Reforms are not all about taxes
Low oil prices are not a cause for panic, but a call for action when countries must seek new opportunities to grow their economies. Middle East economies that have been traditionally reliant on oil to fuel their growth, have that opportunity to reform. They have done it before, they can do it again.
The UAE is one step ahead in the reform process and is diversifying its economy rapidly. Trade and tourism are thriving. The country is not slowing down on infrastructure development projects while placing emphasis in health and education. The larger plan is to develop a knowledge economy, one that drives the future, where innovation, research and development will be critical. His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai wants diversification plans to be put on the fast track. He is setting a relentless pace where the best thinkers and ideas will be rewarded for their efforts.
For Middle East oil producers, this is crunch time. They should put their heads together to activate reforms. IMF chief Christiane Lagarde is for belt-tightening measures, and we agree with some of her proposals like cutting government spending, which the UAE is already doing with its smart governance projects and mobile applications. But rushing into introducing taxes, as suggested by Lagarde may not be a good idea. Social factors have to be considered before undertaking these fiscal reforms. One thing is clear — better diversified economies like the UAE will ride through the storm. The IMF said oil exporters lost more than $340 billion of revenues last year because of low crude prices. This is equivalent to 20 per cent of their combined gross domestic product.
Taxes are not a bad idea if introduced in phases. The timing will have to be decided by the countries themselves. “Most GCC countries are now in a position where they can pace their adjustment over several years and thus limit the impact on growth,” she said. Value-added tax is being considered by the GCC. Income taxes are also not being ruled out. The IMF also said there should be greater emphasis on property and excise taxes. One area of concern, however, will be the flight of capital if this is done.
Diverse ideas to mop up revenue and open up sectors to private players will benefit the region. It won’t be long before countries find sustainable, homegrown solutions to power their economies.