A recent report by credit rating agency Moody’s found that despite ambitions to diversify Gulf economies away from fossil fuels, results have been limited and efforts will be constrained by low oil prices.
The clock is ticking for the Gulf economies to end their overload with fossil fuels as more countries around the world throw up resources in accelerating their transition to green energy and a low carbon future.
But a report released Monday by credit rating agency Moody’s found that despite Gulf Cooperation Council (GCC) states announcing ambitious plans to break their raw habits, economic diversification efforts have yielded only limited results. and further progress can be sustained by low oil prices and many projects targeting the same non-oil sectors.
As we expect the momentum of diversification to increase, it will be mitigated by the declining availability of resources to finance diversification projects in a lower oil price environment and by within-GCC competition in a relatively narrow range of sectors. target, Moodys said.
The credit rating agency also said plans to expand hydrocarbon capacity in the region, combined with the government’s zero or very low tax commitments, do not bode well for the Gulf to significantly reduce its heavy dependence on fossil fuel revenues.
The link between taxes and overload
Despite differences between GCC countries, the group stands out globally for its hydrocarbon surplus when it comes to generating revenue and filling state coffers.
Oil and gas production accounted for up to 45 percent of Kuwait’s economic output in 2019, about 35 percent of Qatar and Oman, and nearly a quarter of Saudi Arabia and the United Arab Emirates, the report notes. Bahrain was the only GCC country where hydrocarbons accounted for less than 15 percent of pre-pandemic gross domestic product (GDP).
Hydrocarbons also generated the largest share of government revenue with Bahrain and the UAE providing more than 50 percent of government revenue from oil and gas, and Kuwait, Qatar and Oman show the highest level of dependence.
This is partly due to the long commitment of GCC governments to a zero or very low tax environment, which is part of the implicit social contract between rulers and citizens, but also reflects the desire to stimulate the growth and development of the non- oil, Moodys said.
As the report notes, the main difference between the GCC states and other countries that rely heavily on oil and gas is an effective lack of direct taxes including personal income taxes and property taxes.
Only Oman has presented the spectrum of a personal income tax, saying it was studying the introduction of one, but it would only apply to wealthier individuals. The de facto ruler of Saudi Arabia Mohammed bin Salman stated in a recent interview that there would be no personal income tax introduced into the kingdom.
Four GCC states however have implemented value-added tax, or VAT, with Oman being the last to introduce the tax in April.
One of the biggest counter-efforts to diversify the Gulf could face plans to further expand oil and gas production, which Moody’s entrusts with a desire to develop power industries such as petrochemicals and plastics.
The report also notes that such plans may reflect the prediction that as the sun sets on fossil fuels, countries facing higher production costs and greater regulatory barriers in relation to the GCC states will leave a larger chunk of the remaining hydrocarbon drink in the Gulf.
Given oil and gas expansion plans and a lack of political will to raise more taxes, Moody’s predicts that if oil prices average around $ 55 a barrel, hydrocarbon production should remain the single largest contributor to GDP. of the GCC sovereign, the main source of government revenue and, therefore, the main driver of fiscal force over at least the next decade.
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