This presentation was made by Peter THURLOW, Advisor, at the 9th OECD MENA-SBO meeting held in Kuwait city on 12-13 October 2016.

1. FISCAL ADJUSTMENT IN
THE GCC
Peter Thurlow,
MENA SBO Meeting,
Kuwait, October 12, 13,
2016
1

2. OUTLINE
Preliminaries
The Challenge Ahead
Fiscal Response
Structural Reform
2

3. THE CHALLENGE AHEAD A Sisyphean Task
3

4. THE DEMOGRAPHIC ISSUE
 Many countries in the region
have similar demographic
profiles
 Huge numbers of young
Nationals will be entering the
labour force over the coming
decade.
 How will meaningful jobs be
generated?
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
Population
AgeGroup
National Population by Age Cohort
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5. THE TAPPED OUT PUBLIC SECTOR
• In the past:
• The traditional approach, with rising and high oil prices has
been to absorb large numbers of young nationals into the public
sector.
• This, and relatively high public sector salaries meant that many
distained the private sector
• Now:
• But with the crash in oil prices, this is not longer viable. The
private sector is the only hope.
• The task before us is to cut expenditure, maintain public
services, maintain employment and support private sector
development.
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6. THE FISCAL RESPONSE Issues and Dilemmas
6

7. THE FISCAL SHOCK IS HERE TO
STAY!
By now it is clear that the fiscal shock
is long-term, and fiscal adjustment is
necessary.
The shock was due to US shale oil
producers raising production, with
insufficient offsetting conventional oil
disruptions.
Shale producers are scaling back
now, but with an increase of price
they will be back, forcing the price
down to their marginal cost of about
US $ 50-60/bbl.
Brent Oil Price
0.00
20.00
40.00
60.00
80.00
100.00
120.00
USD/bbl
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8. SMOOTH ADJUSTMENT VERSUS
SHOCK TREATMENT
• How rapidly should the fiscal adjustment take
place?
• Textbook macroeconomics says a smooth,
gradual adjustment is best to minimize the
economic shock, but the deficits are larger.
• Political economy might suggest rapid
adjustment
• people can see oil prices and understand the
need,
• “austerity fatigue” can set in, and
• deficits are smaller.
8

9. ACROSS-THE-BOARD VERSUS
TARGETED CUTS
• Across-the-Board cuts give the appearance of “fairness” to
government
entities.
• If the objective is to maintain public services, targeted cuts are
essential.
 Target low priorities, and efficiency gains.
 Spending Reviews are essential – (see your friendly OECD team about this!)
 Ensure that government entities provide agreed upon services.
 Easier if proper Performance or Program Budgeting is in place.
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10. OBVIOUS AREAS TO CONSIDER
CUTTING:
• Defense and Foreign Aid – limited domestic economic impact, but
there may
be political impacts.
• Subsidies – leads to more efficient use of subsidized products. A
long-term
schedule of future cuts should be released to facilitate
adjustment.
• No new major projects.
• Entry Salaries of Nationals – makes private sector employment more
competitive.
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11. INCREASING NON-OIL REVENUE
• Please be very careful about this!
• Acts as a strong disincentive to economic diversification, and
private sector
development and investment. This is the very sector that needs to
be developed.
• A major competitive advantage of GCC countries is low tax rates.
• Where externalities exist, excise taxes (fuel, tobacco, alcohol) may
be warranted.
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12. THE TEMPTATION OF USING
ARREARS
• Going into arrears increases uncertainty and costs for suppliers, and their
suppliers.
• Suppliers face Increasing and unknown working capital requirements.
• Suppliers will pass the increased costs back through future pricing and
some
suppliers might exit altogether.
• Seriously damages the reputation as being a good place to do business,
and
private sector development.
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13. FINANCING THE DEFICITS
• Limited set of options:
• Sovereign Wealth Funds (for the lucky ones)
• Foreign Debt
• Domestic Debt
• Cash Reserves
• Domestic debt can help support local financial market
development.
• Be careful of domestic debt or cash reserves.
• Exacerbates the negative economic impact by creating a domestic liquidity
shortage.
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14. STRUCTURAL REFORMS The Essential Companion
of Fiscal Consolidation
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15. WHAT IS STRUCTURAL POLICY?
• The legal and regulatory framework that balances the necessary
protection
of investors, workers and consumers against the need for
businesses to be
competitive.
• Structural Reform refers to adjustments to the frameworks
which may allow
businesses to be more competitive without unduly affecting the
protections.
• Focus on individual markets like labour markets, capital markets
and goods
markets.
15

16. STRUCTURAL POLICY BY
INTERNATIONAL RANKINGS
• Some international rankings are well known. Examples are:
• World Bank’s “Ease of Doing Business”,
• WEF’s “Competitiveness Report”)
• Dubai targets specific improvements in certain indices. This may be
a useful
innovation.
• However, the acid test is the increase in private sector investment
and employment.
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17. IMPORTANCE OF SMES
• SMEs can be a major creator of employment!
 In Canada, SMEs account for over 70% of private sector employment.
• Need to reduce the time and cost of setting up a business, of
bankruptcy,
and ease access to capital.
• Development of an entrepreneurial culture can help.
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18. THANK YOU AND GOOD
LUCK!
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