Subsidy cuts and VAT will aid development, UAE business figures say

Moody’s has estimated that the UAE’s removal of fuel subsidies has added 0.7 per cent to the Emirate’s overall GDP. Mona Al Marzooqi / The National

More than two-thirds of senior business figures in the UAE believe reforms such as cutting fuel subsidies and the introduction of duties such as value-added tax are necessary to boost development in the region.

Research conducted exclusively for The National by Borderless Access found that 69 per cent of respondents in the UAE and 66 per cent of Saudis felt that subsidy cuts and the introduction of VAT would help regional development.

Mathias Angonin, the lead analyst for the UAE for Moody’s, said the ratings agency views both moves as “credit positive”. It has estimated that the UAE’s removal of fuel subsidies added 0.7 per cent of GDP to fiscal revenue.

“Saudi Arabia has increased petroleum prices, but they remain below UAE prices and below market prices generally,” said Mr Angonin.

If Saudi Arabia were to abolish fuel and electricity subsidies, this could contribute up to 3.2 per cent to its GDP.

“Removing subsidies removes an element of volatility in the fiscal balance,” said Mr Angonin. “If oil prices were to rise again, then there’s no additional cost incurred by the government. That’s important for us in terms of better forecasting of the fiscal balance going forward.”

Similarly, the introduction of VAT, which has been proposed across all Arabian Gulf states for 2018 at a rate of 5 per cent, will broaden the tax base in both countries, providing greater stability during downturns, he said.

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The road ahead

■ Throughout the year, The National will be running reports focused on sentiment within the business communities in the UAE and Saudi Arabia around a series of key issues affecting the regional economy as we look ahead to 2017 and beyond. Survey results will be provided by the online marketing and research firm Borderless Access. Email [e-mail] or WhatsApp [phone] to tell us what matters most to you.

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“The fiscal gains would very much depend on the exemptions that are decided. The IMF, for example, estimates that 5 per cent for the UAE would bring in 1.5 per cent fiscal [government revenue] gains for the UAE, which is a reasonable amount. It’s quite small compared to the actual fiscal deficit we forecast for 2018, but it’s a good start.

“The gains are pretty much the same in Saudi Arabia – it’s 1.6 per cent. That being said, it’s also a cross-cyclical measure, like subsidy reform. [That] it’s implemented at a time when there is uncertainty whether oil prices will recover will also affect consumption. We think that it will have an inflationary effect of about 1 per cent in both the UAE and Saudi Arabia.”

Jeanin Daou, the Middle East indirect tax leader for PwC, said experience in other countries “suggests a one-off inflationary effect linked to the introduction of VAT or increase in VAT rates”.

This can be constrained by regulation, with consumer protection bodies taking measures “to prevent opportunistic pricing behaviours”.

Stephen Anderson, the Middle East Markets leader for PwC, said investors in international money markets were supportive of the reforms.

“Money markets are looking for governments to have the public finances under control. Subsidy reform and measures to raise revenue should help this. But the governments need to do this without harming long-term economic growth prospects, which comes down to the pace and depth of reform.”

Dushyant Gupta, the senior vice president of Borderless Access, said responses to the poll showed there were “polarised sentiments” about the reforms, but that the overall positivity showed “that this region’s audience is well aware of these fiscal measures and [their] impact on the economic growth”

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