Gulf countries need to rein in public wage bills that have averaged nearly 10 per cent of economic growth in recent years and levy new taxes to offset the effects of lower oil prices, according to a senior regional World Bank official.
"We know in reality, public sector wages in the Gulf have been increasing [at] a very rapid pace. In most of the GCC countries salaries and wages absorb a large share of government spending and that has to be arrested," said Nadir Mohammed, country director for the GCC countries at the World Bank in an interview with The National.
One reason is that “it's not sustainable in the current fiscal situation in the medium and even the longer term," he said, adding "the ability of the public sector to continue to absorb new entrants to the labour market is going to be limited.”
In the Gulf region, 40 to 60 per cent of public budgets are spent on wages and social services, with more than two-thirds of employed nationals working for the state, according to World Bank estimates.
Mr Mohammed said that countries in the region need to link any increase in public sector wages to a separate index, such as the inflation rate, to protect the purchasing power of public sector employees. Such changes need to be communicated to the citizens to help clarify government policies.
“The big issue in the Gulf has been the existing social contract in which most of the GCC citizens would expect public sector jobs as something guaranteed,” said Mr Mohammed. “It is important to put in place a smaller and efficient and effective [and] meritocratic public administration.”
But states must still maintain an effective social safety net that includes unemployment benefits for citizens who fall through the cracks and are unable to find employment, said Mr Mohammed.
“This benefit needs to be designed effectively…it should be at a level that will protect them from falling under the poverty line and encourage them to continue to seek jobs in the private sector,” he added.
Public sector wages across the Arabian Gulf skyrocketed before the 2008 financial crisis, as governments awash with petrodollars generously remunerated their citizens. The 2014 oil price crash has since put strains on government budgets, which have come under pressure from dwindling oil income, with states across the region stepping up the search for new revenue streams.
Some countries, such as Saudi Arabia, have made tentative steps to lower their public sector wage bills.
The country's National Transformation Programme, unveiled in April last year, envisages lowering public sector wages to 40 per cent of spending by 2020 from the current 45 per cent.
Mr Mohammed also urged Gulf countries to introduce new taxes in addition to the GCC-wide value-added tax, which will be implemented next year across the region at a rate of 5 per cent. Possible examples included higher corporation taxes, as well as income and land taxes, he said.
“I think each country needs to decide, given the political economy, what is the best way to increase fiscal revenue outside of oil and gas and moving to some of these taxes together as they approach value-added tax makes sense,” said Mr Mohammed. “But I am sure, depending on the situation, you will see some GCC countries move quicker than others in terms of taxes.”
When it comes diversification efforts, governments also need to craft concrete and consistent policies to implement their respective visions aimed at weaning themselves off oil. Amending laws related to foreign direct investment and collaboration with the private sector on financing projects are examples of policies that could be undertaken as part of the diversification efforts.
Beefing up the service sector is another important plank of diversification.
“I think diversification has been an objective for the GCC countries for the last 30 years or so with very little progress in most of the countries, maybe as an exception Dubai and to some extent Bahrain have been able to diversify their economic structure,” said Mr Mohammed.
“Most of the GCC countries are really rich in mining and hydro-carbons, and the more they can do to also encourage manufacturing activities related to their natural endowment in the mining sector or hydrocarbons that will be quite beneficial rather than just exporting the raw oil and gas.”
Mr Mohammed said there were encouraging signs that diversification reforms are here to stay.