GCC reforms may help in lowering inflation : expert

Manama : GCC countries should undertake more structural reforms and shouldn’t limit themselves to efforts aimed at restoring fiscal balances, Dr. Marie Owens Thomsen, Chief Economist, Indosuez Wealth Management, said.

“They should usher in an efficient allocation of resources in the economy, boost job creation, and nurture non-oil sectors,” she suggested.

“This is clearly a time to push for change in the GCC countries, as there is immense pressure on State revenues due to lower oil prices. Challenging situations like this are often the time when significant reforms take place. Lower oil revenues have changed the fiscal landscape in the region, and highlighted yet again the perils of over-dependence on one export commodity. There is a greater urgency for regional economies to embark upon wider diversification and potentially lift the non-oil growth rate,” she said.

Dr. Marie, who was addressing a media round table recently in Dubai, said that apart from low oil prices, the GCC also has a disadvantage of being located in a region with significant geopolitical risk. 

“Consequently, GCC countries need to make themselves even more attractive to foreign direct investment than most countries. Foreign direct investment tends to bring with it innovation and productivity gains that tend to lift economic growth in a sustainable way,” she said.

“In an environment where western monetary and fiscal policies are largely exhausted and structural reform is difficult to enact, low oil prices are the one pro-growth factor that has generally supported the positive job creation, higher real income, and low inflation environment which the world’s major economies are experiencing,” she added. 

She warned that unless structural reforms are undertaken, the region’s economies might face high inflation and lower growth. 

“Many GCC countries have already reacted to low oil prices with policy announcements such as subsidy cuts and taxation. As a result, inflation has risen and will rise further when VAT is introduced. At this stage, it is important to note that GDP growth is still positive, and inflation is under control. However, there is arguably a time limit to this – the longer the oil price stays at extremely low levels, the more precarious the situation for the economies in the region,” she added.