Lagarde believes that regional economies have handled the collapse in oil prices well, so far. Policymakers in the Gulf "have started to take ambitious measures to adjust to the new reality", she said. "I am encouraged to see that many countries have enacted energy subsidy reforms, are planning to introduce appropriate new taxes and are considering structural reforms to diversify their economies away from oil."

But she warned of the impact of slower growth in China on the Gulf. While the IMF forecasts Chinese growth of 6.3 per cent this year, many private forecasters are significantly more pessimistic.

“Lower growth in China” would lead to “more moderate demand for oil going forward”, the IMF leader said. “This would contribute to downward pressures on oil prices, thus affect­ing the fiscal and external positions of oil exporters in the region, and … their growth prospects.”

Meanwhile, the prospect of entrenched low inflation, a major risk as price growth in the developed world hovers close to zero, “would have serious consequences for growth around the world”.

Central banks will have to act decisively to prevent forecasts from expecting persistently low inflation, or deflation, Ms Lagarde said. “Clear guidance from central banks is more important than ever.”

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