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Acronyms GCC Gulf Cooperation Council RGDP Real Gross Domestic Product GDP Gross Domestic Product FDI Foreign Direct Investment VAT Value Added Tax DMTT Domestic Minimum Top-up Tax OPEC+ Organization of the Petroleum Exporting Countries Plus PIF Public Investment Fund LNG Liquified Natural Gas AI Artificial Intelligence NDS3 Third National Development Strategy SVAR Structural Vector Autoregression IV Instrumental Variable GHG Greenhouse Gas MtCO2e Metric Tons of Carbon Dioxide Equivalent Bdp Barrel per day LP Local Projections OLS Ordinary Least Square TFP Total Factor Productivity IMF International Monetary Fund I GULF ECONOMIC UPDATE Preface The Gulf Economic Update (GEU) is the product of the Luan Zhao, Željko Bogetić, Joanne Matossian, and Wei- Economic Policy unit for the Middle East and North jian Li. This analysis, with a specific focus on oil trade, Africa at the World Bank Group. It provides an update transport diversion, and oil slicks in the Red Sea and on key economic developments and policies in the Gulf the Gulf, uses data as of April 2025. The Spotlight Sec- Cooperation Council (GCC) countries over the past six tion was prepared by Hoda Youssef with contributions months, places them in a longer-term and global con- from Ashwaq Natiq Maseeh and Mohamed Ashour. The text and assesses the implications of these develop- Special Focus chapter was prepared by Muhammad ments and other changes in policy on the outlook for Khudadad Chattha and Tobias Kawalec. The design the GCC. Its coverage ranges from the macroeconomy and typesetting of the report was done by Muhammad to financial markets to indicators of human welfare and Kamal and Mikael Jonathan Bima Nainggolan. The Ar- development. It is intended for a wide audience, includ- abic translation of the executive summary was done by ing policymakers, business leaders, financial market Mahmoud Ibrahim. participants, and the community of analysts and pro- fessionals engaged in the GCC. The findings, interpretations, and conclusions expressed in this report are those of the World Bank staff and do The report was prepared by a team led by Muhammad not necessarily reflect the views of the Executive Board Khudadad Chattha under guidance from Safaa Tayeb of The World Bank or the governments they represent. El Kogali (Division Director) and Eric Le Borgne (Prac- tice Manager). The core team included Muhammad For questions and comments on the content of this pub- Khudadad Chattha, Hoda Youssef, Ashwaq Natiq Ma- lication, please contact Muhammad Khudadad Chat- seeh, Olena Ftomova, Tobias Kawalec, Xinyue Wang, tha (mchattha@worldbank.org). For media commu- and Yacine Ouahioune. The Recent Developments and nication, please contact Ashraf Al-Saeed (aalsaeed@ Outlook chapters were prepared by Muhammad Khu- worldbank.org), and Saleh Alobaidi (salobaidi@world- dadad Chattha, Hoda Youssef, Ashwaq Natiq Maseeh, bank.org). For information about the World Bank and Olena Ftomova, Xinyue Wang, and Yacine Ouahioune. its activities in the GCC, including e-copies of this publi- Box 1 was prepared by Morakane Thelejane. The anal- cation, please visit (www.worldbank.org/en/country/gcc). ysis on the Rea Sea Shipping Crisis was prepared by II GULF ECONOMIC UPDATE Table of contents Foreword������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������VI Executive Summary�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1 Recent Developments������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 9 Outlook and Risks����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������18 Spotlight Section: Shifting Gears - Oman's Journey to Fiscal Sustainability�������������������������������������������������������������������������������32 Special Focus: Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC������������������������������������������������41 References������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������63 Annex 1: GCC Summary Statistics Table�������������������������������������������������������������������������������������������������������������������������������������������������������������� 69 Annex 2: Country Summary Tables��������������������������������������������������������������������������������������������������������������������������������������������������������������������������70 Annex 3: Methodology to estimate fiscal multipliers in GCC economies���������������������������������������������������������������������������������������76 LIST OF FIGURES Figure 1: GCC growth recovered in 2024, supported by stable non-hydrocarbon activity.�����������������������������������������11 Figure 2: Improvements in growth primarily driven by lower net export contraction.������������������������������������������������������11 Figure 3: Non-hydrocarbon activity remained the main growth driver, offsetting hydrocarbon sector contractions in most GCC economies.���������������������������������������������������������������������������������������������������������������������������������������11 Figure 4: The non-oil private sectors of Saudi Arabia’s and Qatar’s expanded, while Qatar’s showed per- sistent weakness and elevated volatility.����������������������������������������������������������������������������������������������������������������������������������11 Figure 5: GCC inflation decreased in 2024, reflecting contained domestic pressures and effective policy management.�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������12 Figure 6: Inflation trends across GCC countries remained broadly stable in 2024, though country-level variation persisted.�������������������������������������������������������������������������������������������������������������������������������������������������12 Figure 7: Crude oil prices remained volatile, driven by OPEC+ production cuts and geopolitical tensions, while output continued to decline.����������������������������������������������������������������������������������������������������������������������������������������������13 Figure 8: Oil and natural gas prices began to recover in mid-April, reflecting easing supply concerns and shifting market sentiment.�����������������������������������������������������������������������������������������������������������������������������������������������������������������13 Figure 9: While fiscal positions weakened in several GCC countries, others recorded modest improvements.�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������14 Figure 10: These shifts reflect unequal revenue performances and spending.����������������������������������������������������������������������14 Figure 11: The overall non-oil fiscal balance in the GCC continued to improve in 2024.������������������������������������������������15 Figure 12: Debt dynamics diverged across the region, with some countries reducing debt-to-GDP ratios, while another recorded increases.�����������������������������������������������������������������������������������������������������������������������������������������������15 Figure 13: Current account surplus narrowed in 2024, due to declining trade balances and weaker FDIs.��������16 III GULF ECONOMIC UPDATE Figure 14: Foreign reserves maintained healthy levels, supporting imports despite subdued exports.�����������������16 Figure 15: Female (+25) employment-to-population ratios are increasing but remain at low levels.�����������������������17 Figure 16: Oil price fell sharply amid concerns over global demand and the rollback of OPEC+ production cuts.����������������������������������������������������������������������������������������������������������������������������������������������������������������������19 Figure 17: GDP growth projected to accelerate in the medium-term����������������������������������������������������������������������������������������� 20 Figure 18: The increase in projected growth driven by exports, consumption and investment�������������������������������� 20 Figure 19: Most GCC countries are expected to see improved growth prospects in 2025 and to expand in 2026-2027.������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 Figure 20: GCC countries’ inflation projected to slightly pick up but to remain managed in the medium-term����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������21 Figure 21: GCC banks' credit growth is expected to remain strong stimulated by lower interest rates.................21 Figure 22: The GCC fiscal deficit is projected to slightly widen in 2025, and to remain on deficit in the medium term�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23 Figure 23: There is significant divergence in individual countries’ positions���������������������������������������������������������������������������23 Figure 24: The overall debt-to-GDP ratio is projected to rise, but there is significant regional variation.������������23 Figure 25: Current balance surplus is expected to narrow before expanding in the medium term......�������������������25 Figure 26: There is significant cross-country variation in the external sector.�����������������������������������������������������������������������25 Figure 27: Main GCC Trade Partners in Total Merchandise Exports, 2023 (Excluding Intra-regional Trade).....26 Figure 28: GCC Exports in 2023���������������������������������������������������������������������������������������������������������������������������������������������������������������������������27 Figure 29: Vessel Transit Activity at Key Maritime Chokepoints������������������������������������������������������������������������������������������������������28 Figure 30: Pipeline Network Provides an Alternative for Oil Transportation����������������������������������������������������������������������������29 Figure 31: The Red Sea crisis led the GCC to shift from maritime shipping towards a land route connecting Gulf ports to the Eastern Mediterranean and Northern Red Sea ports�������������������������������������������������������������30 Figure 32: Satellite imagery shows a significant increase in oil slicks in the Red Sea following the onset of Houthis attacks on vessels.���������������������������������������������������������������������������������������������������������������������������������������������������������������31 Figure 33: Crude petroleum has the lion share of hydrocarbon activities��������������������������������������������������������������������������������33 Figure 34: Real GDP Growth and Ol Prices����������������������������������������������������������������������������������������������������������������������������������������������������33 Figure 35: Hydrocarbon activities have gradually lost weight in favor of services��������������������������������������������������������������34 Figure 36: Among all services, wholesale and reatil trade and public administration remains the largest����������34 Figure 37: A bulk of manufacturing activities remain concentrated in chemicals sectors.��������������������������������������������34 Figure 38: Oil and Non-oil growth have been growing at similar pace until recent years�����������������������������������������������34 Figure 39: The share of hydrocarbon exports has declined in favor of non-hydrocarbons������������������������������������������� 35 Figure 40: The current account position fluctuates in response to changes in global oil prices������������������������������ 35 Figure 41: The decline in oil prices triggered a sharp decline in fiscal revenue��������������������������������������������������������������������36 Figure 42: Revenue from hydrocarbon have been dominating��������������������������������������������������������������������������������������������������������36 Figure 43: Public spending was not adjusted to lower revenue, triggering fiscal deficits����������������������������������������������37 Figure 44: Revenue from corportate icome taxation remain weak�������������������������������������������������������������������������������������������������37 Figure 45: Accumulated deficits had resulted in a rapid increase in government debt���������������������������������������������������37 Figure 46: Higher debt levels triggered large liabilities of debt service�������������������������������������������������������������������������������������37 Figure 47: The wage bill has declined following the implementation of the MTFP�������������������������������������������������������������39 IV GULF ECONOMIC UPDATE Figure 48: Subsidies reforms were ongoing but suspending following the global energy crisis���������������������������������39 Figure 49: MTFP targets for fiscal balance were met and overachieved�����������������������������������������������������������������������������������39 Figure 50: MTFP targets for non-hydrocarbon revenue were underachieved�����������������������������������������������������������������������39 Figure 51: Non-hydrocarbon revenue grew only modestly during MTFP timeframe�������������������������������������������������������� 40 Figure 52: Per-capita government spending in 2022 in US$�������������������������������������������������������������������������������������������������������������42 Figure 53: Government spending relative to GDP in 2022������������������������������������������������������������������������������������������������������������������43 Figure 54: Government spending relative to non-resource GDP in 2022���������������������������������������������������������������������������������43 Figure 55: The change in government spending relative to GDP from 2006 to 2022�������������������������������������������������������44 Figure 56: Change in gross government debt relative to GDP from 2006 until 2022�������������������������������������������������������45 Figure 57: Public Debt-to-GDP ratio in the GCC in 2006 and 2022���������������������������������������������������������������������������������������������45 Figure 58: Decomposition of per capita government income and expenditures in the GCC in 2023....................46 Figure 59: Gross sovereign income and spending in the GCC���������������������������������������������������������������������������������������������������������47 Figure 60: Non-hydrocarbon sources of government income across the GCC���������������������������������������������������������������������48 Figure 61: Investment share in total government expenditure across the GCC�������������������������������������������������������������������49 Figure 62: Contemporaneous elasticities of government revenue and spending to aggregate output.............. 50 Figure 63: Estimates of fiscal multipliers on government expenditure using the preferred local projection.....54 Figure 64: Estimates of fiscal multipliers on government income using the preferred long-difference local projection��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 56 Figure 65: GCC-wide aggregate fiscal multiplier estimates by instrument����������������������������������������������������������������������������� 58 Figure 66: State-dependence of fiscal multipliers on government expenditure depending on business cycle state�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 59 Figure 67: Long-run Fiscal Multiplier estimates, reflecting the effect of government investment on potential output���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������61 LIST OF BOXES Box 1: The impact of rising protectionism and economic uncertainty on GCC countries�������������������������������������26 Box 2: Monetary Policy in the GCC�������������������������������������������������������������������������������������������������������������������������������������������������������������51 Box 3: Existing estimates of fiscal multipliers in the GCC���������������������������������������������������������������������������������������������������������� 53 Box 4: Long-run multiplier estimation�����������������������������������������������������������������������������������������������������������������������������������������������������60 LIST OF TABLES Table 1: GCC���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 69 Table 2: Bahrain����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������70 Table 3: Kuwait��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������71 Table 4: Oman��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������72 Table 5: Qatar���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������73 Table 6: Saudi Arabia����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 74 Table 7: UAE������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������75 V GULF ECONOMIC UPDATE Foreword The beginning of 2025 has been marked by heightened increasing current account deficits or shrinking sur- global economic uncertainty, driven by rising protec- pluses. Sovereign debt remains contained in most GCC tionism and volatility in global oil demand and produc- countries, shielding their economies from an other- tion. Ongoing efforts toward economic diversification wise worrying phenomenon of fast increasing debt ob- in the Gulf region are thus more critical than ever. In served in many other economies. this context, the June 2025 edition of the Gulf Econom- ic Update monitors the macroeconomic developments Oman’s fiscal consolidation journey stands out as a in the GCC region, explains them in light of the global noteworthy example of effective economic reform and conditions and evaluates them from a medium to long- responsible fiscal management. Guided by its Vision term perspective. 2040, the country launched a bold and comprehensive national strategy focused on long-term economic di- Although GCC countries remain tied to global ener- versification and sustainability. A cornerstone of this gy markets, the ongoing economic diversification will effort was the adoption of the Medium-Term Fiscal Plan improve their economic resilience in the face of re- in 2020, which introduced wide-ranging reforms aimed gional and global uncertainty. This is evidenced by the at enhancing fiscal sustainability. Oman’s reforms have recent output dynamics in the GCC. Even though the yielded tangible results, bolstering the country’s ca- hydrocarbon sector contracted by 3.0 percent in 2024, pacity to navigate external economic shocks. A spot- non-hydrocarbon growth remained resilient, growing light section of this report highlights the challenges at 3.9 percent. In the near future, it is expected that Oman has faced due to oil dependency, the measures it growth in the GCC will remain robust at 3.2 percent implemented to restore fiscal balance, and the encour- in 2025 and 4.5 percent in 2026. Across the GCC, the aging outcomes of these reforms. non-hydrocarbon sector is likely to remain an import- ant driver of growth. This edition of the Gulf Economic Update has a Special Focus on the effectiveness of fiscal policy. As the on- For the past few years, the GCC countries have been going transition agenda is largely supported by fiscal strengthening their macroeconomic foundation, a expenditures, the question of whether such spendings pre-condition to sustained growth. Prudent fiscal and yield the expected outcomes becomes crucial. The monetary policies have continued to support econom- analysis shows important results that can inform fiscal ic stability in the region. Despite ongoing oil revenue policy in the future. First, public spending in the GCC uncertainty, the GCC countries have avoided unsus- have helped stabilize the cyclical fluctuations in output tainable deficits by broadening their income base and – our estimates show that a 1-unit fiscal expenditure keeping fiscal expenditures broadly contained. Infla- increase boosts output by up to 0.45 unit. Second, the tion rates have been hovering around 2.0 percent, far report also shows the contribution of fiscal investment below the levels seen in many other MENA countries. to long-run growth, under the condition of sustainable However, external balances remain largely reliant on budget balance in the long-run. oil production and prices, with recent years showing VI GULF ECONOMIC UPDATE I continue to be proud of the partnership between that further aid the transformative agenda in the GCC. the World Bank and the GCC in shaping the policy di- I hope that the insights provided through our analysis alogue, fostering improved economic outcomes in the of the recent economic performance in the GCC and region. By basing our recommendations on rigorous our projections for the future can support the GCC research and analytical work, coupled with dialogue countries in shaping the development agenda that with all stakeholders, we intend to contribute insights they have committed themselves to. Safaa El Tayeb El-Kogali Division Director Gulf Cooperation Council Countries World Bank Group VII GULF ECONOMIC UPDATE VIII FOREWORD GULF ECONOMIC UPDATE Executive Summary hile global energy markets continue side, trade uncertainty and tariffs can induce a glob- W to play a significant role across the al economic slowdown, hampering global demand for GCC, sustained diversification efforts hydrocarbons, which remain among the main export are fostering a more balanced and goods for the GCC. Again, impacts on Chinese busi- resilient growth model. In 2024, GCC ness and consumer dynamism could have particularly economies faced a contraction of the oil pronounced effects for the GCC due to their strong sector of 3.0 percent linked to OPEC+ production cuts, trade linkages. At the same time, this uncertainty can which were aimed at the stabilization of global energy also be an opportunity to accelerate structural re- prices. Overall regional growth nonetheless strength- forms in the GCC. ened to 1.8 percent, driven by a resilient expansion of the non-hydrocarbon sector by 3.9 percent. This ex- Trade uncertainty caused by major shifts in trade pansion has been driven by Bahrain, Oman, Qatar, policy may affect the GCC countries through the en- Saudi Arabia, and the UAE. On aggregate, 50 percent ergy demand channel. This holds particularly true for of the non-hydrocarbon expansion can be attributed the effects of increased tariffs on production in China, to private consumption, with the other half being driv- as the country remains one of the major export desti- en by government consumption and fixed investment. nations for the GCC. In 2023, exports to China made up the largest share in Oman at 36.2 percent, followed by The diversification efforts supporting the tran- Kuwait at 18.6 percent, Saudi Arabia at 14.9 percent, sition away from hydrocarbon reliance require and Qatar at 13.8 percent. Bahrain and the UAE are further structural reforms. The success of target- significantly less exposed to China through export link- ed diversification agendas remains dependent on im- ages. The effects of escalating tariffs might be largest provements to productivity growth, stable political for the countries with close trade ties to China. Howev- support, and sufficient fiscal capacity. Achieving a suc- er, with concerns over global slowdown in the wake of cessful combination of these factors requires an inter- escalating tariffs1, a downside scenario includes a pro- play of political decision-makers and sufficient over- tracted reduction in energy demand across the entire sight over projects enhancing this process. Ultimately, globe. Under such a scenario, the predicted recovery successes in economic diversification also remain de- of the hydrocarbon market will come under significant pendent on the ability of the GCC member economies strain with a likely impact across the GCC. Under such to absorb external disturbances to these factors. circumstances, ongoing diversification efforts remain crucial for the region’s future. Global trade uncertainty can be a risk for diversifi- cation efforts across the GCC. Its impact could mate- Fiscal sustainability has been maintained across rialize through the supply of externally sourced materi- the GCC, though recent oil price volatility and als and the demand for exported hydrocarbons. Trade OPEC+ production cuts2 have strained fiscal reve- uncertainty induces reduced business and investment nues. Despite continued public spending growth, es- dynamism through risks to future cash flows, reducing pecially in Bahrain, Kuwait, Oman, and Saudi Arabia, long-term growth prospects. On the global demand some countries maintained budget surpluses in 2024: 1 WB projections expect a slowdown in global growth by 0.3 percentage point for a 10 percent universal US tariff and retaliatory tariffs from partners, relative to the baseline (World Bank Global Economic Prospects, January 2025); IMF revised its global growth forecast from 3.3 percent to 2.8 in 2025 following US tariffs (World Economic Outlook, April 2025). 2 Introduced in November 2023. 01 EXECUTIVE SUMMARY GULF ECONOMIC UPDATE Oman (5.4percent of GDP, down from 6.9 percent in to previous years, 2024 saw interest rate cuts across the 2023), the UAE (4.6 percent), and Qatar (0.7 percent). GCC countries, in line with decisions by the U.S. Federal Improvements in fiscal balances were noted in Bah- Reserve, given the exchange rate pegs. While rising pub- rain and the UAE compared to 2023. However, most lic spending and other factors could have pushed for an GCC countries are expected to face slightly higher fis- acceleration in inflation particularly in Bahrain, Kuwait, cal deficits in 2025 due to declining oil revenues from Oman, and Saudi Arabia, the containment of inflation weaker global demand. Tax reforms, such as the intro- remains attributable to the continued usage of subsi- duction of a 15 percent Domestic Minimum Top-Up Tax dies and the anchoring of monetary policy frameworks in Bahrain, Kuwait, and the UAE, are seen as positive through currency pegs. Within the GCC, Saudi Arabia steps toward revenue diversification. and UAE have been experiencing minimally increasing but broadly stable Consumer Price Index (CPI) infla- Debt trajectories in the GCC vary, with Oman, Qa- tion rates, which were mostly driven by housing prices. tar, and the UAE reducing debt, while Saudi Arabia, Demand-side price pressures and heightened trade un- Bahrain, and Kuwait saw increases. Oman contin- certainty levels are likely to exert some near-term price ued its path to enhanced debt sustainability, reducing pressures across the GCC, but overall price stability at its public debt by 2.3 percentage points of GDP. Qatar low inflation levels is expected to persist. enjoyed a similar debt consolidation, while the UAE maintained their 29.8 percent debt-to-GDP ratio. Sau- Overall employment levels remain high in the GCC, di Arabia (increase of 1.6 percentage points of GDP), but the improvements witnessed in recent years Bahrain (1.5), and Kuwait (4.1) all faced heightened are stalling. Specifically, Bahrain, Kuwait, and Oman sovereign debt dynamics, although from a low base, re- experienced stagnating employment rates after recent flecting the fiscal pressure from lower oil revenues and improvements, and the employment-to-population ra- growing fiscal expenditures. The near-term outlook for tio in the UAE still lags compared to its peers. On the government debt remains stable, except for Bahrain contrary, Saudi Arabia enjoyed a decline in the aver- where debt levels are high and expected to further in- age quarterly unemployment rate from 4.4 percent in crease to 131 percent of GDP by 2026. 2023 to 3.5 percent in 2024, and Qatar also maintained a very high employment rate of 87.4 percent. That said, GCC countries maintained a relatively strong ex- youth unemployment rates remain a challenge in Ku- ternal position despite trade uncertainty and pres- wait, Saudi Arabia, and Oman, signifying the need for sure from reduced oil revenues. In 2024, current structural reforms aimed at a better inclusion of young account surpluses remained positive in all GCC coun- people for employment. tries, except Saudi Arabia. Service exports helped mitigate the impact of declining oil exports, reflecting The GCC economy is forecast to grow by 3.2 percent the growing resilience of the GCC to global changes. in 2025, with further robust growth of 4.5 percent The current account surplus, however, has gone down in 2026. These dynamics are shaped by the expected in most GCC countries due primarily to higher imports rollback of OPEC+ production cuts and an expansion of intermediary goods and machinery, reflecting grow- of the non-oil sector, particularly in Saudi Arabia, Qa- ing investment, while oil export revenue remained con- tar, and the UAE. Hydrocarbon sector dynamics are tained. However, Qatar stands out as being the only expected to exhibit more cross-country variation in country improving its current account balance by 0.5 the GCC, while the non-hydrocarbon sector is expect- percentage points of GDP in 2024, driven by the per- ed to contribute to economic growth in all GCC econo- formance of the tourism and transportation sectors. mies. Oil sector growth is expected to experience me- The UAE continues to stand out as the single biggest dium-term growth rates of 5.7 percent, while non-oil recipient of Foreign Direct Investments (FDI) in the sector growth is forecast to remain around 4.9 percent GCC, despite a normalization to 2.7 percent of GDP in in the medium term. Most of the additional improve- 2024 after reaching 4.2 percent of GDP in 2023. ments in growth are expected to come from contri- butions to net exports, with consumption and invest- Headline inflation across the GCC remains low, de- ment-driven contributions remaining broadly positive. spite interest rate cuts in 2024. GCC headline inflation All forecasts, however, must be treated with caution rates averaged 2.0 percent in 2024, showing a further de- amid heightened global uncertainty on hydrocarbon cline from an average of 2.2 percent in 2023. In a change demand and trade policy. 02 EXECUTIVE SUMMARY GULF ECONOMIC UPDATE SPOTLIGHT SECTION: Oman’s Journey to Fiscal Sustainability Oman has made substantial progress in enhancing 2024 Medium-Term Fiscal Plan, Oman introduced its economic resilience and building a foundation reforms to diversify revenue, improve spending effi- for sustainable growth. Like other GCC countries, it ciency, and manage oil windfalls. These reforms have has grappled with reducing dependence on oil reve- delivered tangible results. Since 2022, Oman has sig- nues and managing public finances amid volatile global nificantly improved its fiscal position, notably reducing oil prices. In past periods of low oil prices, Oman faced a public debt through the strategic use of oil windfalls. twin deficit and relied on borrowing to cover fiscal gaps. This has expanded fiscal space and strengthened the In recent years, Oman has taken significant steps to country’s ability to withstand external shocks. Oman’s reduce its reliance on oil and strengthen fiscal sustain- experience stands out as a model of effective fiscal con- ability, particularly after the 2014 oil price shock and solidation and economic reform. the COVID-19 crisis. Under Vision 2040 and the 2020- SPECIAL FOCUS: Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC This Special Focus chapter analyzes the effective- As the main quantitative exercise of interest, this ness of fiscal policy in fostering economic growth Special Focus chapter provides fiscal multiplier in the Gulf Cooperation Council (GCC) region. In estimates for all individual GCC members. The es- doing so, the principal focus of the chapter is on fis- timation is conducted using econometric methods, cal multipliers, which measure the effect of changes allowing for a robust estimation of fiscal multipliers in government spending or revenue on the country’s based on plausibly exogenous variations of fiscal space output (GDP). In simple terms, they quantify how much in each GCC member country. economic activity is generated by each dollar of fiscal policy action. • Estimated fiscal multipliers of government con- The need to evaluate the effectiveness of fiscal pol- sumption spending on non-hydrocarbon output icy is especially relevant for GCC countries given in the GCC countries are positive but relatively their intensified economic diversification efforts in weak. Depending on the country under consideration, recent years. Globally, fiscal policy has been playing multipliers for government consumption spending in a growing role, with public expenditure as a share of the GCC countries range within the interval 0.1-0.45 GDP growing in more than 70 percent of all countries in the short-term. This is broadly in line with existing since the Global Financial Crisis. In the GCC, the share estimates for the GCC, as well as in line with global of fiscal expenditure in non-hydrocarbon GDP ranges evidence on fiscal expenditure multipliers, even if the between 36 percent and 84 percent. As public spend- multipliers are overall on the lower end. On impact, the ing is often being undertaken through large-scale pub- effect of government expenditures is largest in Saudi lic investments, this calls for a better understanding of Arabia and the UAE, and smaller in Kuwait and Oman. the returns on GDP from those investments, the effec- For Bahrain and Qatar, the impact change of non-hy- tiveness of capital allocation, and whether fiscal pol- drocarbon output in response to fiscal expenditures is icies are well designed to maximize employment and positive, but not statistically significant. In economic job creation, among other objectives. On the revenue terms, this implies that a 1 unit increase in government side, most of the income is related to sales of hydrocar- spending can trigger an increase in output in a mag- bon products as hydrocarbon sales revenue makes up nitude ranging between 0.1 and 0.45 units. While this between 40 and 90 percent of overall government rev- means that fiscal spending can have a positive effect enues in 2023. on output, there are no typical ‘Keynesian multiplier’ 03 EXECUTIVE SUMMARY GULF ECONOMIC UPDATE effects by which initial changes in spending can lead • For the effects of government capital expendi- to greater overall changes in aggregate demand and tures, this study finds a marginal impact of a 0.07 output. percent change in potential output for a one-time percentage point change in investment. This esti- • Regarding business cycles, fiscal multipliers are mate concerns a single one percentage point change positive during recessions, playing an important to government investment, and is broadly in line with stabilizing role, and close to zero in times of high evidence for OECD countries. This positive effect for growth. This is in line with what economic theory would transitory government investment expenditures is predict. This suggests that public spending is more conditional on such investments not being financed effective at stimulating economic activity during down- through deficits. The results on long-term multipliers turns while having little or no effect during periods must generally be appreciated with caution, as the of growth. This usually occurs when the economy is underlying assumptions made for the estimation are already operating at near full employment, so addi- much more sensitive. Permanent changes to govern- tional spending does not trigger substantial impact ment investment are likely to have larger and more on GDP growth. sustained effects. Such effects would be especially visible over the long-term as government investment • Fiscal multipliers of government revenues on transforms into productive capital, which is of use non-hydrocarbon output are frequently insignifi- for prolonged periods of time. Further research into cantly different from zero. This aligns well with re- the size of this long-run growth multiplier estimate cent evidence on the effects of tax policy in the GCC. and various components of government investment Existing evidence on advanced economies usually finds expenditures should be welcomed. negative revenue multipliers, in contrast to the zero-ef- fect found here for the GCC. Typically, government The main policy takeaway is that fiscal policy is revenues mostly change through changes in tax policy broadly effective at stabilizing cyclical fluctuations (increases or cuts in personal income tax, corporate of (non-hydrocarbon) output, especially during times tax, VAT, etc.) or changes in non-tax income. As the of economic dearth. While fiscal multipliers in the GCC revenue multiplier is insignificant, this implies that no appear to be positive across the board, they are gener- clear statistically robust relationship exists between ally weak and less than one, in line with the estimates in changes in government revenue and economic output. the literature for a multitude of other countries. Policy- This may reflect the still low tax-to-GDP ratios across makers should therefore not expect multiplying effects GCC countries, where modest changes in tax revenues in response to stabilizing fiscal policy measures, which relative to GDP are less likely to produce significant occur for fiscal multipliers that are larger than one. macroeconomic effects compared to higher-tax econ- This does not, however, imply a total absence of fiscal omies. Future scope in enhancing the effects of tax policy impact on output. As the estimated multipliers policy in the GCC thus exists by broadening the tax are significantly larger during recessions, the findings base, allowing for tax policy changes to become a more make a robust case for adopting countercyclical fiscal powerful fiscal instrument. policy. Such countercyclical policy should aim at an ex- pansion of demand through fiscal stimulus only during demand-driven downturns. 04 EXECUTIVE SUMMARY GULF ECONOMIC UPDATE ‫ملخص تنفيذي‬ ‫تقليص ديناميكية األعامل والرشكات واالستثامرات‪ ،‬بسبب املخاطر‬ ‫عىل الرغم من أن أسواق الطاقة العاملية ال تزال تؤدي دورًاً بالغ‬ ‫التي تهدد التدفقات النقدية املستقبلية‪ ،‬مام يحد من فرص تحقيق‬ ‫األهمية يف جميع أنحاء دول مجلس التعاون الخليجي‪ ،‬فإن الجهود‬ ‫النمو عىل املدى الطويل‪ .‬وعىل صعيد الطلب العاملي‪ ،‬قد يؤدي‬ ‫املستمرة لتنويع النشاط االقتصادي تعزز منوذج منو أكرث توازنًاً‬ ‫عدم اليقني بشأن سياسات التجارة والتعريفات الجمركية إىل تباطؤ‬ ‫ومرونة وقدرة عىل الصمود‪ .‬ففي عام ‪ ،2024‬شهدت اقتصادات دول‬ ‫النشاط االقتصادي العاملي‪ ،‬مام ينعكس سلبًاً عىل الطلب العاملي‬ ‫مجلس التعاون الخليجي انكامشًاً يف قطاع النفط بنسبة ‪ 3%‬من‬ ‫عىل الهيدروكربونات‪ ،‬التي تظل من أهم سلع التصدير لدول مجلس‬ ‫جراء تخفيضات اإلنتاج التي أقرتها مجموعة أوبك‪+‬؛ بهدف تحقيق‬ ‫التعاون الخليجي‪ .‬مرة أخرى‪ ،‬قد تؤثر التغريات يف ديناميكية األعامل‬ ‫استقرار أسعار الطاقة العاملية‪ .‬ومع ذلك‪ ،‬ارتفع معدل النمو اإلجاميل‬ ‫والرشكات واملستهلكني يف الصني بشكل واضح عىل دول مجلس‬ ‫يف املنطقة إىل ‪ ،1.8%‬بسبب التوسع املتسم باملرونة يف القطاع غري‬ ‫التعاون الخليجي‪ ،‬وذلك بسبب الروابط التجارية القوية بينهام‪ .‬ويف‬ ‫الهيدروكربوين الذي بلغ نحو ‪ .3.9%‬وساعد يف تحقيق هذا النمو‬ ‫الوقت نفسه‪ ،‬قد ميثل عدم اليقني فرصة لترسيع وترية اإلصالحات‬ ‫والتوسع كل من البحرين وعامن وقطر واململكة العربية السعودية‬ ‫الهيكلية يف دول مجلس التعاون الخليجي‪.‬‬ ‫واإلمارات العربية املتحدة‪ .‬وبشكل عام‪ ،‬ميكن القول إن ‪ 50%‬من‬ ‫التوسع يف األنشطة غري الهيدروكربونية يعود إىل االستهالك الخاص‪،‬‬ ‫قد تؤثر حالة عدم اليقني بشأن التجارة الناتجة عن التحوالت‬ ‫أما النصف اآلخر‪ ،‬فهو مدفوع باالستهالك الحكومي واالستثامرات‬ ‫الرئيسية يف سياسات التجارة عىل دول مجلس التعاون الخليجي‬ ‫الثابتة‪.‬‬ ‫بسبب تحول مسار الطلب عىل الطاقة‪ .‬ويظهر هذا التأثري بشكل‬ ‫خاص يف زيادة الرسوم الجمركية عىل اإلنتاج يف الصني‪ ،‬إذ تظل‬ ‫تتطلب جهود تنويع النشاط االقتصادي الرامية إىل تقليل االعتامد‬ ‫الصني واحدة من الوجهات الرئيسية لصادرات دول مجلس التعاون‬ ‫عىل الهيدروكربونات مزيدًاً من اإلصالحات الهيكلية‪ .‬ويعتمد نجاح‬ ‫الخليجي‪ .‬ففي عام ‪ ،2023‬شكلت الصادرات إىل الصني النسبة‬ ‫برامج التنويع عىل تحسني منو اإلنتاجية‪ ،‬واستقرار الدعم السيايس‪،‬‬ ‫األكرب يف سلطنة عامن بواقع ‪ ،36.2%‬تليها الكويت بنسبة ‪،18.6%‬‬ ‫فضًالً عن تعزيز كفاءة قدرات املالية العامة‪ .‬ويتطلب نجاح هذه‬ ‫والسعودية بنسبة ‪ ،14.9%‬وقطر بنسبة ‪ ،13.8%‬أما البحرين‬ ‫العوامل تضافر جهود صانعي القرار السيايس وفرض رقابة دقيقة‬ ‫واإلمارات فليس لهام عالقات تصدير قوية بالصني‪ .‬وقد تكون آثار‬ ‫ّعالة عىل تنفيذ املشاريع لدعم هذه التوجهات‪ .‬ويف النهاية‪ ،‬يعتمد‬‫وف ّ‬ ‫زيادة التعريفات الجمركية أكرب بالنسبة للبلدان التي تربطها عالقات‬ ‫نجاح تنويع النشاط االقتصادي عىل قدرة اقتصادات مجلس التعاون‬ ‫تجارية وثيقة بالصني‪ .‬لكن مع تصاعد املخاوف من تباطؤ االقتصاد‬ ‫الخليجي عىل استيعاب الصدمات واالضطرابات الخارجية التي قد‬ ‫العاملي يف أعقاب زيادة التعريفات الجمركية‪ ،1‬يتضمن سيناريو‬ ‫تؤثر سلبًاً عىل هذه العوامل‪.‬‬ ‫التطورات السلبية انخفاضًاً طويل األمد يف الطلب عىل الطاقة يف‬ ‫جميع أنحاء العامل‪ .‬ويف إطار هذا السيناريو‪ ،‬من املتوقع أن يواجه‬ ‫يف اقتصادات دول مجلس التعاون الخليجي‪ ،‬ميثل عدم اليقني‬ ‫تعايف سوق الهيدروكربونات ضغوطًاً كبرية‪ ،‬مع إمكانية التأثري عىل‬ ‫املرتبط بالتجارة العاملية تحديًاً بارزًاً أمام جهود التنويع االقتصادي‪.‬‬ ‫اقتصادات دول مجلس التعاون الخليجي بشكل عام‪ .‬ويف ظل هذه‬ ‫وهذا األثر قد يتضح من خالل املعروض من املواد والسلع التي يتم‬ ‫الظروف‪ ،‬تظل الجهود املستمرة لتنويع النشاط االقتصادي بالغة‬ ‫الحصول عليها من مصادر خارجية‪ ،‬باإلضافة إىل الطلب عىل صادرات‬ ‫األهمية من أجل مستقبل املنطقة‪.‬‬ ‫الهيدروكربونات‪ .‬كام يؤدي عدم اليقني يف سياسات التجارة إىل‬ ‫‪ 1‬تشري توقعات البنك الدويل إىل تباطؤ النمو العاملي بنسبة ‪ 3.0‬نقطة مئوية نتيجة فرض الواليات املتحدة تعريفات جمركية موحدة بنسبة ‪ %01‬عىل جميع السلع الواردة إليها‪ ،‬باإلضافة إىل التعريفات االنتقامية من الرشكاء‪ ،‬وذلك مقارنة بخط األساس (تقرير‬ ‫اآلفاق االقتصادية العاملية للبنك الدويل الصادر يف يناير‪/‬كانون الثاين ‪ .)5202‬كام قام صندوق النقد الدويل مبراجعة توقعاته للنمو العاملي‪ ،‬حيث تم تعديلها من ‪ %3.3‬إىل ‪ %8.2‬لعام ‪ 5202‬بعد فرض التعريفات الجمركية األمريكية (تقرير اآلفاق االقتصادية العاملية‬ ‫الصادر يف أبريل‪/‬نيسان ‪.)5202‬‬ ‫‪05‬‬ ‫‪EXECUTIVE SUMMARY‬‬ ‫‪GULF ECONOMIC UPDATE‬‬ ‫شهدت تحسن يف رصيد حسابها الجاري مبقدار ‪ 0.5‬نقطة مئوية من‬ ‫تم الحفاظ عىل استدامة املالية العامة يف مختلف دول مجلس‬ ‫إجاميل الناتج املحيل يف عام ‪ ،2024‬مدفوعة بأداء قطاعي السياحة‬ ‫التعاون الخليجي‪ ،‬عىل الرغم من أن تقلبات أسعار النفط األخرية‬ ‫والنقل‪ .‬وتظل اإلمارات العربية املتحدة الوجهة الرئيسية لالستثامرات‬ ‫وتخفيضات‪ 2‬اإلنتاج التي أقرتها منظمة أوبك‪ +‬قد أضافت ضغوطًاً‬ ‫األجنبية املبارشة يف دول مجلس التعاون الخليجي‪ .‬وعىل الرغم من‬ ‫عىل إيرادات املالية العامة‪ .‬وعىل الرغم من استمرار منو اإلنفاق العام‪،‬‬ ‫تراجع معدل هذه االستثامرات إىل‪ 2.7%‬من إجاميل الناتج املحيل يف‬ ‫ال سيام يف البحرين والكويت وعامن واململكة العربية السعودية‪،‬‬ ‫عام ‪ ،2024‬مقارن ً‬ ‫ًة بـام بلغ ‪ 4.2%‬يف عام ‪ ،2023‬فإنها ال تزال تحتفظ‬ ‫حافظت بعض البلدان عىل فوائض يف موازناتها يف عام ‪ :2024‬فقد‬ ‫مبكانتها البارزة يف جذب االستثامرات‪.‬‬ ‫حققت سلطنة عامن فائضًاً ماليًاً قدره ‪ 5.4%‬من إجاميل الناتج‬ ‫ًة ب ‪ 6.9%‬يف عام ‪ ،)2023‬يف حني سجلت اإلمارات‬ ‫املحيل‪ ،‬مقارن ً‬ ‫ال يزال معدل التضخم العام يف جميع دول مجلس التعاون الخليجي‬ ‫فائضًاً نسبته ‪ ،4.6%‬وحققت قطر فائضًاً بلغ ‪ .0.7%‬ولوحظت‬ ‫منخفضًاً‪ ،‬عىل الرغم من خفض أسعار الفائدة يف عام ‪ .2024‬فقد‬ ‫تحسينات يف أرصدة املالية العامة يف البحرين واإلمارات مقارنة بعام‬ ‫بلغ متوسط معدل التضخم نحو ‪ 2.0%‬خالل عام ‪ ،2024‬مام يعكس‬ ‫‪ .2023‬ومن املتوقع أن تواجه معظم دول مجلس التعاون الخليجي‬ ‫ًة باملتوسط البالغ ‪ 2.2%‬يف عام ‪ .2023‬ويف عام‬ ‫انخفاضًاً إضافيًاً مقارن ً‬ ‫عجزًا ً طفيفًاً يف املوازنة العامة يف عام ‪ ،2025‬نتيجة النخفاض عائدات‬ ‫‪ ،2024‬وعىل عكس السنوات السابقة‪ ،‬شهدت جميع دول مجلس‬ ‫النفط بسبب تراجع الطلب العاملي‪ .‬وتتمثل الخطوات اإليجابية‬ ‫التعاون الخليجي تخفيضات يف أسعار الفائدة‪ ،‬وذلك متاشيًاً مع قرارات‬ ‫التي تستهدف تنويع قاعدة اإليرادات يف اإلصالحات الرضيبية‪،‬‬ ‫مجلس االحتياطي الفيدرايل األمرييك‪ ،‬نظر�ا الرتباط سعر الرصف‬ ‫ًة تطبيق الحد األدىن للرضيبة التكميلية املحلية بنسبة ‪15%‬‬ ‫وخاص ً‬ ‫بالدوالر‪ .‬وعىل الرغم من أن ارتفاع اإلنفاق العام وعوامل أخرى‬ ‫يف البحرين والكويت واإلمارات العربية املتحدة‪.‬تتباين مسارات‬ ‫رمبا دفعت إىل ترسيع وترية التضخم‪ ،‬ال سيام يف البحرين والكويت‬ ‫الديون يف دول مجلس التعاون الخليجي‪ ،‬حيث تسعى سلطنة عامن‬ ‫وعامن واململكة العربية السعودية‪ ،‬فإن احتواء التضخم ال يزال‬ ‫وقطر واإلمارات العربية املتحدة إىل تخفيض ديونها‪ ،‬يف حني شهدت‬ ‫السبب فيه هو استمرار إعانات الدعم وتثبيت أطر السياسة النقدية‬ ‫اململكة العربية السعودية والبحرين والكويت زيادة يف مستويات‬ ‫من خالل ربط عمالت دول مجلس التعاون الخليجي بالدوالر‪ .‬وعىل‬ ‫ديونها‪ .‬وواصلت سلطنة عامن مسارها نحو تعزيز القدرة عىل تحمل‬ ‫مستوى دول مجلس التعاون الخليجي‪ ،‬تشهد السعودية واإلمارات‬ ‫أعباء الديون‪ ،‬حيث خفضت دينها العام بنسبة ‪ 2.3‬نقطة مئوية من‬ ‫معدالت تضخم بسيطة ولكنها مستقرة إىل حد كبري يف مؤرش أسعار‬ ‫إجاميل الناتج املحيل‪ .‬واتبعت قطر إجراءات مامثلة تهدف إىل توحيد‬ ‫املستهلكني‪ ،‬والسبب يف هذا التضخم هو ارتفاع أسعار العقارات‬ ‫الديون وتثبيتها‪ ،‬يف حني حافظت اإلمارات عىل نسبة الدين إىل الناتج‬ ‫والوحدات السكنية‪ .‬ومن املحتمل أن تؤدي ضغوط الطلب وزيادة‬ ‫املحيل اإلجاميل البالغة ‪ .29.8%‬وواجهت اململكة العربية السعودية‬ ‫حالة عدم اليقني بشأن سياسات التجارة إىل بعض الضغوط السعرية‬ ‫(التي شهدت زيادة يف مستويات الديون قدرها ‪ 1.5‬نقطة مئوية‬ ‫عىل املدى القصري يف دول مجلس التعاون الخليجي‪ .‬ومع ذلك‪ُ ،‬يُتوقع‬ ‫من إجاميل الناتج املحيل) والبحرين (‪ )1.5%‬والكويت (‪)4.1%‬‬ ‫أن يستمر استقرار األسعار بشكل عام‪ ،‬مع بقاء معدالت التضخم‬ ‫تفاقًامً يف ديناميكيات الديون السيادية ‪ -‬وإن كان ذلك انطالقا من‬ ‫منخفضة‪.‬‬ ‫قاعدة منخفضة‪ ،‬مام يعكس الضغوط عىل املالية العامة الناجمة عن‬ ‫انخفاض عائدات النفط وتزايد نفقات املالية العامة‪ .‬وال تزال آفاق‬ ‫ال تزال معدالت التشغيل مرتفعة بشكل عام يف دول مجلس التعاون‬ ‫الدين الحكومي مستقرة عىل املدى القريب‪ ،‬باستثناء البحرين حيث‬ ‫الخليجي‪ ،‬غري أن التحسينات التي تحققت يف السنوات األخرية آخذة‬ ‫ُتُظهر مستويات الدين ارتفاعًاً ملحوظًاً‪ ،‬ومن املتوقع أن تصل إىل‬ ‫يف التوقف حاليا‪ .‬فعىل وجه التحديد‪ ،‬شهدت البحرين والكويت‬ ‫‪ 131%‬من إجاميل الناتج املحيل بحلول عام ‪.2026‬‬ ‫ُعامن ركود�ا يف معدالت التشغيل بعد التحسينات األخرية‪ ،‬وال‬ ‫وُ‬ ‫تزال نسبة التشغيل إىل عدد السكان يف اإلمارات أقل من البلدان‬ ‫حافظت دول مجلس التعاون الخليجي عىل مركز خارجي قوي نسبيًاً‬ ‫املامثلة‪ .‬ويف املقابل‪ ،‬شهدت السعودية انخفاضًاً يف املتوسط ربع‬ ‫عىل الرغم من عدم اليقني بشأن التجارة والضغوط الناجمة عن‬ ‫السنوي ملعدل البطالة من ‪ 4.4%‬يف عام ‪ 2023‬إىل ‪ 3.5%‬يف عام‬ ‫انخفاض عائدات النفط‪ .‬ففي عام ‪ ،2024‬ظلت فوائض الحساب‬ ‫‪ ،2024‬وحافظت قطر أيضا عىل معدل تشغيل مرتفع للغاية بلغ‬ ‫الجاري إيجابية يف جميع دول مجلس التعاون الخليجي‪ ،‬باستثناء‬ ‫‪ .87.4%‬ومع ذلك‪ ،‬ال تزال معدالت البطالة بني الشباب تشكل تحديًاً‬ ‫اململكة العربية السعودية‪ .‬وساعدت صادرات الخدمات عىل‬ ‫ُعامن‪ ،‬مام يدل عىل رضورة إجراء إصالحات‬‫يف الكويت والسعودية و ُ‬ ‫التخفيف من تأثري تراجع صادرات النفط‪ ،‬مام يعكس قدرة دول‬ ‫هيكلية تستهدف زيادة فرص العمل للشباب‪.‬‬ ‫مجلس التعاون الخليجي املتزايدة عىل الصمود يف مواجهة التغريات‬ ‫العاملية‪ .‬غري أن فائض الحساب الجاري شهد تراجعًاً يف معظم دول‬ ‫من املتوقع أن يسجل اقتصاد دول مجلس التعاون الخليجي منوًاً‬ ‫مجلس التعاون الخليجي بسبب ارتفاع الواردات من السلع الوسيطة‬ ‫بنسبة ‪ 3.2%‬يف عام ‪ ،2025‬مع تحقيق معدل منو قوي بنسبة ‪4.5%‬‬ ‫واآلالت‪ ،‬وهو ما يعكس منو االستثامرات‪ ،‬يف حني استقرت إيرادات‬ ‫يف عام ‪ .2026‬تتشّكّل هذه الديناميكيات نتيجة الرتاجع املتوقع عن‬ ‫تصدير النفط‪ .‬ومع ذلك‪ ،‬تربز قطر باعتبارها الدولة الوحيدة التي‬ ‫‪ 2‬تم التطبيق يف نوفمرب‪/‬ترشين الثاين ‪.3202‬‬ ‫‪06‬‬ ‫‪EXECUTIVE SUMMARY‬‬ ‫‪GULF ECONOMIC UPDATE‬‬ ‫الحكومي أو اإليرادات الحكومية عىل إجاميل الناتج املحيل للبلد‬ ‫تخفيضات اإلنتاج التي أقرتها "أوبك‪ ،"+‬إىل جانب التوسع املستمر‬ ‫املعني‪ ،‬أي التحديد الكمي لكل نشاط اقتصادي يتحقق مقابل كل‬ ‫يف القطاع غري النفطي يف كل من اململكة العربية السعودية وقطر‬ ‫دوالر ُيُنفق وفق سياسة املالية العامة‪.‬‬ ‫واإلمارات العربية املتحدة‪ .‬ومن املتوقع أن ُت ُظهر ديناميكيات قطاع‬ ‫الهيدروكربونات تفاوت�ا أكرب بني دول مجلس التعاون الخليجي‪،‬‬ ‫تقييم فاعلية سياسة املالية العامة له أهمية خاصة بالنسبة لدول‬ ‫ويف املقابل‪ُ ،‬يُتوقع أن ُيُسهم القطاع غري الهيدروكربوين يف النمو‬ ‫مجلس التعاون الخليجي عىل خلفية جهودها الحثيثة التي تستهدف‬ ‫االقتصادي يف جميع اقتصادات دول املجلس‪ .‬ومن املتوقع أن يشهد‬ ‫تنويع النشاط االقتصادي يف السنوات األخرية‪ .‬فعىل املستوى العاملي‪،‬‬ ‫َّدر بنحو ‪ .5.7%‬ويف‬‫القطاع النفطي معدالت منو متوسطة األجل ُتُق َ‬ ‫ومنذ األزمة املالية العاملية‪ ،‬أصبحت سياسة املالية العامة تؤثر بشكل‬ ‫املقابل‪ُ ،‬يُتوقع أن يحافظ القطاع غري النفطي عىل وترية منو مستقرة‬ ‫متزايد عىل االقتصادات العاملية‪ ،‬حيث ارتفع اإلنفاق العام كنسبة من‬ ‫تبلغ نحو ‪ 4.97%‬عىل املدى املتوسط‪ .‬ومن املتوقع أيضًاً أن تأيت‬ ‫إجاميل الناتج املحيل يف أكرث من ‪ 70%‬من البلدان‪ .‬ويف دول مجلس‬ ‫معظم التحسينات اإلضافية يف النمو من ارتفاع صايف الصادرات‪ .‬ويف‬ ‫التعاون الخليجي‪ ،‬ترتاوح نسبة اإلنفاق عىل مستوى املالية العامة‬ ‫الوقت نفسه‪ ،‬ستظل مساهامت االستهالك واالستثامرات إيجابية‬ ‫ًرا‬ ‫من إجاميل الناتج املحيل غري الهيدروكربوين بني ‪ 36%‬و‪ .84%‬ونظ ً‬ ‫بشكل عام‪ .‬ومع ذلك‪ ،‬يجب التعامل مع هذه التوقعات بحذر بالغ‪،‬‬ ‫ألن اإلنفاق العام يتم غالبًاً من خالل استثامرات عامة واسعة النطاق‪،‬‬ ‫نظرًا ً لتصاعد حالة عدم اليقني العاملي املرتبطة مبستوى الطلب عىل‬ ‫فإن ذلك يستدعي فهًامً أفضل للعوائد عىل إجاميل الناتج املحيل‬ ‫الهيدروكربونات وسياسات التجارة‪.‬‬ ‫من هذه االستثامرات‪ .‬كام يستلزم تقييم فاعلية تخصيص رأس املال‪،‬‬ ‫والتأكد من أن السياسات املالية العامة مصممة بشكل جيد لتعزيز‬ ‫قسم النقاط البارزة يف التقرير‪:‬‬ ‫مستويات التشغيل وخلق فرص العمل‪ ،‬إىل جانب تحقيق أهداف‬ ‫مسرية سلطان ُ‬ ‫ُعامن نحو استدامة املالية العامة‬ ‫أخرى‪ .‬وعىل جانب اإليرادات‪ ،‬يرتبط معظم الدخل مببيعات املنتجات‬ ‫الهيدروكربونية‪ ،‬حيث شكلت إيرادات مبيعات الهيدروكربونات ما‬ ‫ُعامن تقدمًاً ملحوظًاً يف تعزيز قدرتها االقتصادية عىل‬ ‫حققت سلطنة ُ‬ ‫بني ‪ 40%‬و‪ 90%‬من إجاميل اإليرادات الحكومية يف عام ‪.2023‬‬ ‫الصمود‪ ،‬ووضع أسس للنمو املستدام‪ .‬وأسوة بدول مجلس التعاون‬ ‫الخليجي األخرى‪ ،‬كثفت السلطنة جهودها لتقليل االعتامد عىل‬ ‫ُمفصلة ملضاعفات‬ ‫عائدات النفط‪ ،‬وإدارة املالية العامة يف ظل تقلبات أسعار النفط يعرض الفصل الخاص يف هذا التقرير تقديرات ُ‬ ‫العاملية‪ .‬ويف الفرتات السابقة من انخفاض أسعار النفط‪ ،‬واجهت املالية العامة يف كل دولة من دول مجلس التعاون الخليجي‪ .‬هذه‬ ‫السلطنة عجزًا ً مزدوجًاً واعتمدت عىل االقرتاض لسد الفجوات املالية‪ .‬التقديرات عبارة عن التحليل الكمي الرئييس الذي ميثل محور‬ ‫أما يف السنوات األخرية‪ ،‬فقد اتخذت خطوات مهمة للحد من اعتامدها تركيز هذا التقرير‪ .‬وقد تم التوصل إليها باستخدام أساليب االقتصاد‬ ‫عىل النفط وتعزيز استدامة املالية العامة‪ ،‬ال سيام بعد صدمة أسعار القيايس‪ ،‬مام يسمح بتقدير دقيق لهذه املضاعفات بناء عىل التباينات‬ ‫النفط يف عام ‪ 2014‬وأزمة كورونا‪ .‬ويف إطار رؤية السلطنة ‪ 2040‬املعقولة يف حيز املالية العامة يف كل دولة من دول مجلس التعاون‬ ‫وخطة املالية العامة متوسطة األجل ‪ ،2024-2020‬طبقت ُ‬ ‫ُعامن الخليجي‪.‬‬ ‫إصالحات لتنويع اإليرادات‪ ،‬وتحسني كفاءة اإلنفاق‪ ،‬وإدارة اإليرادات‬ ‫ ُتُعترب مضاعفات املالية العامة التقديرية لإلنفاق االستهاليك‬ ‫النفطية غري املتوقعة‪ .‬هذه اإلصالحات حققت نتائج ملموسة‪ .‬ومنذ ·‬ ‫الحكومي عىل الناتج غري الهيدروكربوين يف دول مجلس‬ ‫عام ‪ ،2022‬حققت عامن تحسينات كبرية يف املركز املايل للدولة‪ ،‬وكان‬ ‫التعاون الخليجي إيجابية‪ ،‬لكنها ضعيفة نسبيًاً‪ .‬فعىل املدى‬ ‫اإلنجاز األبرز هو خفض الدين العام عرب التوظيف اإلسرتاتيجي لألرباح‬ ‫القصري‪ ،‬ترتاوح مضاعفات اإلنفاق االستهاليك الحكومي يف‬ ‫النفطية غري املتوقعة‪ .‬وقد أدى ذلك إىل توسيع الحيز املتاح يف املالية‬ ‫دول مجلس التعاون الخليجي بني‪ 0.1‬و‪ ،0.45‬وذلك بحسب‬ ‫العامة وتدعيم قدرة السلطنة عىل تحمل الصدمات الخارجية‪ .‬جدير‬ ‫الدولة املحددة التي يتم تحليلها‪ .‬ويتوافق هذا بشكل عام‬ ‫ُعامن متثل منوذجًاً ُيُحتذى به لضبط أوضاع املالية‬‫باالعتبار أن تجربة ُ‬ ‫مع التقديرات الحالية لدول مجلس التعاون الخليجي‪،‬‬ ‫العامة وتحقيق اإلصالح االقتصادي الفعال‪.‬‬ ‫وكذلك مع األدلة والشواهد العاملية حول مضاعفات نفقات‬ ‫ًبا ما تكون يف‬ ‫املالية العامة‪ ،‬رغم أن هذه املضاعفات غال ً‬ ‫فصل خاص يف التقرير‪:‬‬ ‫املستويات األدىن‪ .‬وكان تأثري اإلنفاق الحكومي هو األكرب‬ ‫اإلنفاق الذيك يحقق نواتج اقتصادية أقوى ــ سياسة‬ ‫يف اململكة العربية السعودية واإلمارات العربية املتحدة‪،‬‬ ‫املالية العامة من أجل ازدهار دول مجلس التعاون‬ ‫ُعامن‪ .‬وبالنسبة للبحرين وقطر‪ ،‬جاء‬ ‫واألصغر يف الكويت و ُ‬ ‫الخليجي‬ ‫تأثري التغري يف الناتج غري الهيدروكربوين استجابة لنفقات‬ ‫املالية العامة إيجابيًاً‪ ،‬لكنه ليس ذا داللة إحصائية كبرية‪.‬‬ ‫يحلل هذا الفصل الخاص الوارد يف ثنايا التقرير فاعلية سياسة‬ ‫ومن الناحية االقتصادية‪ ،‬يشري هذا إىل أن زيادة مبقدار‬ ‫املالية العامة يف تعزيز النمو االقتصادي يف منطقة مجلس التعاون‬ ‫وحدة واحدة يف اإلنفاق الحكومي ميكن أن تؤدي إىل‬ ‫ًء عليه‪ ،‬ينصب محور الرتكيز الرئييس لهذا الفصل‬ ‫الخليجي‪ .‬وبنا ً‬ ‫زيادة يف الناتج بحجم يرتاوح بني ‪ 0.1‬و‪ 0.45‬وحدة‪ .‬وعىل‬ ‫عىل مضاعفات املالية العامة‪ ،‬التي تقيس تأثري التغريات يف اإلنفاق‬ ‫‪07‬‬ ‫‪EXECUTIVE SUMMARY‬‬ ‫‪GULF ECONOMIC UPDATE‬‬ ‫فيام يتعلق بتأثري النفقات الرأساملية الحكومية‪ ،‬أظهرت‬ ‫الرغم من أن إنفاق املالية العامة ميكن أن ُيُسهم يف زيادة ·‬ ‫ ‬ ‫هذه الدراسة أن هناك تأثريًاً هامشيًاً يتمّثّل يف زيادة بنسبة‬ ‫الناتج‪ ،‬ال توجد تأثريات منطية ملضاعف كينز ‪Keynesian‬‬ ‫‪ 0.07%‬يف الناتج املحتمل مقابل زيادة بنسبة نقطة مئوية‬ ‫‪ multiplier‬التي تسمح للتغريات األولية يف اإلنفاق‬ ‫واحدة يف االستثامر ملرة واحدة‪ .‬ويتعلق هذا التقدير بتغيري‬ ‫بإحداث تغيريات أكرب يف الطلب والناتج عىل املستوى الكيل‪.‬‬ ‫واحد ومنفرد مبقدار نقطة مئوية واحدة يف االستثامرات‬ ‫الحكومية‪ ،‬ويتسق بوجه عام مع الشواهد الخاصة ببلدان‬ ‫فيام يتعلق بالدورات االقتصادية‪ ،‬تكون مضاعفات‬ ‫ ·‬ ‫ ‬ ‫منظمة التعاون والتنمية االقتصادية‪ .‬هذا التأثري اإليجايب‬ ‫املالية العامة إيجابية خالل فرتات الركود‪ ،‬وتؤدي دورًاً‬ ‫عىل النفقات االستثامرية الحكومية العارضة‪/‬االنتقالية‬ ‫غاية يف األهمية يف تحقيق االستقرار‪ ،‬لكنها تقرتب من‬ ‫(‪ )transitory‬مرهون بعدم متويل هذه االستثامرات من‬ ‫الصفر يف أوقات النمو االقتصادي املرتفع‪ .‬وهذا يتسق‬ ‫خالل االقرتاض (أي بإحداث عجز يف املوازنة)‪ .‬ويستلزم‬ ‫مع التنبؤات يف إطار النظرية االقتصادية‪ .‬ويشري ذلك‬ ‫عمومًاً توخي الحذر والحيطة عند تقدير النتائج الخاصة‬ ‫إىل أن اإلنفاق العام يكون أكرث فاعلية يف تحفيز النشاط‬ ‫باملضاعفات طويلة األجل‪ ،‬ألن االفرتاضات األساسية‬ ‫االقتصادي خالل فرتات الركود‪ ،‬يف حني أن تأثريه يكون‬ ‫املحددة للتقديرات شديدة الحساسية‪ .‬ومن املرجح أن‬ ‫محدودًا ً أو غري ملموس خالل فرتات النمو‪ .‬ويحدث هذا‬ ‫يكون للتغيريات الدامئة يف االستثامرات الحكومية تأثري‬ ‫عادة عندما يكون االقتصاد قريبًاً من مستوى التشغيل‬ ‫أكرب وأكرث استدامة‪ .‬وستكون هذه اآلثار واضحة بشكل‬ ‫الكامل (‪ ،)full employment‬مام يعني أن اإلنفاق‬ ‫خاص عىل املدى الطويل مع تحول االستثامرات الحكومية‬ ‫اإلضايف ال يساهم بشكل كبري يف منو إجاميل الناتج املحيل‪.‬‬ ‫إىل رأس مال إنتاجي ُيُستخدم لفرتات طويلة من الزمن‪.‬‬ ‫ومن الرضوري دعم األبحاث التي تهدف إىل تقييم تأثري‬ ‫يف الكثري من الحاالت يكون تأثري مضاعفات املالية العامة‬ ‫ ·‬ ‫ ‬ ‫ّونات املختلفة‬ ‫مضاعفات النمو عىل املدى الطويل واملك ّ‬ ‫لإليرادات الحكومية عىل الناتج غري الهيدروكربوين قريبًاً من‬ ‫للنفقات االستثامرية الحكومية‪.‬‬ ‫الصفر‪ .‬ويتسق هذا متامًاً مع الشواهد واألدلة األخرية عىل‬ ‫آثار السياسة الرضيبية يف دول مجلس التعاون الخليجي‪.‬‬ ‫ّعالة بوجه عام يف تحقيق استقرار‬ ‫الخالصة‪ :‬سياسة املالية العامة ف ّ‬ ‫ًة ما تشري األدلة والشواهد املتعلقة باالقتصادات‬ ‫وعاد ً‬ ‫التقلبات الدورية يف الناتج (غري الهيدروكربوين)‪ ،‬ال سياّما يف أوقات‬ ‫املتقدمة إىل مضاعفات سلبية لإليرادات‪ ،‬مقارن ً‬ ‫ًة بالتأثري‬ ‫الندرة االقتصادية‪ .‬ورغم أن مضاعفات املالية العامة يف دول مجلس‬ ‫الصفري الذي ُيُالحظ يف دول مجلس التعاون الخليجي‪.‬‬ ‫التعاون الخليجي ُتُظهر تأثريًا ً إيجابيًاً يف كل الحاالت التي متت دراستها‪،‬‬ ‫وجرت العادة أن تتغري اإليرادات الحكومية من خالل‬ ‫لكنها بوجه عام تظل ضعيفة وأقل من واحد‪ ،‬وهذا يتامىش مع‬ ‫التغيريات يف السياسة الرضيبية (زيادات أو تخفيضات‬ ‫التقديرات الواردة يف الدراسات الخاصة بالعديد من البلدان األخرى‪.‬‬ ‫رضيبة الدخل الشخيص‪ ،‬ورضيبة الرشكات‪ ،‬ورضيبة القيمة‬ ‫لذلك‪ ،‬ينبغي أال يتوقع واضعو السياسات حدوث تأثريات مضاعفة‬ ‫املضافة‪ ،‬وما إىل ذلك) أو التغريات يف الدخل غري الخاضع‬ ‫استجابة لتدابري سياسة املالية العامة الرامية إىل تحقيق االستقرار‪،‬‬ ‫للرضيبة‪ .‬ونظرًا ً لضعف التأثري املضاعف عىل اإليرادات‪ ،‬فإن‬ ‫حيث إن هذه التأثريات تحدث يف حالة زيادة مضاعفات املالية العام‬ ‫ذلك يشري إىل عدم وجود عالقة واضحة وذات داللة إحصائية‬ ‫عىل رقم واحد (‪ .)1‬غري أن هذا ال يعني غيابًاً تامًاً لتأثري سياسة املالية‬ ‫بني التغريات يف اإليرادات الحكومية والناتج االقتصادي‪.‬‬ ‫العامة عىل الناتج‪ .‬ونظرًا ً ألن املضاعفات التقديرية تكون أكرب بكثري‬ ‫وهذا قد يعكس استمرار انخفاض نسب الرضائب إىل‬ ‫خالل فرتات الركود االقتصادي‪ ،‬فإن هذه النتائج تدعم بقوة تبني‬ ‫إجاميل الناتج املحيل يف دول مجلس التعاون الخليجي‪،‬‬ ‫سياسة مالية عامة تهدف إىل مواجهة التقلبات الدورية‪ ،‬وتوسيع‬ ‫حيث إن التغريات الطفيفة يف اإليرادات الرضيبية مقارنة‬ ‫نطاق الطلب من خالل برامج التحفيز املايل لتنشيط االقتصاد خالل‬ ‫بإجاميل الناتج املحيل من غري املرجح أن تؤثر بشكل كبري‬ ‫فرتات الركود بسبب تراجع الطلب عىل السلع والخدمات‪.‬‬ ‫عىل االقتصاد الكيل‪ ،‬مقارنة باالقتصادات التي تتمتع بنسب‬ ‫ًء عىل ذلك‪ ،‬هناك إمكانية مستقبلية‬ ‫رضائب أعىل‪ .‬وبنا ً‬ ‫لتعزيز تأثريات السياسة الرضيبية يف دول مجلس التعاون‬ ‫الخليجي عرب توسيع القاعدة الرضيبية‪ ،‬مام يتيح إجراء‬ ‫تغيريات يف السياسة الرضيبية لتصبح أداة مالية أكرث فاعلية‪.‬‬ ‫‪08‬‬ ‫‪EXECUTIVE SUMMARY‬‬ ‫‪GULF ECONOMIC UPDATE‬‬ Chapter 01 Page 9 – 17 Recent Developments Growth in the GCC improved in 2024 despite contractions in the hydrocarbon sector. This was driven by resilient non-hydrocarbon activity and sustained diversification momentum across most economies. E conomic growth in the GCC in 2024 and hence not subject to production cuts, saw its hy- remained closely tied to the global drocarbon GDP grow by 0.5 percent. The UAE posted 2.1 energy markets. While oil produc- percent hydrocarbon GDP growth despite crude oil pro- tion cuts and volatility in energy prices duction cuts, thanks to the country’s natural gas exports. constrained activity, overall regional growth strengthened to 1.8 percent, up Oil market dynamics in 2024 were marked by con- from 0.4 percent in 2023 (Figure 1). The contraction tinued OPEC+ production adjustments, leading to a in oil GDP went down from 5.2 percent (2023) to 3.0 decline in GCC crude output (Figure 7). In early April, percent (2024). In contrast, non-hydrocarbon sectors oil and natural gas prices experienced a sharp but expanded by 3.9 percent – compared to 3.4 percent short-lived correction, triggered by heightened global in 2023 - supported by ongoing diversification efforts trade uncertainty and a temporary shift in market sen- across the region. Growth was primarily driven by sta- timent. Prices began to recover rapidly, supported by ble domestic demand, with private consumption, and easing supply concerns and a prompt reaffirmation by fixed investment contributing positively (Figure 2). OPEC+ of its commitment to existing output targets However, net exports weighed on overall performance, (Figure 8). These developments underscore ongoing reflecting the impact of OPEC+ production cuts and exposure of GCC economies to commodity price vola- weaker hydrocarbon revenues. tility and the importance of maintaining fiscal buffers and accelerating economic diversification. The extension of OPEC+ production caps through- out 2024 constrained hydrocarbon growth. The oil A strong and resilient non-oil sector mitigated the output caps were maintained throughout 2024, ex- impact of oil production cuts, but with different plaining the contractions of the hydrocarbon sector sectoral drivers of growth across the region. Coun- observed in Bahrain, Kuwait, Oman, and Saudi Ara- try-specific developments in non-oil sector perfor- bia (2.3, 5.8, 3.0, and 4.5, respectively). These negative mance in 2024 along with the sectoral drivers are pre- trends were compensated by robust growth in non-oil sented below: sectors (Figure 3). Qatar, a former member of OPEC 09 CHAPTER 1 GULF ECONOMIC UPDATE • Bahrain: Non-hydrocarbon growth remained firm at remain subdued, public finances have benefited from 3.6 percent, driven by financial and insurance activ- non-oil revenue reforms, notably from the VAT. ities, followed by manufacturing and construction. These sectors offset the impact of oil sector contraction • The UAE is making steady progress on economic and reflected continued diversification momentum. diversification, led by a dynamic services sector. Robust growth has been supported by strong domestic • Kuwait: The non-oil sector began to recover, reach- activity and strategic investments, with the non-oil ing 0.1 percent, supported by a rebound in private sector now accounting for 74 percent of total GDP. sector credit growth and the implementation of Non-oil exports continue to expand, and public rev- large-scale infrastructure projects. These include enues have been strengthened through tax reforms Mubarak Al-Kabeer Port and the Silk City initiative, and business-friendly reforms. which contributed to employment generation, invest- ment inflows, and reduced oil dependence. • Bahrain’s Economic Vision 2030 and the Economic Recovery Plan (2022–2026) have expanded the non- • Oman: Non-oil activity strengthened, with 3.3 per- oil sector to 85 percent of GDP in 2024. While recent cent growth, led by robust performance in manu- growth has been led by financial services, manufactur- facturing, construction, and services. ing, and construction, the broader non-oil economy continues to be supported by structural investments • Qatar: Non-hydrocarbon growth was moderate at in infrastructure, gas, logistics, fintech, and tourism. 2.7 percent, supported by strong gains in education, Bahrain also stands out among GCC peers for advanc- accommodation and food services, arts and enter- ing revenue diversification, with tax revenues reaching tainment, and transportation. Tourism exceeded its 5.3 percent of GDP in 2023, up from 2.0 percent in 2018, annual visitor targets, underpinned by major events driven by the introduction of VAT and a minimum top- and infrastructure upgrades, while business sentiment up tax on multinationals. improved. • Oman’s Vision 2040 has been supported by strong • Saudi Arabia: Non-oil sector growth was robust at non-oil activity (72.7 percent of GDP) alongside 4.3 percent, driven by services—particularly whole- rising non-hydrocarbon exports. Fiscal and external sale, restaurants, and hotels, as well as finance. This balances have improved due to prudent debt reduction reflects continued momentum in structural reforms. strategies. • United Arab Emirates: The non-oil economy contin- • Qatar has made notable strides in building a knowl- ued its impressive growth of 4.5 percent supported edge-based economy, with progress in education, by financial services, transportation, construction, infrastructure, and tourism exceeding national and real estate. FDI inflows and improvements in targets and contributing to non-oil sector growth. governance further strengthened competitiveness In 2024, non-oil activities accounted for nearly 64 per- and reinforced the success of service-oriented diver- cent of total GDP. Private sector exports reached over sification strategies. US$ 3.35 billion, marking a 68.5 percent year-on-year increase in the fourth quarter. While revenue diversi- GCC countries continue to pursue diversification fication remains limited, further reforms are planned through structural reforms and strategic invest- under the National Development Strategy. ment, though progress is uneven due to structural constraints. When looking at traditional measures of • In Kuwait, diversification and fiscal sustainability diversification, GCC countries show different patterns. are recognized. While the non-oil sector remains rel- atively underdeveloped, there has been modest prog- • In Saudi Arabia, Vision 2030 continues to drive ress, with its share of GDP increasing from 50 percent diversification; the share of non-oil sectors in GDP in 2023 to 52 percent in 2024. Non-oil exports remain grew from 45.4 percent to 54.8 percent since its limited in scale, and reform momentum continues to adoption. Further progress has been hampered by be constrained by persistent political gridlock. stagnant productivity growth. While non-oil exports 10 CHAPTER 1 GULF ECONOMIC UPDATE FIGURE 1 GCC growth recovered in 2024, FIGURE 2 Improvements in growth primarily supported by stable non- driven by lower net export contraction. hydrocarbon activity. Hydrocarbon GDP Non-hydrocarbon GDP RGDP Hydrocarbon GDP Non-hydrocarbon GDP RGDP Private Consumption Govt. Consumption Fixed Investment Net Exports 12 10 9 12 Contribution to growth, percent 8 8 7 6 8 4 5 4 3 Percent 4 0 2 1 Percent 0 0 –4 –1 –2 –3 –4 –8 –4 2021 2022 2023 2024 2021 2022 2023 2024 –8 Source: Haver and2021 2022 World Bank staff calculations. 2023 2024 Source: Haver Analytics and World Bank staff calculations. FIGURE 3 Non-hydrocarbon activity remained FIGURE 4 The non-oil private sectors of Saudi the main growth driver, offsetting Arabia and the UAE expanded, while hydrocarbon sector contractions in Qatar’s showed persistent weakness most GCC economies. and elevated volatility. Hydrocarbon GDP Non-hydrocarbon GDP RGDP QTR KSA UAE 70 Above 50= expansion; 6 Below 50= contraction PMI: Total Economy Output (Index) 4 65 2024 RGDP growth, percent 2 60 0 –2 55 –4 50 –6 –8 45 UAE B R QTR OMN KSA KWT 24:M3 24:M7 24:M11 25:M3 Source: World Bank staff estimations Source: Haver Analytics and World Bank staff calculations. 11 CHAPTER 1 GULF ECONOMIC UPDATE Headline inflation remained contained in 2024, with country-specific factors shaping outcomes. GCC inflation remained broadly low in 2024, sup- continued. In Qatar, inflation declined to 1.1 percent ported by the exchange rate peg with the US$ in from 3.1 percent in 2023, reflecting the support of sub- most countries and other targeted policy mea- sidies, price controls, and softening price increases for sures. Inflation remained low and stable relative to rents and recreation services, in addition to the strong global peers, with limited transmission of external riyal peg. Similarly, in Saudi Arabia, inflation amount- price shocks (Figure 5). In a group of countries where ed to 2.1 percent, anchored by tight monetary policy administered prices and subsidies played a key role, and regulated prices for key consumption items, with inflation was particularly low (Figure 6). Bahrain also housing costs remaining the dominant contributor. experienced low inflation at 0.9 percent – the main The UAE recorded an inflation of 2.3 percent, with sta- driver of inflation was the hotel and restaurant sector. ble tradable goods prices offsetting increases in hous- In Kuwait, inflation eased to below 3.0 percent, reflect- ing and utilities. Overall, inflation remained contained ing waning demand-side pressures and lower imported across the region (2 percent), with monetary policy food prices. In Oman, inflation remained at 1.0 percent, credibility, subdued import costs, and country-specific as transport deflation and moderation in food prices pricing mechanisms contributing to price stability. FIGURE 5 GCC inflation decreased in 2024, FIGURE 6 Inflation trends across GCC countries reflecting contained domestic pressures remained broadly stable in 2024, though and effective policy management. country-level variation persisted. 2023 2024 BHR KWT OMN QTR KSA UAE 18 4 16 14 3 12 CP (y/y percent change) 2 10 Percent 8 1 6 0 CPI (2023=100, y/y percent change) 4 2 –1 0 –2 MENA USA AE E GCC CHINA 2024:M3 2024:M5 2024:M7 2024:M9 2024:M11 2025:M1 2025:M3 Source: IMF WEO April 2024; WB Macro-Poverty Source: Haver and WB staff visualizations. Outlook, SM 2024; and WB staff visualizations. 12 CHAPTER 1 GULF ECONOMIC UPDATE FIGURE 7 Crude oil prices remained volatile, FIGURE 8 Oil and natural gas prices began to driven by OPEC+ production cuts and recover in mid-April, reflecting easing geopolitical tensions, while output supply concerns and shifting market continued to decline. sentiment. Crude Oil Production (Mb/d) Crude Oil Price Inex (rhs) UK Natural Gas Futures Oil Price (RHS) 16680 100 110 76 16660 74 95 105 Brent Crude Oil Price (US$/ Barrel) 16640 Natural Gas (Sterling/ Therm) 90 72 16620 100 16600 85 70 Crude Oil (mb/d) 16580 Crude Oil Price 80 95 68 16560 16540 75 66 90 16520 70 64 16500 85 65 62 16480 16460 60 80 60 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 20-Mar 27-Mar 3-Apr 10-Apr 17-Apr Source: Haver and World Bank staff calculations. Source: Haver Analytics and World Bank staff calculations. Amid oil revenue uncertainty, only some GCC countries managed to improve their fiscal standings. H ​ igher public spending across GCC economies was down from 5.5 percent in 2023. Oman is estimated to affected by the instability of oil revenue, resulting have also seen its fiscal surplus decline to 5.4 percent in fiscal pressure in most GCC (Figure 9). Deficits of GDP in 2024, down from 6.9 percent in 2023. While widened in Kuwait, Oman, Saudi Arabia, and Qatar, capital revenue and taxes on goods and services sup- whereas Bahrain and the UAE managed to maintain ported the overall balance, public spending rose by 1.1 favorable fiscal positions (Figure 10). percent of GDP, driven by increased investment in oil and gas, manufacturing, tourism, logistics, and digital • Fiscal pressures increased in several GCC econo- transformation. mies due to lower growth of hydrocarbon revenues and continued expenditure growth. In Kuwait, the • In contrast, fiscal positions in Bahrain and the UAE fiscal deficit widened slightly to 5.0 percent of GDP remained more favorable in 2024. In Bahrain, the in 2024 from 4.8 percent in 2023 due to lower oil rev- fiscal deficit is estimated to have narrowed slightly from enues from declining prices and OPEC+ production 8.4 percent of GDP in 2023 to 7.9 percent of GDP in cuts, despite contained current expenditure growth 2024, supported by ongoing fiscal consolidation efforts relative to 2023 and declining capital expenditure. through spending rationalization measures – particu- Similarly, Saudi Arabia’s fiscal deficit increased from larly targeting social subsidies and public sector wage 2.0 to 2.8 percent of GDP, as expenditure growth (1.4 growth – but also through the introduction of higher percent of GDP) — mainly from other spending, the VAT rates and the implementation of Domestic Mini- wage bill, and subsidies — outpaced revenue growth mum Top-Up Tax. In the UAE, fiscal surplus expanded (0.6 percent), despite a modest rise in non-oil reve- to 4.6 percent of GDP compared to 3.6 percent of GDP nues from higher VAT collections. In Qatar, a decline in previous year, underpinned by robust fiscal buffers, of 18 percent in hydrocarbon revenue led to a large and continued progress on diversification. narrowing of the fiscal surplus to 0.7 percent of GDP, 13 CHAPTER 1 GULF ECONOMIC UPDATE • To enhance fiscal sustainability and align with me- groups with global revenues exceeding €750 million. dium-term diversification strategies, GCC countries Kuwait and the UAE formally confirmed implemen- continue to advance tax policy reforms. Non-oil fiscal tation in December 2024. The UAE also expanded its balances continued to strengthen across the region, international tax cooperation through the ratification supported by tax policy reforms and diversification of a revised Double Taxation Agreement with Swit- efforts (Figure 11). In line with commitments under zerland and concluded an economic agreement with the OECD/G20 Inclusive Framework on Base Erosion the Eurasian Economic Union to boost non-oil trade. and Profit Shifting (BEPS), Bahrain, Kuwait, and the These measures reflect a strategic shift toward glob- UAE announced the implementation of a 15 percent ally coherent tax regimes and more resilient domestic Domestic Minimum Top-Up Tax (DMTT) effective revenue structures in oil-exporting economies. from 2025. This tax will target multinational enterprise Public debt across the GCC diverged in 2024, reflecting underlying differences in fiscal policy stances, revenue developments, and debt management strategies. While debt levels in most countries remained percent of GDP, underpinned by fiscal discipline and below the MENA average of 45.4 percent of GDP, strengthened non-oil revenues (see Spotlight section on increases were recorded in Bahrain, Kuwait, and Oman’s fiscal consolidation experience). Bahrain’s public Saudi Arabia, reflecting ongoing financing needs and debt continued to rise, reaching 124.5 percent of GDP, legacy spending pressures, even as new consolidation despite ongoing reform efforts and support from the GCC efforts took hold. In contrast, Oman, Qatar, and the financial assistance program. The country’s elevated UAE reduced their debt-to-GDP ratios, reflecting debt burden and continued reliance on hydrocarbon sustained fiscal consolidation, improved revenue revenues leave its fiscal position exposed to oil price mobilization, and limited new borrowing. Oman made volatility. notable progress, reducing its debt from 37.5 to 35.2 FIGURE 9 While fiscal positions weakened in FIGURE 10 These shifts reflect unequal revenue several GCC countries, others recorded performances and spending. modest improvements. Change fiscal balance, 2023-2024 Fiscal Revenue Fiscal Expenditure 2 60 1 50 Percent of GDP 0 40 Percent of GDP –1 30 –2 20 –3 10 –4 0 –5 2023 2024 2023 2024 2023 2024 2023 2024 2023 2024 2023 2024 QATAR OMAN SAUDI K WAIT BAH AIN UAE ARABIA K WAIT OMAN SAUDI QATAR UAE BAH AIN ARABIA Source: WB Macro-Poverty Outlook, SM 2025. Source: WB Macro-Poverty Outlook, SM 2025. 14 CHAPTER 1 GULF ECONOMIC UPDATE FIGURE 11 The overall non-oil fiscal balance FIGURE 12 Debt dynamics diverged across the in the GCC continued to improve region, with some countries reducing in 2024. debt-to-GDP ratios, while others recorded increases. Overall non-oil fiscal balance, General Government Change in Debt, 2023-2024 5 –27 4 –28 3 –29 2 Percent of GDP Percent of GDP –30 1 –31 0 –32 MENA –1 –33 –2 –34 –3 –35 K WAIT BAH AIN SAUDI UAE QATAR OMAN 2020 2021 2022 2023 2024 ARABIA Source: IMF, WB databases and World Bank staff calculations. Source: Haver analytics and WB Staff calculations and estimates. The current account surplus of GCC countries narrowed in 2024, owing to subdued commodity revenues driven by oil production caps and rising imports. Lower export growth due to OPEC+ production in 2024), despite a slightly decreasing estimated cuts and rising imports worsened GCC’s external trade balance (-2.1 percent). This was largely driven position, despite an overall increase in service ex- by a strong performance in services exports—including ports. All GCC countries but Qatar saw their current tourism, transport, and logistics—supported by sus- account surpluses decrease in 2024, by an estimated tained infrastructure investments and regional events. average of 1.14 point of GDP (excluding Qatar). Healthy international reserves levels offered the GCC This reflects an increase in imports and voluntary oil some cushion in the face of high oil price volatility production caps established by OPEC+ explaining the and uncertainty in global trade (Figure 13). Despite stagnation of export revenues. pressures on the current account, GCC economies have substantial foreign exchange reserves to weather any • Bahrain, Kuwait, and the UAE saw their current external sector shock. In 2024, internal reserves re- account balances deteriorate, reflecting a decline mained strong across most GCC countries, with the UAE of merchandise exports (-1 percent in Bahrain, -2.4 experiencing a sustained increase due to its economic percent in Kuwait, -1.5 percent in the UAE). Saudi diversification efforts. Oman and Qatar experienced Arabia saw its current account surplus drop from an weaker but stable increases throughout 2023 and 2024 estimated 3.2 percent of GDP in 2023 to 2.5 percent in thanks to FDIs and efforts to reduce government debt, 2024, a drop mainly driven by a 3.8 percentage point hereby improving the confidence of investors. The stocks decrease of the Kingdom’s trade balance year-on-year. of foreign reserves in Saudi Arabia and Kuwait remained broadly stable in 2024, with lower current account sur- • Qatar is the only GCC country that saw its cur- pluses and subdued FDIs inflows weighing on reserves. rent account balance improve (+0.5 point of GDP 15 CHAPTER 1 GULF ECONOMIC UPDATE FIGURE 13 Current account surpluses narrowed FIGURE 14 Foreign reserves maintained healthy in 2024, due to declining trade levels, supporting imports despite balances and weaker FDIs. subdued exports. GCC QTR BHR KSA KWT KWT OMN QTR UAE KSA 180 Current Account balance, percent of annual GDP, SA 9 170 8 160 7 International Reserves, January 6 150 5 140 4 130 3 120 2 110 1 0 100 –1 90 –2 80 2023 2024:Q1 2024:Q2 2024:Q3 2024:Q4 Jan May Sep Jan May Sep Jan 2023 2023 2023 2024 2024 2024 2025 Source: Haver analytics Source: Haver analytics GCC countries had varied levels of success to attract to 1.1 percent of GDP compared to 2.1 percent in 2023. Foreign Direct Investments (FDI) in 2024. The UAE, Foreign investment inflows also decreased in Bahrain, particularly Dubai, maintained its rank as the number Kuwait, and Qatar (-7.3, –2.3, and –0.5 percent of GDP, one destination of greenfield FDI projects relative to respectively), highlighting the need for further reforms the size of the economy, reaching an estimated AED removing structural barriers to foreign ownership. On 52.3 billion (US$14.24 billion) in FDI capital compared to the contrary, Oman attracted higher levels of foreign AED 39.26 billion (US$10.69 billion) in 2023. Despite its investments (+2.4 percent of GDP), thanks to prudent ambitious Vision 2030 agenda, Saudi Arabia’s FDI net fiscal management and diversification efforts attracting inflows decreased in 2024 as a share of GDP, amounting foreign investors. 16 CHAPTER 1 GULF ECONOMIC UPDATE Labor markets in GCC countries maintained low unemployment rates, but challenges persist around female labor participation and youth unemployment. Employment rates in GCC countries reflect efforts benefits, promotion policies, and support for female to raise employment rates but gender gaps, na- entrepreneurs. Qatar maintained its excellent em- tionality, and age imbalances remain key challeng- ployment-to-population rate of 87.4 percent. In Saudi es. Women’s labor force participation rates have seen Arabia, the employment-to-population ratio remained promising increases across several GCC economies, stagnant at 58.5 percent, while the unemployment rate but significant gaps remain. Youth unemployment re- stabilized at 0.8 percent. Although it remains far be- mains higher than the market average, calling for ad- low that of Saudi men (30 points difference), the labor ditional inclusion policies and broader labor market force participation of Saudi women is showing encour- reforms. Bahrain, Kuwait, and Oman saw the growth aging results. UAE’s employment rate is estimated at of their employment rates stagnate after multiple 80.4 percent in 2024. However, youth unemployment years of improvement (at 70.9, 70, and 67.3 percent remains a key challenge, especially for young women: in 2024, respectively). This is especially challenging while female (ages +15) unemployment rate was 4.5 among women. Previous gains were achieved thanks to percent in 2024, it was as high as 11.9 percent for young inclusion policies targeting women, such as maternity women (ages 15-24). FIGURE 15 Female (+25) employment-to-population ratios are increasing but remain at low levels. UAE BHR KWT OMN QTR KSA Employment-to-population ratio, female 25+, 2013=100 140 130 120 110 100 90 80 2013 2015 2017 2019 2021 2023 Source: Haver analytics and World Bank staff calculations 17 CHAPTER 1 GULF ECONOMIC UPDATE Chapter 02 Page 18 – 31 Outlook & Risks The global economic outlook remains fragile due to heightened trade policy uncertainty. Oil market volatility poses additional risks to growth, fiscal stability, and external balances across the region. T he global economy enters 2025 under The oil market faces a volatile and uncertain out- a cloud of heightened uncertainty, look in 2025. Brent crude prices fell sharply in early primarily driven by rising trade pol- 2025, dropping from over US$80 per barrel in January icy tensions. Trade policy uncertainty to below US$65 per barrel by April—the lowest since surged sixty-fold between September 2021—amid concerns over global demand and the roll- 2024 and March 20253, weighing heav- back of OPEC+ production cut. Futures markets signal ily on investment decisions, supply chains, and market continued weakness, with prices expected to remain confidence. These dynamics risk dampening global subdued through 2026. OPEC+ announced in April an demand and disrupting export-import flows, with po- accelerated plan to reverse production cuts starting tential long-term repercussions for productivity and May 2025, which may increase downward pressure pric- growth. Inflation has moderated globally due to lower es in the short term. While the GCC countries stand to energy prices, offering some relief to monetary author- benefit from increased production volumes, price vola- ities. Nonetheless, the outlook remains fragile, with tility could strain fiscal revenues and external balances. downside risks stemming from further protectionism, The broader oil outlook is highly sensitive to global trade tighter financial conditions, and potential geopolitical trends, geopolitical developments, and energy transition flare-ups. Emerging markets with high trade exposure, dynamics. If global growth slows or trade barriers rise, limited policy space, and weak external positions are oil demand could weaken further, compounding revenue particularly vulnerable in this evolving environment. and investment risks for producers. 3 World Bank, MENA Economics Update, April 2025 18 CHAPTER 2 GULF ECONOMIC UPDATE FIGURE 16 Oil price fell sharply amid concerns over global demand and the rollback of OPEC+ production cuts. Average Crude Oil Spot Price 90 80 US$ per barrel 70 60 50 40 2023 2024 2025 2026 2027 Source: Commodity Market Outlook; and WB Staff calculations. Despite a global economic slowdown and rising trade uncertainty, the GCC is projected to experience relatively strong economic growth in the medium term. Growth in GCC countries is expected to increase in structure projects, including the Northern Special the medium term due to an increase in oil produc- Economic Zone. Long-term growth prospects re- tion and robust non-hydrocarbon activity. With the main contingent on the effective implementation of full resumption of oil output and strong activity in the structural reforms and diversifying the economy. non-oil sector, the GCC real GDP is projected to grow by 3.2 percent (y/y) in 2025 - driven by both the oil sec- Oman: Estimated increase in growth to 3.0 in 2025, tor (2.8 percent) and non-oil sector (3.2 percent) – and prompted by a rebound in oil sector (2.1 percent) to expand by an average of 4.6 percent over 2026-2027 and solid non-hydrocarbon growth (3.4 percent). (Figure 18). This is higher than the rest of the MENA re- Non-hydrocarbon growth is likely to be driven by gion where economic growth is projected to reach 2.6 construction, manufacturing and services activities. percent and 3.7 percent in 2025 and 2026, respective- In the medium term (2026-2027), the full resumption ly.4 Details of growth projections for individual coun- of oil production and steady growth in non-hydrocar- tries are given below: bon activities is likely to drive real GDP growth to 4 percent. Bahrain: Growth is expected to accelerate to 3.5 per- cent in 2025, with the completion of BAPCO refinery Qatar: Real GDP growth is expected to hold steady upgrades while oil production recovers. Over 2026- at 2.4 percent in 2025, before accelerating to 5.4 2027, real GDP is projected to grow to about 2.9 per- percent in 2026 with the anticipated expansion of cent driven by robust non-hydrocarbon growth sup- Liquified Natural Gas (LNG) capacity. Non-hydro- ported by the expansion of Sitra oil refinery. carbon growth is projected to stay strong at 3.3 per- cent, supported by manufacturing, construction, Kuwait: Growth is estimated to recover to 2.2 per- and tourism. The hydrocarbon sector is projected to cent in 2025 primarily due to the rollback of OPEC+ grow by 0.9 percent in 2025, but a significant boost is production cuts. The non-oil sector is forecasted anticipated in 2026 as LNG output is set to surge by to expand by 1.6 percent in 2025, supported by a 40 percent to 110 mtpa. rebound in real credit growth and large-scale infra- 4 World Bank, MENA Economics Update, April 2025 19 CHAPTER 2 GULF ECONOMIC UPDATE Saudi Arabia: Growth is forecasted to increase in UAE: Economic growth is projected at 4.6 percent in the medium term, driven by increased oil production 2025 and to remain stable in the medium-term. The from 8.9 million bpd in March 2025, to 9.98 million gradual resumption of oil production between May bpd towards the end of 2026. With the full resump- 2025 and September 2026 is expected to support oil- tion of oil production (anticipated to further pick up GDP. The non-oil sector is expected to remain a key in 2027 to an average of 10.4 million bpd), oil GDP contributor to growth, with projected expansion of growth is expected to accelerate starting 2026, and 4.9 percent in 2025, supported by growth in tourism, reach 6.7 and 6.1 percent in 2026 and 2027, respec- construction, transportation, and financial services. tively. Meanwhile, the non-oil sector is estimated to maintain steady yearly growth (3.6 percent on aver- age) between 2025 and 2027. FIGURE 17 GDP growth projected to accelerate FIGURE 18 The increase in projected growth in the medium-term. is driven by exports, consumption and investment. Hydrocarbon GDP Non-hydrocarbon GDP Private Consumption Govt. Consumption RGDP Fixed Investment Net Exports 8 5 6 Contribution to growth, percent 3 4 1 Percent 2 0 –1 2 –3 2024 2025 2026 2027 2024 2025 2026 2027 Source: WB Staff calculations. Source: WB Staff calculations. FIGURE 19 Most GCC countries are expected to see improved growth prospects in 2025 and to expand in 2026-2027 Hydrocarbon GDP Non-hydrocarbon GDP RGDP 15 10 5 Growth, percent 0 –5 –10 2025 2025 2025 2025 2025 2025 2023 2023 2023 2023 2023 2023 2027 2027 2027 2027 2027 2027 SAUDI ARABIA UNITED ARAB K WAIT QATAR OMAN BAH AIN EMIRATES Source: Commodity Market Outlook; and WB Staff calculations. 20 CHAPTER 2 GULF ECONOMIC UPDATE Regional inflation is expected to stay stable in the medium term, and lower than in most other regions. Inflation is projected to remain low and stable in tion, while the currency peg to US dollar plays a stabi- 2025 (2.2 percent) and beyond, with some variation lizing effect. Credit to the private sector is expected to across GCC countries. Inflation in the GCC is expect- remain strong (Figure 21). Among the GCC economies, ed to remain contained at 2.1 percent during 2026- it is important to highlight that the housing and real 2027. Despite the potential disruption in supply chains estate sector remains the primary driver of inflation in from trade uncertainty, government subsidies and Saudi Arabia and the UAE. price caps are likely to prevent a sharper rise in infla- FIGURE 20 GCC countries’ inflation is projected FIGURE 21 GCC banks' credit growth is expected to slightly pick up but to remain to remain strong, stimulated by lower managed in the medium-term. interest rates. Euro Area United States World Domestic Credit Growth Inflation Middle East GCC 20 9 16 6 Percent Percent 12 3 8 4 0 K WAIT SAUDI OMAN UNITED BAH AIN QATAR 0 ARABIA ARAB EMIRATES 2023 2024 2025 2026 2027 Source: WB Macro-Poverty Outlook, SM 2025; and Economist Intelligence Unit, 2025. Source: Economist Intelligence Unit, 2025; WB Macro-Poverty Note: Domestic credit growth measured as percentage change in bank lending to Outlook, SM 2025; and WB staff calculations. public and private sectors, plus bank lending in domestic currency overseas. Fiscal pressures are expected to increase due to lower oil prices, with divergence in individual country prospects. Fiscal strains are projected to intensify in 2025 due percentage points), Oman (-3.4 point), and the UAE to downward pressure on oil prices. Despite ongoing (-0.4 point) in 2025 (Figure 23). Saudi Arabia and efforts to reduce dependence on oil and gas, hydrocar- Oman are projected to see their fiscal stances remain bon revenues remain significantly important for fiscal subdued in the medium-run (-3 percent of GDP on stability in the GCC. The recent OPEC+ oil output hike5, average in 2026-2027 in Saudi Arabia, 2.6 in Oman). coupled with the broader global economic slowdown Strong non-hydrocarbon revenue, driven by ongoing amid heightened  trade uncertainty,  have prompted a diversification drives in the GCC, is anticipated to mit- decline in oil prices. These factors are expected to put igate the impact of lower oil prices and prevent larger pressure on the GCC countries’ fiscal balance. In 2025, fiscal deficits. fiscal balances are expected to worsen in Kuwait (-2.2 5 On April 3, 2025, OPEC+ countries unexpectedly agreed to advance their plan to phase out oil output cuts by increasing output by 411,000 barrels per day in May. 21 CHAPTER 2 GULF ECONOMIC UPDATE The decline in oil prices will have mixed impact on On the other hand, Oman, Qatar, and UAE are expect- GCC fiscal balances.  Bahrain, Kuwait, and Saudi ed to be in better positions to weather oil prices trajec- Arabia are expected to face fiscal pressures. tory. Bahrain: Higher non-hydrocarbon revenues, along Oman: Lower oil prices will put pressure on Oman’s with the implementation of the new announced cor- government revenues, leading to a lower estimated porate tax and the expanding capacity of Sitra oil fiscal surplus of 2 percent of GDP in 2025. It is pro- refinery, are expected to partially offset the current jected to gradually improve to an estimated average decline in oil prices. This would slightly narrow the of 2.6 percent of GDP during 2026-2027, as oil and fiscal deficit to 7.7 percent of GDP in 2025, from 7.9 gas production picks up and there is continued fis- percent of GDP in the previous year. While encour- cal adjustment. Recent performance has shown that aging, this consolidation still leaves fiscal deficits at Oman is committed to fiscal discipline and prudent elevated absolute levels. As a relatively smaller pro- financial management, building upon the successes ducer of oil, a potential sustained downturn in global of its 2020–2024 Medium-Term Fiscal Plan (MTFP). energy prices may impact Bahrain, but the largest impact would come from high interest burden which Qatar: Fiscal surplus is projected to grow to 1.5 per- will continue to pressure fiscal balances. This risks cent of GDP in 2025, driven by LNG earnings and pru- pushing the deficit to 7.9 and 8.5 percent of GDP in dent fiscal management. Additionally, the long-de- 2026 and 2027, respectively. layed implementation of value-added tax (VAT), anticipated later in 2025, can help mitigate some re- Saudi Arabia: Fiscal deficit is projected to keep wid- ductions in hydrocarbon revenues from softer pric- ening between 2025 and 2027 (2.3, 2.9, and 3.1 per- es. This is projected to expand the fiscal surplus to cent, respectively) given uncertain oil revenues and an estimated 4.2 and 6.1 percent of GDP in 2026 and the Kingdom’s investments aligned with Vision 2030. 2027, respectively. Nevertheless, the country’s Public Investment Fund (PIF) and dividends from Aramco will likely offer the UAE: Fiscal balance is expected to remain in surplus means to pursue the ambitious Vision 2030. of 4.2 percent of GDP in 2025. It is projected to ex- pand to 4.5 and 4.6 percent of GDP in 2026 and 2027 Kuwait: Due to oil revenue losses, the projected fis- each, reinforced by ongoing tax policy reforms, in- cal deficit is expected to widen to 7.2 percent of GDP in cluding the implementation of the Domestic Mini- 2025 (5.4 and 5.0 percent of GDP in 2026 and 2027, re- mum Top-Up Tax. spectively), despite efforts to limit public expenditures. 22 CHAPTER 2 GULF ECONOMIC UPDATE FIGURE 22 The GCC fiscal deficit is projected to FIGURE 23 There is significant divergence in slightly widen in 2025, and to remain individual countries’ positions. on deficit in the medium term. Fiscal Balance (rhs) 8 General Govt. Revenue (lhs) 6 General Govt. Expenditure (lhs) 4 Percent of GDP 2 10 2 0 –2 5 1 Growth, percent Percent of GDP –4 0 0 –6 –8 –5 –1 –10 2023 2025 2027 2023 2025 2027 2023 2025 2027 2023 2025 2027 2023 2025 2027 2023 2025 2027 –10 –2 SAUDI UAE K WAIT QATAR OMAN BAH AIN ARABIA –15 –3 2023 2024 2025 2026 2027 Source: WB Macro-Poverty Outlook, AM 2024. Source: WB Macro-Poverty Outlook, AM 2024. Fiscal pressures are expected to increase due to lower oil prices, with divergence in individual country prospects. Debt levels across the region remain at low and tinue to rise during 2026–2027, reflecting lower hydro- sustainable levels, barring Bahrain (Figure 24). In carbon revenues, hefty interest payments and elevated Bahrain, despite the government’s debt reduction gross financing needs. This makes it even more crucial commitment, the debt-to-GDP-ratio is projected to for Bahrain to pursue deeper fiscal consolidation mea- remain the highest among GCC countries at an esti- sures to bring its debt levels onto a sustainable path. mated 127.1 percent in 2025. Government debt will con- FIGURE 24 The overall debt-to-GDP ratio is projected to rise, but there is significant regional variation. Government Debt GCC Debt-to GDP Average 160 140 120 Percent of GDP 100 80 60 40 20 0 2025 2027 2025 2027 2025 2027 2025 2027 2025 2027 2025 2027 BAH AIN OMAN QATAR UAE SAUDI ARABIA K WAIT Source: WBG-Poverty Outlook, SM2025 23 CHAPTER 2 GULF ECONOMIC UPDATE GCC countries’ external balances are expected to remain in surplus in the medium-term, despite downward pressure on hydrocarbon prices. However, there is significant cross-country variation. Despite the potential global trade downturn, all picks up, the surplus is estimated to increase even GCC countries are expected to maintain a current further to 20.2 percent of GDP in 2027. account surplus in the medium term. The current account surplus is predicted to narrow in all GCC coun- Oman: The potential impact of trade uncertainty tries except Saudi Arabia, mainly reflecting lower en- on oil export revenues, together with rising imports ergy export revenues (Figure 25). Saudi Arabia is pre- costs, will reduce the current account surplus to less dicted to benefit from increased service exports in the than 1 percent of GDP in 2025. It is expected to re- short term (+4.2 percentage points of GDP in 2025). In bound during 2026-27, driven by the anticipated in- 2025-2026, higher export volumes along with strong crease in oil production and solid increase in service performance will partially offset the impact of lower en- exports on the back of increased tourism and higher ergy prices, ensuring wider external balance surpluses, refined fuel exports. except in Bahrain, which could in turn translate into reduced oil exports, thus jeopardizing a higher exter- Qatar: The current account surplus is expected to nal surplus. Meanwhile, trade uncertainty could lead to narrow but remain robust at 13.1 percent in 2025. supply chain disruptions and higher import costs, put- This reflects lower energy export revenues together ting pressure on the region’s trade balance. However, with rising imports costs driven by trade uncertain- there is significant variation across the region: ties, partially offset by strong tourism exports. Bahrain: The current account balance will remain in Saudi Arabia: The anticipated increase in oil pro- surplus during 2025–2027, albeit lower than its cur- duction and improving services balance are also rent level. This is in line with oil price outlook and the expected to strengthen the external sector in 2025- slump in global demand following the recent trade 2027. Additionally, service exports as a percentage of policy related uncertainty. Bahrain’s aluminum ex- GDP are projected to increase due to increased tour- port earnings are not expected to be impacted, given ism and investments in the digital economy. that they are already subject to a 25 percent tariff. UAE: The current account surplus is expected to Kuwait: The current account surplus is projected at stay stable throughout the medium term, remaining a robust 15 percent of GDP in 2025. As oil production between 6.2 and 6.8 percent of GDP from 2025 to 2027. 24 CHAPTER 2 GULF ECONOMIC UPDATE FIGURE 25 Current balance surplus is expected FIGURE 26 There is significant cross-country to narrow before expanding in the variation in the external sector. medium term. Merchandise Trade Prim.& Second. Income Current Account Balance Exports Imports (rhs) (lhs) (lhs) Services Trade Current Account Balance 20 20 40 30 20 15 15 Percent of GDP 10 0 Growth, percent Percent of GDP 10 10 -10 -20 5 5 -30 -40 0 0 2025 2026 2027 2025 2026 2027 2025 2026 2027 2025 2026 2027 2025 2026 2027 2025 2026 2027 -5 -5 SAUDI UNITED K WAIT QATAR OMAN BAH AIN 2023 2024 2025 2026 2027 ARABIA ARAB EMIRATES Source: WB Macro-Poverty Outlook, AM 2024. Source: WB Macro-Poverty Outlook, AM 2024. GCC economies face heightened risks from global economic uncertainty, unpredictability of oil prices, and spillovers from continued conflicts in the Middle East. Major changes in trade policies could impact GCC In 2024, GCC countries’ non-oil commodity exports to economies. Although the future of further tariff hikes the US amounted to approximately 7.5 percent of the remains shrouded with uncertainty, this rising un- region’s total non-oil commodity exports. However, certainty reduces global growth prospects and could GCC economies could be indirectly impacted by a glob- impact GCC countries. This group of countries is un- al economic slowdown and its effects on oil prices and likely to face a strong direct impact of tariffs, due to the demand for oil. their limited integration in global markets (beyond oil). 25 CHAPTER 2 GULF ECONOMIC UPDATE BOX 1 The impact of rising protectionism and economic uncertainty on GCC countries. Escalating trade tariffs between the US and China could have important consequences for the Gulf region. China is a major global energy consumer and the GCC region’s largest trade partner. FIGURE 27 Main GCC Trade Partners in Total Merchandise Exports, 2023 (Excluding Intra-regional Trade). China 19,2% India 13,2% Japan 11,0% South Korea 5,6% US 4,4% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% Source: Foreign Trade Cooperation Council for the Arab States of the Gulf 2023, December 2024 Rising protectionism could have serious implications for global growth prospects. World Bank simulations in January 2025 indicate that a 10-percentage-point increase in U.S. tariffs on all trading partners in 2025, coupled with retaliatory tariffs, would result in a global growth reduction of about 0.3 percentage points for the year compared to the baseline.6 The IMF predicts that an intensification of protectionist policies could reduce market efficiency and further disrupt supply chains.7 Based on tariff announcements between 1 February and 4 April, the IMF revised its global growth forecast to 2.8 percent for 2025 and 3 percent for 2026, down 0.8 percentage points from January 2025 estimates and well below the 2000–2019 average of 3.7 percent.8 Assessing China’s Strategic Role as a Key Trade Partner for the GCC These tariff hikes could dampen China’s economic growth and reduce its demand for energy inputs from GCC countries. This is especially significant for Saudi Arabia, whose economy is closely tied to Chi- na—the Kingdom’s top export partner—accounting for 14.9 percent of total exports in 2023.9 A decline in Chinese demand could also indirectly impact Bahrain, due to its close trade ties with Saudi Arabia. The UAE, while still significantly engaged with China, is more economically diversified and may be better posi- tioned to withstand fluctuations in Chinese demand. Oman is the most exposed GCC country, with over 36 percent of its exports going to China in 2023. Kuwait and Qatar also rely substantially on Chinese markets, particularly for oil and gas. Kuwait sent 18.55 percent of its exports to China, mostly oil, while Qatar export- ed 18.56 percent of its gas to China, along with oil and other commodities.10 6 World Bank Global Economic Prospectus, January 2025, https://openknowledge.worldbank.org/server/api/core/bitstreams/f983c12d-d43c-4e41-997e-252ec6b87dbd/ content 7 IMF, “GCC: Pursuing visions amid geopolitical turbulence: Economic prospects and policy challenges for the GCC countries” 8 IMF, “World Economic Outlook, April 2025; A Critical Juncture amid Policy Shifts” 9 Harvard’s Growth Lab, Atlas, https://atlas.hks.harvard.edu/ 10 Harvard’s Growth Lab, Atlas, https://atlas.hks.harvard.edu/ 26 CHAPTER 2 GULF ECONOMIC UPDATE In 2023, China sourced around 201 million metric tons of crude oil and 18 million tons of liquefied natural gas from GCC countries. This accounted for roughly one-third and one-fourth of its total imports respectively, according to official data.11 That same year, GCC countries exported 12.4 million barrels per day, or roughly 617.46 million metric tons annually.12 As a result, around one-third of the GCC’s crude oil exports were directed to China. Any slowdown in China’s economy could therefore significantly affect the energy revenues and broader economic stability of several GCC nations. FIGURE 28 GCC Exports in 2023. Rest of the World China 0,5% 99,5% 18,5% 36,2% 13,8% 14,9% 7,8% 92,2% 86,2% 85,1% 81,5% 63,8% BAH AIN K WAIT OMAN QATAR SAUDI ARABIA UAE Source: Harvard's Growth Lab, Atlas Finally, slower growth in China is likely to impact greenfield FDIs in GCC countries. China has come to be the main source of greenfield FDIs in GCC between 2021 and 2025. In particular, it invested US$17.11 billion in greenfield projects in Saudi Arabia in 2023, making the kingdom the main destination of Chinese FDIs that year and highly vulnerable to a Chinese downturn. Strategic Responses and Opportunities for the GCC Pushing the diversification agenda and putting more emphasis on regional trade are important ways to mitigate the potential impact of trade disruptions on the GCC economies. In the past decade, in- tra-GCC trade has tripled to over US$70 billion but still accounts for less than 10 percent of total exports.13 Strengthening complementarity in the region and boosting GCC trade will help the region stay resilient amidst global shocks. Energy export-dependent GCC economies face major economies, projected by the IMF at US$84.7/b in Saudi risks due to dampened global demand for oil and Arabia, US$78.3/b in Kuwait, and US$127.8/b in Bahrain. gas coupled with growing supply. Although oil and Despite sustained efforts to diversify their economies gas have been spared from the protectionist measures, from oil through multi-decennial national strategies, the Brent crude oil price has experienced a significant government revenues of GCC countries largely remain decline since the beginning of April 2025, reaching a dependent on oil exports. four-year low (US$60.23 per barrel on May 5th). OPEC+’s accelerated schedule of production caps phase-out and Reignited geopolitical tensions in the Middle East growing pressure to increase production to tame global could lead to spillover effects on GCC economies. inflation caused by tariffs will put further downward The subsection below provides a detailed analysis and pressure on oil prices. Crude oil prices are likely to remain update on the Red Sea Shipping Crisis as an example of below the fiscal breakeven oil prices for multiple GCC the impact of regional conflict on GCC economies. 11 China ready to boost oil ties with GCC, https://fj.gov.cn/english/news/202406/t20240603_6459466.htm#:~:text=Energy%20cooperation%20is%20a%20 crucial,resources%20in%20the%20GCC%20countries 12 CME Group, crude oil conversion calculator, https://www.cmegroup.com/tools-information/calc_crude.html 13 Kristalina Georgieva, Speech at World Government Summit 2025, https://www.imf.org/en/News/Articles/2025/02/11/sp021125-shaping-future-gulf-cooperation- council-economy-amid-regional-global-challenges 27 CHAPTER 2 GULF ECONOMIC UPDATE THE RED SEA SHIPPING CRISIS AND ITS IMPACT ON OIL TRADE, TRANSPORT, AND OIL SLICKS IN THE GULF STATES The deepening Red Sea shipping crisis is increasingly impacting oil trade in the Gulf states. Given the longer-term nature of the shock, major inter-modal diversion is taking place of oil exports - from maritime transport in the Red Sea to oil pipeline and road transport of goods trade, and plans are being made to build cargo railway links across the Arabian Peninsula. The Red Sea shipping crisis has disrupted regional Europe, prompting key exporters—such as Qatar, the supply chains, especially impacting oil and gas ex- world’s second-largest liquefied natural gas exporter, and ports from Gulf Cooperation Council (GCC) countries Saudi Arabia, which has the longest Red Sea coastline to Europe. Traffic through the Strait of Hormuz—the and depends on its ports as critical trade hubs14—to world’s most critical oil passageway and a chokepoint bypass the Suez Canal and reroute shipments around between the Arabian Gulf and the Gulf of Oman—has the Cape of Good Hope.15 However, Saudi Arabia, the fallen by about 6 percent between November 2023 and UAE—both key exporters and recent participants in April 2025 compared to the pre-crisis baseline from the Brazil, Russia, India, China, and South Africa group January 2022 to November 2023 (Figure 29.A). The of emerging economies (BRICS)—and Kuwait continue disruption was primarily driven by a sharp decline of to redirect oil exports toward emerging markets, par- around 15 percent in seaborne oil trade (Figure 29.B). The ticularly Asia, partially mitigating the negative impact crisis has primarily impacted Gulf oil and gas exports to in the Red Sea.16 FIGURE 29 Vessel Transit Activity at Key Maritime Chokepoints. A. Seaborne goods trade volume B. Seaborne goods trade volume via the Strait of Hormuz (% change from historical average) (% change from historical average) Oil Non-oil Bab el-Mandeb Strait Cape of Good Hope 20% Middle East Red Sea Strait of Hormuz Suez Canal 15% Conflict Crisis 10% 150% Middle East Red Sea 5% 125% Conflict Crisis 0% -5% 100% -10% 75% -15% 50% -20% 25% -25% 0% -30% -25% -50% /1 /4 /7 0 /1 /4 /7 0 /1 /4 -75% /1 /1 25 23 24 25 23 24 23 24 23 24 20 20 20 20 20 20 20 20 20 20 /1 /4 /7 0 /1 /4 /7 0 /1 /4 /1 /1 23 25 24 25 23 24 23 24 23 24 20 20 20 20 20 20 20 20 20 20 Source: IMF Portwatch, https://portwatch.imf.org/; CEIC; World Bank staff estimates. Note: The lines show the 7-day moving average of daily tonnages of ships passing through key chokepoints including Bal el-Mandeb Strait, Cape of Good Hope, Strait of Hormuz, and Suez Canal, expressed as a percentage relative to the historical average from January 1, 2022, to November 17, 2023. The two vertical lines indicate the start of the Middle East conflict and the Red Sea crisis. 14 bne IntelliNews. 2024. “Oil shipments from Saudi Arabia and Iraq to Europe delayed amid Red Sea tensions.” January 20, 2024. https://www.intellinews.com/oil- shipments-from-saudi-arabia-and-iraq-to-europe-delayed-amid-red-sea-tensions-308609/ 15 Chow, Emily, and Marwa Rashad. 2024. “Tankers carrying Qatari LNG change course amid Red Sea tension -data.” Reuters, January 16, 2024. https://www.reuters.com/ markets/commodities/lng-tankers-carrying-qatari-lng-resume-course-data-shows-2024-01-16/ 16 According to the Organization of the Petroleum Exporting Countries (OPEC) Annual Statistical Bulletin 2024, which covers Saudi Arabia, the United Arab Emirates, and Kuwait—together accounting for approximately 90 percent of total crude oil exports from the GCC—Asia received around 80 percent of Saudi Arabia’s crude oil exports in 2023, and over 90 percent of crude oil exports from both the UAE and Kuwait. 28 CHAPTER 2 GULF ECONOMIC UPDATE Following the outbreak of the Red Sea crisis, the Following the onset of the Red Sea crisis in late 2023, pipeline network across the Arabian Peninsula Saudi Arabia ramped up exports from the Muajjiz ter- has become an increasingly vital alternative for oil minal in the early 2024, which is linked to eastern oil transport among GCC countries. Saudi Aramco’s fields via the East-West Pipeline, to avoid high-risk ar- East-West Pipeline, with a capacity of 5 million barrels eas in the southern Red Sea.17 As a result, both imports per day (b/d), offers a route that bypasses the Strait of and exports at port Yanbu—connected to Muajjiz—in- Hormuz—carrying the equivalent of 25 percent of the creased in 2024 (Figure 30.B). Strait’s average oil flow of 20 million b/d (Figure 30.A). FIGURE 30 Pipeline Network Provides an Alternative for Oil Transportation. A. Pipelines bypass the Southern Red Sea B. Monthly oil trade volumes in Muajjiz terminal (thousand metric tons) Imports Exports 800 700 600 500 2024 average Thousands 2022 average 400 2023 average 300 200 100 0 20 /1 20 4 20 7 20 0 20 1 /4 20 7 20 0 20 /1 20 4 20 7 20 0 20 1 /4 / / / / / / / /1 /1 /1 25 23 24 22 25 23 24 23 22 24 22 23 24 22 20 20 Source: U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=61002; IMF Portwatch, https://portwatch.imf.org/; World Bank staff estimates. The scale and protracted nature of the crisis have also routed through Yanbu, a port on Saudi Arabia’s western prompted broader intermodal transport adjustment coast, is now being redirected to Dammam. Ports that from maritime shipping towards land transport of serve as key nodes along this overland corridor, such cargo, and there are plans for railway links, across the as Jebel Ali in the UAE and Mina Salman in Bahrain, Arabian Peninsula. Since December 2023, attacks on have also recorded increased vessel traffic since late Red Sea shipping routes have spurred the development of 2023 (Figure 31.B and Figure 31.C). More recently, in an alternative land route using trucks to transport cargo a further signal of long-term transport adjustment, in through Saudi Arabia to other destinations. This shift April 2025, Saudi Arabia launched a tender for a rail- has increased vessel activity at Saudi Arabia’s Dammam way linking the Persian Gulf to the upper Red Sea, while port by about 26 percent between November 2023 and Kuwait signed a contract to build a railway connecting April 2025 compared to the baseline period of January 1 it overland to Oman.18 to November 16, 2023 (Figure 31.A), as cargo previously 17 Lee, Julian, and Alex Longley. 2024. “Saudis boost North Red Sea oil exports to avoid chaos in South.” Bloomberg, February 1, 2024. https://www.ajot.com/news/saudis- boost-north-red-sea-oil-exports-to-avoid-chaos-in-south?utm_source=chatgpt.com 18 Khatinoglu, Dalga. 2025. “Iran’s Threats Have Reshaped the Region’s Trade Corridor Map.” Middle East Forum, April 18, 2025. https://www.meforum.org/mef-observer/ irans-threats-have-reshaped-the-regions-trade-corridor-map 29 CHAPTER 2 GULF ECONOMIC UPDATE The Red Sea crisis led the GCC to shift from maritime FIGURE 31 shipping towards a land route connecting Gulf ports to the Eastern Mediterranean and Northern Red Sea ports. A. Monthly trade volumes in Port Dammam B. Monthly trade volumes in Jebel Ali C. Monthly trade volumes in Mina Salman (metric tons) (metric tons) (metric tons) Imports Exports Imports Exports Imports Exports 80 25 3,0 70 2,5 20 60 2,0 50 15 Thousand Millions Millions 40 1,5 10 30 1,0 20 5 0,5 10 0,0 0 0 Jan–23 May–23 Sep–23 Jan–24 May–24 Sep–24 Jan–25 Apr–25 Jan–23 Apr–23 Jul–23 Oct–24 Jan–24 Apr–24 Jul–24 Oct–24 Apr–25 Jan–23 Apr–23 Jan–25 Jul–23 Oct–24 Jan–24 Apr–24 Jul–24 Oct–24 Jan–25 Apr–25 Source: Stuart Todd, https://www.ajot.com/insights/full/ai-trucknet-sets-up-a-gulf-israel-egypt-land-bridge, American Journal of Transpiration (AJOT) Insights; IMF’s PortWatch platform, https://portwatch.imf.org; World Bank staff estimates. Houthi attacks on ships in the region have caused through the critical chokepoints of the Suez Canal and significant environmental damage from oil spills Bab el Mandeb have decreased by 51 and 60 percent, and the potential release of hazardous cargo such respectively, during the same period. To put this into as fertilizer. Since March 2024, dozens of vessels car- perspective, the area affected by oil slicks since the rying fertilizer, heavy fuel oil, and marine diesel have conflict began—more than 11,000 km2—is equivalent been attacked and sunk by the Houthis.19 Satellite im- to Qatar’s total land area and over fifteen times the agery reveals a dramatic rise in oil slicks in the Red Sea size of Bahrain. These environmental impacts could since the onset of the crisis, with the number of slicks potentially critically affect coastal communities along surging by 40 percent and the area they cover expand- the Red Sea that depend on it for fishing, tourism, and ing by 68 percent between November 2023 and April livelihoods—including those in Saudi Arabia.20 While 2025 compared to the pre-conflict baseline of June oil spills are also common in the Gulf, they are likely un- 2022 to November 2023 (Figure 32.A and Figure 32.B). related to the conflict in the Red Sea. This is particularly striking given that transit calls 19 Dozens of vessels, including tankers and carriers, have been targeted, with the most severely impacted being the sunken Rubymar (March 2024), the Tutor (June 2024), the Chios Lion (July 2024), and the Sounion oil tanker (August 2024). The Rubymar poses a particular high risk as its oil and fertilizer cargo remain trapped inside, threatening future leaks. For the analysis of broader losses of human lives and damage to ships, see the two MENA Prosperity FCV Economic Briefs cited in footnote 1 above. 20 Fitt, Elizabeth. 2024. “Six months after first Houthi ship sinking, attacks slick Red Sea with oil.” Mongabay, September 2, 2024. https://news.mongabay.com/2024/09/ six-months-after-first-houthi-ship-sinking-attacks-slick-red-sea-with-oil/ 30 CHAPTER 2 GULF ECONOMIC UPDATE FIGURE 32 Satellite imagery shows a significant increase in oil slicks in the Red Sea following the onset of Houthis attacks on vessels. A. Large oil slicks (40 km2 – 100+ km2) B. Large oil slicks (40 km2 – 100+ km2) from June 5, 2022, to November 16, 2023 from November 17, 2023, to April 29, 2025 Source: SkyTruth satellite imaging platform, https://cerulean.skytruth.org/?zoom=4.650721&lat=21.552818&lng=39.278053&mp a=1&eez=0&iho=0&startDate=2023-01-01&endDate=2023-12-31&machine_confidence=0.7&area=99_&sources= Note: These oil slicks are the result of various factors, not solely the Houthi attacks. Nearby vessels have also been identified in connection with these slicks. Looking ahead, in the short-term, Red Sea insecuri- raeli vessels across key regional waterways. U.S. forces ty is likely to persist amid continued tensions. Fol- carried out airstrikes across Yemen, including on Ho- lowing a temporary pause in Houthi attacks beginning deidah port and a major oil terminal, while Houthi forc- in mid-January 2025, hostilities resumed in March es also targeted U.S. warships in the Red Sea. The risk 2025. On March 11, the Houthis imposed a ban on Is- of further conflict escalation remains high. 31 CHAPTER 2 GULF ECONOMIC UPDATE Chapter 03 Page 32 – 40 Spotlight Section: Shifting Gears: Oman's Journey to Fiscal Sustainability O man has made significant strides in versifying revenue sources, improving expenditure strengthening its economic resilience efficiency, and prudently managing hydrocarbon wind- and laying the groundwork for a more falls. Spurred by the challenges of the 2014 oil price sustainable future. Like other GCC shock and the COVID-19 pandemic, Oman’s reforms countries, it has faced the challenge of have yielded tangible results. Since 2022, the country reducing its reliance on oil revenues and has seen a marked improvement in its fiscal position, managing public finances amid the volatility of global including a significant reduction in public debt. No- oil prices. During past periods of low oil prices, Oman tably, the strategic use of hydrocarbon windfalls to experienced a twin deficit and turned to borrowing to reduce debt has expanded fiscal space and bolstered manage fiscal shortfalls, which led to a rise in public Oman’s capacity to navigate external economic shocks. debt from near-zero levels to around 68 percent over Oman’s fiscal consolidation journey thus stands out as six years. In response, and guided by Vision 2040, the a noteworthy example of effective economic reform government launched a bold and comprehensive na- and responsible fiscal management. This spotlight tional strategy focused on long-term economic diversi- piece explores the challenges Oman has faced due to fication and sustainability. A cornerstone of this effort oil dependency, the measures it implemented to re- was the adoption of the Medium-Term Fiscal Plan in store fiscal balance, and the encouraging outcomes of 2020, which introduced wide-ranging reforms aimed these reforms. at enhancing fiscal sustainability. These included di- 32 CHAPTER 3 GULF ECONOMIC UPDATE Economic Developments: Trends, Drivers, and Implications Oman’s economy has long been defined by oil and declined over the past two decades in favor of service gas sector as major sources of growth. While crude activities (Figure 35). Among services, wholesale and petroleum constitutes the lion’s share of hydrocarbon retail trade and public administration and defense sec- activities, natural gas production has seen its share tors remain the largest. Important sectors like tourism growing over the years, reaching 14 percent of total and ICT remain small and have not really gained in im- hydrocarbon activities in 2024 (Figure 33). Real eco- portance through the years (Figure 36). Manufacturing nomic growth has also long been defined by the devel- has also gained in importance, although near to 40 opments in global oil prices, with a very high correla- percent remains concentrated in chemicals and chem- tion between both (Figure 34). This over-dependence ical products (Figure 37). That said, non-oil growth has on natural resource had made the economy tied to the been always reflecting developments in the oil sector, fluctuations of oil and gas prices and negatively im- suggesting some strong correlation between oil and pacted by repeated slumps in global oil prices. non-oil activities. Only in recent years, oil sector growth took a hit from production cuts (witnessing zero and That said, efforts on the diversification efforts negative growth in 2023-2024) while non-oil growth have gradually paid off. Although at a slow pace, the has mitigated the impact on the economy (Figure 38). share of hydrocarbon activities in GDP has gradually FIGURE 33 Crude petroleum has the lion’s share FIGURE 34 Real GDP growth has been moving of hydrocarbon activities. in tandem with oil prices. Crude Petroleum Natural Gas GDP growth (LHS) 100% Avg. crude oil export price (US$/ barrel) 90% Percent 10,0 120 80% % of total hydrocarbon activities 8,0 70% 100 60% 6,0 80 50% 4,0 40% 60 2,0 30% 40 0,0 20% –2,0 20 10% 0% –4,0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: National Centre for Statistics and Information (NCSI) Source: NCSI 33 CHAPTER 3 GULF ECONOMIC UPDATE FIGURE 35 Hydrocarbon activities have gradually FIGURE 36 Among all services, wholesale and lost weight in favor of services. retail trade and public administration remain the largest. Average 2005-2014 Average 2015-2024 Average 2005-2014 Average 2015-2024 Wholesale & 21% HYDROCARBONS Retail 18% 37% Public Admin & 19% Defence 21% 32% Professional 13% Services 11% AGRI & FISHING Financial 10% Intermediation 12% 1% Transport 11% 2% Storage 11% Education 10% INDUSTRY 10% Health 5% 20% 6% 22% Hotels 4% 4% SERVICES ICT 3% 4% 44% Social & 2% 47% Personal... 2% Private 1% Household 1% Source: NCSI Source: NCSI FIGURE 37 A bulk of manufacturing activities FIGURE 38 Oil and Non-oil growth have been remain concentrated in chemicals growing at a similar pace until sectors. recent years. Other Chemicals and Refined Petroleum Manufacturing Chemical Products Products Oil Sectors Non-Oil Sectors 4000 15% Millions of domestic currency 10% 3000 5% 2000 0% 1000 –5% 0 –10% 2005 2007 2009 2011 2013 2015 1999 2001 2003 2017 2019 2021 2023 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: NCSI Source: NCSI 34 CHAPTER 3 GULF ECONOMIC UPDATE Hydrocarbon exports remain the cornerstone of The share of non-hydrocarbon exports has grown to Oman’s external sector. Crude oil, refined petroleum reach a third of total exports, in a marked improve- and gas account for more than 60 percent of the coun- ment compared to only 12 percent in the early years try’s export revenues in 2023, although this share has of the last decade. Key non-oil exports include chem- seen a decline compared to the early 2010s (Figure 39). icals, base metals (especially aluminum), plastics, and This heavy reliance exposes Oman to global commodi- mineral products. Re-exports (mainly vehicles, elec- ty price cycles, as episodes of current account deficits trical and machinery), however, have seen their share have coincided with those when oil prices have been shrink over the past decade. Oman’s main exports low (Figure 40). Historically, when oil prices go below markets are UAE, Saudi Arabia, USA and India. As for US$70 per barrel, Oman suffers from current account oil exports, China remains the major destination, with deficit. To mitigate these vulnerabilities, Oman has im- close to 94 percent of total oil exports.21 plemented various structural reforms under its Vision 2040. These include diversifying export markets, de- veloping logistics and port infrastructure, encourag- ing private sector investment, and promoting tourism. FIGURE 39 The share of hydrocarbon exports has FIGURE 40 The current account position fluctuates declined in favor of non-hydrocarbons. in response to changes in global oil prices. Current Account Balance (% of GDP) Hydrocarbon (oil & gas) exports Non-Oil Exports Re-exports Avg. Crude Oil Export Price (US$/ barrel) - RHS 100% 15 Percent 120 90% 33% 10 100 12% 80% 5 70% 80 70% 60% 0 61% 60 50% –5 40% 40 30% –10 20% 20 –15 10% –20 0 0% 2010 2012 2014 2016 2018 2020 2022 2024 2017 2012 2014 2023 2021 2013 2016 2018 2019 2015 2022 2020 Source: Central Bank of Oman Source: Central Bank of Oman 21 Source: Central Bank of Oman. 35 CHAPTER 3 GULF ECONOMIC UPDATE Rising Fiscal Pressures Since the 2014–2015 Global Oil Price Shock The global oil price shock 2014-2015 depressed eco- stabilization capacity, helping the government manage nomic activity in Oman, and a slow fiscal policy re- revenue volatility and reducing the need to cut capital sponse gave rise to severe imbalances. Crude brent spending (on infrastructure and development) during oil prices fell from an average of US$101.2/barrel over downturns. 2011-2013 US$53.5/barrel in 2015.22 The decline in oil prices caused fiscal revenue to fall from almost 40 to The moderate recovery in oil prices in 2018 helped 26 percent of GDP between 2014 and 2016 (Figure 41). narrowing fiscal and external deficits, but the accu- The share of hydrocarbon revenue remains high, above mulated deficits had resulted in a rapid increase in the 70 percent mark (Figure 42). During this same peri- government debt. Before the oil price crash in mid- od, public spending was not adjusted, increasing form 2014, Oman maintained relatively low levels of public 41.4 to 44.6 percent of GDP (Figure 43). As a result, debt, stabilizing around the 5 percent levels during the fiscal deficit emerged in 2014, quickly accelerating 2010-2014. Low oil prices and accumulated deficits to double digits, reaching an average of 14.5 percent pushed debt levels to 13.1 percent of GDP in 2015, a of GDP during 2015-2017. During those times of fiscal trend that kept accelerating with government debt stress, gross financing needs were partially covered by peaking at 65.4 percent of GDP in 2020. Around 75 non-debt creating financing, through drawdown from percent of this debt was in external debt (50.5 percent sovereign wealth funds (SWFs) to help smooth pub- of GDP), while around a quarter (17.5 percent of GDP) lic spending and support macroeconomic stability.23 was domestic debt (Figure 45). The Covid19-2020 cri- Primarily derived from the nation’s hydrocarbon rev- sis and the collapse in oil prices also amplified fiscal enues, SWF serve as financial buffers to help mitigate and external vulnerabilities, resulting in further debt the impact of economic shocks and maintain fiscal sta- build up, a series of credit rating downgrades, and siz- bility. In that respect, Oman’s SWF has functioned in a able financing needs. FIGURE 41 The decline in oil prices triggered a FIGURE 42 Revenue from hydrocarbon have sharp decline in fiscal revenue. been dominating. Total revenues (% of GDP) - LHS Hydrocarbon Revenue Nonhydrocarbon Revenue Oman, crude Oil export price - RHS 90 Percent 45 120 80 100 40 70 Oil Price Shock 60 80 76.6 35 50 60 40 30 28.9 40 30 20 25 20 10 20 0 0 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2023 2024e 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: Oman NCSI; WB staff estimates, and IMF data Sources: Oman NCSI; WB staff estimates, and IMF data 22 World Bank Commodity Markets. https://www.worldbank.org/en/research/commodity-markets 23 IMF Article IV, 2021. 36 CHAPTER 3 GULF ECONOMIC UPDATE FIGURE 43 Public spending was not adjusted to FIGURE 44 Revenue from corporate income lower revenue, triggering fiscal deficits. taxation remains weak. Total expenditures Fiscal balance Gas Corporate income tax Other Oil Customs Capital revenue 50 Percent of total 100 40 80 30 Percent of GDP 20 60 10 40 0 -10 20 -20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e Sources: Oman NCSI; WB staff estimates, and IMF data Sources: Oman NCSI; WB staff estimates, and IMF data FIGURE 45 Accumulated deficits had resulted in a FIGURE 46 Higher debt levels triggered rapid increase in government debt. large liabilities of debt service. External debt Domestic debt Central government debt Debt Service, % of Goods & Services Exports 70 20 60 50 15 Percent of GDP 40 10 30 20 5 10 0 0 2020 2023 2022 2024 2015 2013 2016 2018 2019 2021 2010 2012 2014 2017 2011 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: Central Bank of Oman and IMF. Sources: Central Bank of Oman and Ministry of Finance 37 CHAPTER 3 GULF ECONOMIC UPDATE Oman's Efforts Toward Successful Fiscal Consolidation Oman’s Medium-Term Fiscal Plan (MTFP) 2020– ucation, and basic foodstuffs. Outperformance of oil and 2024 was adopted as a pivotal initiative aimed at gas revenues are being used to repay and reduce debt. restoring fiscal stability and reducing the country’s dependency on oil revenues. Introduced in response On the expenditure side, several measures were in- to fiscal challenges exacerbated by the 2014 oil price troduced before the MTFP to rationalize recurrent shock and the COVID-19 pandemic, the MTFP sought and capital spending, and reform the subsidies to achieve fiscal sustainability through a comprehen- system. These included for instance hiring freeze on sive set of reforms. The plan aimed at achieving fiscal public sector employment except for critical functions, balance (targeting a fiscal deficit of 1.7 percent of GDP to contain the public sector wage bill -the most signifi- by 2024), diversifying government revenues, and ratio- cant cost in the state budget. Effectively, the wage bill nalizing expenditure, all while preserving social pro- has declined from 12 to 9 percent of GDP following the tection systems to safeguard vulnerable populations implementation of the MTFP (Figure 47). Oman began during the fiscal consolidation process. Public Finan- liberalizing fuel prices in 2015, with the MTFP set to cial Management reforms were also a cornerstone of accelerate the shift towards market-based pricing. A the plan, to enhance transparency, accountability, and key development was the establishment of the Nation- efficiency in managing public finances.24 The MTFP al Subsidy System (NSS), which targets fuel subsidies also served as a foundational enabler for Oman Vision to low-income Omanis through a direct support mech- 2040, aligning a stable fiscal environment with the anism. Subsidy reform in electricity and water sectors broader goals of economic diversification. were applied gradually starting from 2021. A tariff in- crease was introduced in phases, while government On the revenue side, Oman had already started im- subsidy was kept for those registered in the NSS. How- plementing a series of tax reforms since the early ever, in 2022, the government of Oman reintroduced 2010s. These measures have helped broadening the petrol and electricity subsidies to keep prices capped government revenue beyond hydrocarbons and re- at October 2021 levels, in an effort to shield domestic duced fiscal vulnerability to oil market volatility. Excise consumers from the effects of the global energy crisis taxes were adopted in 2019, targeting products that and counter the expected inflationary pressures. De- are harmful to health or the environment, such as to- spite the policy reversal, the government of Oman is bacco, soft drinks, and energy drinks, with rates of up committed to phasing out untargeted electricity sub- to 100 percent. Amendments to the corporate income sidies by 2030, through a mix of tariff increases and tax (CIT) were also introduced earlier in 2017 to expand other actions to reduce the cost of electricity gener- the tax base and improve compliance mechanisms. ation, transmission, and supply, including by enhanc- The standard corporate tax rate stands at 15 percent, ing companies’ efficiency and increasing the share of with a lower rate of 3 percent for small companies and a renewables in power generation (targeted to reach 40 higher rate of 55 percent applicable to oil and gas com- percent of the energy matrix by 2040).25 On capital panies. As part of the MTFP, a value added tax (VAT) spending, the focus has shifted towards critical infra- was introduced in April 2021 at a standard rate of 5 structure and projects in line with the country’s devel- percent, applied to a wide range of goods and services, opment objectives, also allowing more space for the with specific exemptions for essentials such as health, ed- private sector to contribute. Public debt was significantly reduced from 68 to 35 percent of GDP between 2020 and 2024, reflecting prudent fiscal management. 24 For more details, see IMF Oman 2023 Article IV, published January 2024. 25 IMF, Article IV 2025. 38 CHAPTER 3 GULF ECONOMIC UPDATE FIGURE 47 The wage bill has declined following FIGURE 48 Subsidies reforms were ongoing the implementation of the MTFP. but suspended following the global energy crisis. Compensation Use of goods Cost of Oil Percent of recurrent spending of Employees and services Production 12 11.9% 11.4% 10 Percent of total spending 9.1% 8 8.6% 8.0% Percent of GDP 7.1% 6 4 2.4% 2.3% 2 2.0% 1.0% 0 0.0% 2020 2020 2023 2023 2022 2022 2015 2015 2013 2016 2018 2019 2013 2016 2018 2019 2021 2021 2014 2014 2017 2017 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Electricity Subsidiy Fossil Fuel Product Subsidy Source: Ministry of Finance and World Bank Calculations Source: Ministry of Finance and World Bank Calculations The plan delivered strong results, including suc- debt repayments. However, targets related to non-hy- cessive fiscal surpluses since 2022 and a reduction drocarbon revenue were not met (Figure 50) and in public debt. MTFP targets for fiscal balance were non-hydrocarbon revenue grew only modestly by 1.6 met and overachieved (Figure 49). Public spending was percent of GDP over the same period 2020-2024 (Fig- substantially contained, dropping by approximate- ure 51). Yet, the overall successful fiscal consolidation ly 16 percent of GDP during the five-year plan. Public led to the restoration of its investment-grade rating debt was significantly reduced from approximately 68 (BBB-) from S&P in September 2024, enhancing inves- percent of GDP in 2020 to around 35 percent in 2024, tor confidence. reflecting prudent fiscal management and accelerated FIGURE 49 MTFP targets for fiscal balance were FIGURE 50 MTFP targets for non-hydrocarbon met and overachieved. revenue were underachieved. Actuals MTFP Targets 5 Actuals MTFP Targets 40 0 Fiscal Balance (% of GDP) 35 Share of non-oil revenue 30 -5 25 -10 20 15 -15 10 5 -20 2020 2021 2022 2023 2024 0 2020 2021 2022 2023 2024 Sources: Ministry of Finance Sources: Ministry of Finance 39 CHAPTER 3 GULF ECONOMIC UPDATE Going forward, a steady commitment to contin- ue fiscal consolidation efforts could be achieved FIGURE 51 Non-hydrocarbon revenue grew only through domestic revenue mobilization strategies, modestly during MTFP timeframe. some of which are already underway. A draft Person- al Income Tax (PIT) bill is under consideration, but the details and timing of implementation are yet to be offi- Non-hydrocarbon revenues, % of GDP cially confirmed. In 2024, Oman has issued Royal De- cree promulgating the law for Top-Up Tax on Constit- 14 uent Entities of Multinational Groups, providing for a 12 minimum tax rate of 15 percent in alignment with the 10 OECD framework as part of Pillar Two to avoid Base 8 Erosion and Profit Shifting (BEPS) and in line with the 6 international tax principles. Effective January 2025, 4 the law applies to companies with consolidated reve- nue exceeding EUR 750 million (approximately OMR 2 300 million). Although the general rate of corporate 0 income tax in Oman is also 15 percent, the law could im- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e pact businesses that enjoy corporate income tax relief such as those granted in free zones, possibly generat- ing higher tax revenue to the State budget. Source: Ministry of Finance and World Bank Calculations Despite the progress achieved, the economy contin- ues to track the movements in global oil prices and demand. Additional measures of generating non-oil revenues, and continuing to rationalize spending while improving its composition, necessitate a balanced ap- proach to ensure societal buy in. A continued focus on building institutional capacity, improving governance, and fostering a culture of fiscal responsibility are also key to expand fiscal space for additional growth-enhanc- ing spending, and ensure long-term fiscal sustainability. 40 CHAPTER 3 GULF ECONOMIC UPDATE Chapter 04 Page 41 – 62 Special Focus: Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC T his Special Focus chapter sheds light found in particular when examining the impact of gov- on the effectiveness of fiscal policy ernment expenditure on non-hydrocarbon output. For for macroeconomic stabilization and most countries in the GCC26, the ‘fiscal multiplier’, long-term growth across GCC coun- which is a measure of the unit change of output follow- tries. The main focus of this chapter is ing a 1 unit change in government expenditure, lies be- to zoom in on fiscal expenditures, both tween 0.1 and 0.4. This implies that a 1 unit increase in in terms of recurrent spending and long-term invest- government expenditure yields a 0.1-0.4 unit increase ment, within the GCC member economies. Two differ- in short-term cyclical output. Overall, this represents ent dimensions of fiscal policy and their effects on ag- a small but significant change in output in response to gregate output are highlighted. First, the role of fiscal government expenditure. As the multiplier is smaller spending and income as a macroeconomic stabilization than one, a unit of government spending does not in- tool, as evidenced through short-run fiscal multipliers. crease output by the same factor. One possible reason Second, the ability of public investment to promote is a crowding out of private sector expenditures. There long-run growth in the GCC, given the structural chal- is also the possibility of crowding out of net exports, lenge of hydrocarbon dependence faced by GCC econ- i.e., a decrease in firm export activity due to the govern- omies. The chapter does not analyze non-financial ment taking up available production resources. When elements of fiscal policy, such as regulatory environ- pooling available evidence across the GCC, the leading ments, or industrial policies, which are important but factor influencing this positive effect of fiscal policy is are too vast to be included in this analysis. the business cycle status; that is, whether or not a giv- en country is in a recession. Fiscal policy appears to The estimated results provide evidence that fiscal be particularly effective during recessions in the GCC; policy can be effective at mitigating cyclical varia- during economic expansions, fiscal multipliers drop to tion of output when deployed using the right tools almost zero. at the right times. Positive effects of fiscal policy are 26 These are Oman, Kuwait, Qatar, and Saudi Arabia. 41 CHAPTER 4 GULF ECONOMIC UPDATE The chapter is structured as follows. Part I presents across business cycles in the GCC region. Part III pro- headline statistics on fiscal income and expenditures vides evidence on the long-term effects of fiscal expen- in the GCC against the global background of fiscal pol- diture through investment, characterizing its effects icy since the period of the Global Financial Crisis. Part on potential output. Finally, the chapter concludes II provides evidence on the efficacy of fiscal income with relevant broad policy suggestions. and spending policies for macroeconomic stabilization PART I Broad global fiscal policy trends The global importance of fiscal expenditure policy Fiscal policy has been contributing significantly to drop, Figure 52 provides information on aggregates business cycle dynamics this century. Around the of fiscal policy in the GCC relative to the global state world the appetite for fiscal policy to fulfill a myriad of of fiscal expenditures. It plots per-capita government objectives for national economies has grown since the spending across the globe in 2022, expressed in US$ to macroeconomic turmoil of the Global Financial Crisis. ensure comparability. Per-capita government spend- These objectives range from macroeconomic stabil- ing levels in the GCC are higher than other countries ity, through developmental concerns, to addressing in the MENA region with significant variation across questions of inequality. The sovereign policy toolkit is countries. They range from slightly below 7,000 US$ in wide-ranging and includes governance laws and indus- Oman (which is among the likes of Poland or Taiwan) trial or trade policy among others. up to almost 20,000 US$ in Qatar, comparable to New Zealand or Italy. GCC countries hence exhibit a sizable In the GCC, government spending levels are higher government sector that influences gross output dy- relative to most other MENA economies. To under- namics in a quantitatively significant way. stand where the GCC stands against the global back- FIGURE 52 Per-capita government spending in 2022 in US$. World GCC Govt. Spending per capita in US$ Source: World Bank staff visualizations, with data from (IMF, 2025) 42 CHAPTER 4 GULF ECONOMIC UPDATE Weighing by GDP confirms the important role of er share of output dynamics in the GCC. This con- the government sector in the GCC (Figure 53). On a text is unique to the GCC, which has one of the highest global scale, there is again significant variation with a shares of natural resource extraction in contributing larger government sector in European economies. This to aggregate output globally. Considering the share of is related to the significant outlays for pension and government spending in non-hydrocarbon GDP, the health insurance systems across Europe due to pres- importance of the sovereign sector increases vastly. ent population dynamics. The unweighted global aver- The ratios of government spending to non-hydrocar- age across countries in the worldwide sample is around bon GDP range from 36 percent in Bahrain, through 32 percent, which is close to the share of government around 45 percent in the UAE, Saudi Arabia, and spending in GDP for all GCC economies but Kuwait in Oman, up to 61 percent and 84 percent in Qatar and 2022. Kuwait’s share of government spending in GDP Kuwait. Figure 54 shows the importance of govern- lies at about 39 percent. Oman, Saudi Arabia, and ment spending for non-resource GDP globally and in Bahrain are at or slightly below 30 percent, and Qatar the GCC. and the UAE are around 25 percent. Relative to coun- tries with more than 10 million inhabitants, however, All this evidence bolsters the case for a detailed in 2022, Oman and Saudi Arabia each exhibit higher analysis of government expenditure. This includes shares of government spending to GDP. both the efficacy of government spending in providing short-run macroeconomic stabilization and the useful- Relative to value creation outside of hydrocarbon ness of government investment in improving long-term extraction, the fiscal sector makes up an even larg- growth outcomes. FIGURE 53 Government spending relative to GDP in 2022. World GCC Govt. Spending per capita in USD Govt. Spending in % of local GDP Source: World Bank staff visualizations, with data from (IMF, 2025) FIGURE 54 Government spending relative to non-resource GDP in 2022. World GCC Govt. Spending in % of local GDP Govt. Spending/ Non-Resource Output (in %) Source: World Bank staff visualizations, with data from (IMF, 2025) 43 CHAPTER 4 GULF ECONOMIC UPDATE Fiscal policy around the globe since 2006 The importance of fiscal policy measures as mac- There is a growing appetite for use of fiscal poli- roeconomic stabilization tools has increased in cy around the world. For more than 70 percent of all importance since the Global Financial Crisis of countries for which data is available, the share of gov- 2007-2009 (Ramey, 2019). A natural focus has since ernment spending in GDP has grown since the Global been put on the ability of fiscal policy to mitigate the Financial Crisis (Figure 55). In unweighted terms, half detrimental consequences of recessions (Parker, 2011). of the overall cumulative increase in real government Consequently, the above snapshot must be supported spending is driven by China and the US alone, with the with a brief description of the dynamics of fiscal policy remainder of the world making up the other half. Fur- around the globe to set the GCC in context. ther significant contributions come from countries such as India, South Korea, France, the United King- The major fiscal policy tools considered by the lit- dom, Germany and Japan. In real relative per-capita erature are taxes (and subsidies), spending, and (if terms, more than 18 percent of all countries at least the two are in disarray), deficits (Rutherford, 2002). doubled their government expenditures since 2006, This guides the definition of fiscal policy as policies being led by China, Nepal, and Cambodia. Zooming managing these three factors, as set by a sovereign en- into the GCC again, Qatar stands out as having de- tity. This can be summarized as budgetary policy. As creased government spending relative to GDP since laid out by Easterly, et al., 1993, not all fiscal expendi- 2006 by more than 5 percentage points. The state ture is alike: investment and spending follow different sector now accounts for 7 percentage points more of objectives and different implementation horizons and aggregate output in Kuwait and the UAE. Overall, the might therefore be evaluated separately. In evaluating GCC boasts stable spending dynamics relative to the the effects of fiscal policy, the primary concern is the global background, driven in part by recent consolida- risk of crowding out private spending or investment tion efforts. These efforts saw the share of government that would otherwise occur (Afonso, et al., 2012).27 De- spending in GDP decline across the GCC since 2019 by spite this concern, government expenditures around an average of almost 7 percentage points. the globe remain elevated following recent crises that increased the appetite for fiscal interventionism.28 FIGURE 55 The change in government spending relative to GDP from 2006 to 2022. World GCC Govt. Spending/Non-Resource Output (in %) Change in G/Y (%) Source: World Bank staff visualizations, with data from (IMF, 2025) 27 Governments can also influence real activity through the provision of sound institutions and equal opportunities for business owners, as well as the promotion of structurally disadvantaged sectors through industrial policy. Such measures are explicitly not considered in the present analysis, which is restricted to budgetary policy. 28 Fiscal policy has also been considered a policy tool promoting macroeconomic development through the provision of public services that lift human capital in the long run (Clements, Gupta, and Inchauste, 2004). 44 CHAPTER 4 GULF ECONOMIC UPDATE The increased appetite for fiscal interventionism increase with variation across countries since 2006 must, of course, be financed. Empirical data shows (Figure 57). Kuwait and Saudi Arabia stand out as that there is no matching concurrent increase in rev- the two countries that managed to reduce their sov- enues raised by governments across the globe to fi- ereign debt in the period since the onset of the Global nance the glut for government spending. Debt issu- Financial Crisis. The remaining GCC economies, which ance therefore becomes a more popular choice to raise all had a sovereign debt-to-GDP ratio of less than 20 the required funds to finance government expendi- percent before the GFC, financed government expen- tures. This, in turn, raises concerns about fiscal space, ditures to some extent by additional debt issuance particularly in relation to debt ceilings being possibly since then. Bahrain boasts the highest debt-to-GDP reached, which might constrain the ability of countries ratio at 111 percent in 2022, which is equivalent to its to borrow. government debt-to-GDP level in 2009. Fiscal expan- sions, as measured through increases in debt-to-GDP The increase in government spending since 2006 ratios, occurred in Oman, Saudi Arabia, and the UAE. has been financed significantly by additional debt Here, however, debt-funded expansions all yield rela- issuance (Figure 56). There is a significant increase in tively low debt-to-GDP ratios in a global context, rang- sovereign indebtedness across the globe in the period ing from 24 percent in Saudi Arabia to 41 percent in between 2006 and 2020.29 Oman. Finally, Kuwait and Qatar enjoyed debt consol- idations, reducing their debt-to-GDP levels since 2010 Absolute levels of debt in the GCC remained below to 3 percent (Kuwait) and 43 percent (Qatar). advanced economies, but there is an overall debt FIGURE 56 Change in gross government debt relative to GDP from 2006 until 2022. World GCC Change in G/Y (%) Change in Debt/GDP (%) Source: World Bank staff visualizations, with data from (IMF, 2025) FIGURE 57 Public Debt-to-GDP ratio in the GCC in 2006 and 2022. 2006 2022 BAH AIN K WAIT OMAN QATAR SAUDI UAE ARABIA 111 108 105 Change in Debt/GDP (%) Debt-to-GDP Ratio (%) 102 50 40 30 20 10 0 2006 2022 2006 2022 2006 2022 2006 2022 2006 2022 2006 2022 Year Source: World Bank staff visualizations, with data from (IMF, 2025) 29 As for the emerging markets that have undergone debt consolidations since 2006 (e.g., DR Congo, Ethiopia, Guyana, Myanmar, Syria), their debt consolidations result to a significant extent from debt haircuts. They are not necessarily arising from debt repayment. See Horn, et al. (2020) for a discussion of such haircuts. 45 CHAPTER 4 GULF ECONOMIC UPDATE PART II Fiscal policy in the GCC Sovereign Income and Spending in the GCC since 2010 The primary objective of fiscal policy evaluated in highest in Qatar, Kuwait, and the UAE, and smaller the literature is short-term macroeconomic stabi- in Saudi Arabia, Oman, and Bahrain. Where the bud- lization. Making fiscal policy explicitly countercyclical get decomposition can be observed, spending usually aligns well with this objective, as described by Bogetić, outstrips investment on the expenditure side, while et al. (2024). Previous evidence showed significant fis- sovereign income remains largely sourced in hydrocar- cal resilience across the GCC and countercyclical fiscal bon sales, except for the UAE. Note, however, that the policy for most countries in the region. presented figures are likely not entirely representative of the full degree of sovereign investment. Any invest- Figure 58 shows government income and expen- ment conducted through Sovereign Wealth Funds is ditures in the GCC, with a decomposition into two not captured here, as it is not included in the headline respective main categories wherever data was government expenditure statistics employed here. available. Per-capita revenues and expenditures are Decomposition of per capita government income and expenditures in the FIGURE 58 GCC in 2023. Expenditure & Income Components Total Govt. Exp. Govt. Investment Non-Oil Income Total Income Govt. Spending Oil Revenue 20000 Value (in real 2017 US$) 15000 10000 5000 0 BAH AIN K WAIT OMAN QATAR SAUDI UAE ARABIA Source: World Bank staff visualizations (using data from (Müller, et al., 2025) and (IMF, 2025) These snapshots of recent government income and of the Global Financial Crisis in the GCC. As before, expenditure are now enriched by a more dynamic the natural starting point to such considerations is the analysis of headline fiscal policy trends across the quantity of gross government spending to GDP, which GCC over time. Figure 59 reflects the dynamics of ag- reflects the overall level of importance of government gregate sovereign income and spending since the end interventions. 46 CHAPTER 4 GULF ECONOMIC UPDATE Mirroring the previous results, Kuwait can be sin- spending generally exceeds government income in the gled out as the country in which government income sample period in Bahrain. Oman, Qatar, Saudi Ara- and spending are comparatively more important bia, and the UAE seem to be running approximately for aggregate dynamics over time. Saudi Arabia and balanced budgets in the medium-run. Kuwait enjoyed especially the UAE have relatively lower levels of gov- significant surpluses in terms of their sovereign bud- ernment income and spending as shares of total GDP. get, although sovereign income was deteriorating Sidelining the general uptick in government spending throughout much of the 2010s before rebounding in in 2020 caused by the Covid-19 pandemic, government recent years. FIGURE 59 Gross sovereign income and spending in the GCC. Govt. Income/GDP (%) Govt. Spending/GDP (%) BAH AIN K WAIT OMAN 80 60 40 20 QATAR SAUDI ARABIA UNITED ARAB EMIRATES 80 60 40 20 2010 2014 2018 2022 2010 2014 2018 2022 2010 2014 2018 2022 Year Source: World Bank staff visualizations, with data from (IMF, 2025), (Müller, et al., 2025), (The World Bank, 2025) Gross government revenues raised over time across Arabia and the UAE. Nonetheless, the share of income the GCC thanks to hydrocarbon extraction, with sources other than taxation in government revenues important successes in revenue diversification in remains above the counterparts of many advanced Saudi Arabia and UAE (Figure 60). The revenue di- economies, whose fiscal budget relies on the taxation versification efforts shaping recent aggregate dynam- of any domestic value added. ics in the GCC are particularly pronounced for Saudi 47 CHAPTER 4 GULF ECONOMIC UPDATE FIGURE 60 Non-hydrocarbon sources of government income across the GCC. BAH AIN K WAIT OMAN 1 Share of government income not attributed to oil sources .8 .6 .4 QATAR SAUDI ARABIA UNITED ARAB EMIRATES 1 .8 .6 .4 2010 2014 2018 2022 2010 2014 2018 2022 2010 2014 2018 2022 Year Source: World Bank staff visualizations, with data from (IMF, 2025), (Müller, et al., 2025), (The World Bank, 2025) On the expenditure side, the degree to which invest- Among the three countries for which considerable ment has been making up sovereign expenditures time series are available, the investment share of matters. This is because investment might boost the government expenditures decreases across time. long-term growth prospects of the economy, especially That, however, is to be expected given the initial very when private investment provision is inefficiently low.30 high shares of sovereign investment. Across the GCC, Figure 61 plots the share taken up by investment in the investment in recent observations makes up around quarterly expenditure of each GCC sovereign entity 10-20 percent of sovereign expenditures, broadly in where data is available. line with investment expenditures in the US, for in- stance.31 30 Government spending, in turn, relates to day-to-day expenditures within the context of the present analysis and are unlikely to raise the production frontier in the long-run. 31 See: (Congressional Budget Office, 2019). 48 CHAPTER 4 GULF ECONOMIC UPDATE FIGURE 61 Investment share in total government expenditure across the GCC. BAH AIN K WAIT OMAN 60 Share of investment in government expenditure (in %) 40 20 0 QATAR SAUDI ARABIA UNITED ARAB EMIRATES 60 40 20 0 2010 2015 2020 2025 2010 2015 2020 2025 2010 2015 2020 2025 Year Source: World Bank staff visualizations, with data from (IMF, 2025), (Müller, et al., 2025), (The World Bank, 2025) Employment dynamics similarly reflect the import- total/hydrocarbon-specific GDP. This analysis there- ant role of the government sector in the GCC. Con- fore provides evidence on how the changes in govern- sidering only nationals, the share of people employed ment variables and changes to output coincide in a in the public sector relative to overall (public and pri- descriptive sense. These elasticities are estimated us- vate sector) employment is very high.32 The results re- ing quarterly detrended data for the core sample pe- inforce the previous findings, with nationals employed riod from 2010Q1 until 2024Q3. Any elasticity defined in the public sector accounting for shares between here measures how a 1 percent change in government 43 percent (Oman) and 81 percent (Qatar, Kuwait) expenditures or revenues changes government expen- of overall employment of nationals. Bahrain (47 per- ditures. The first two columns show the elasticities of cent) and Saudi Arabia (62 percent) sit between the expenditures to GDP and hydrocarbon GDP. extreme points. In the GCC-wide sample, the first column signifies To round up the description of headline fiscal pol- that a 1 percent increase in GDP correlates with a icy variables, Figure 62 plots contemporaneous 0.46 percent increase in government expenditures. correlations in the growth rates of expenditures/ This positive contemporaneous correlation can be revenues and output. Figure 62 therefore shows de- found for any individual economy within the GCC, both scriptive estimates of contemporaneous elasticities. for aggregate GDP and aggregate hydrocarbon GDP. These are measures of the percentage change in ex- Looking at the change in government revenues, the penditures/revenues following a 1 percent change to correlations are even sharper, with estimated elastici- 32 Due to limitations on data provided by the GCC Statistical Center, descriptive statistics are considered for the year 2019. The UAE is excluded from this analysis due to a lack of suitable data. 49 CHAPTER 4 GULF ECONOMIC UPDATE ties amounting to 0.84 for Qatar, 2.28 for Bahrain, and changes to government income/spending policy and 1.39 for the entire GCC. In terms of contemporaneous output. This further motivates the need to determine correlations, government revenues therefore seem to exactly how much output changes when fiscal policy be much more sensitive to GDP in Bahrain relative to changes in a quantitative (and ideally quasi-causal) Qatar. Since all these correlations are positive, there sense.33 generally seems to be positive co-movement between FIGURE 62 Contemporaneous elasticities of government revenue and spending to aggregate output. GCC BHR KWT OMN QTR KSA UAE 2.0 1.5 Value 1.0 0.5 0.0 Expenditures-to Expenditures-to Revenue-to Revenue-to GDP Oil GDP GDP Oil GDP Elasticity Source: World Bank staff estimates 33 Within the context of the GCC, Sovereign Wealth Funds (SWFs), excluded from the presented analysis, also deserve a mention as savings tools of governments. Their size is non-trivial, with the SWFs of Kuwait, Saudi Arabia, and some Emirates within the UAE boasting each more than $1 Trillion AUM. 50 CHAPTER 4 GULF ECONOMIC UPDATE Monetary Policy in the GCC is constrained by exchange rate pegs, making fiscal policy the primary macroeconomic stabilization tool Monetary policy in the GCC cannot set policy rates icy are independent in their decision-making, but inter- flexibly, as the prevailing exchange rate pegs force dependent in terms of their efficacy (see Leeper, 1991; some co-movement with policy rates set by the US Sims, 1994; Leeper, et al., 2016; Ramey, 2019). Within Federal Reserve. This is relevant for the analysis as the context of the GCC, however, monetary policy can- monetary policy is a prominent macroeconomic stabi- not serve as the principal macroeconomic stabilization lization tool in the eyes of both policymakers and the tool, as it is constrained by the prevailing exchange academic community (see Ramey, 2016 and Romer et rate pegs. This makes fiscal policy the primary mac- al., 2023). Furthermore, even though monetary policy roeconomic stabilization tool, making the analysis of is externally constrained in the GCC, it might feedback fiscal policy in terms of its efficacy to influence macro- to fiscal multipliers. Generally, monetary and fiscal pol- economic variables even more important. BOX 2 Monetary Policy in the GCC. Exchange rate pegs shape monetary policy across the GCC. Bahrain, Oman, Qatar, Saudi Arabia, and the UAE operate under a strictly maintained exchange rate peg to the US Dollar. Kuwait operates under an exchange rate peg to an undisclosed basket of currencies, having moved away from a strict US$ exchange rate peg that operated between 2003 and 2007.34 The arrangements of Bahrain, Oman, Qatar, Saudi Arabia, and the UAE all are categorized as conventional single-currency fixed peg arrangements, with the exchange rate of each local currency to the US$ being kept stable. The prevailing exchange rate pegs allow for open capital accounts and relatively free capital funds flows into and out of the GCC economies. Despite the fixed peg arrangements, domestic overnight interbank rates remain free-floating, matching mostly the Federal Funds Target Rate but reacting to idiosyncratic elements particular to each given interbank market. Still, GCC interest rates can be broadly characterized as being cointegrated with respect to the Fed Funds Rate (Bova, 2012). The policy tools of GCC central banks are not limited to interest rate policies, as they maintain an influence on the real and nominal economy through policies related to the banking sector. These policies include loan-to-deposit ratios, reserve requirements, and general macroprudential tools (Espinoza and Prasad, 2012). These exchange rate pegs matter for the estimation of fiscal multipliers, since the size of fiscal multipliers depends on the prevalent exchange rate regime. Ilzetzki et al. (2013) provide conclusive global evidence that fiscal multipliers are positive, especially in economies with exchange rate pegs. A brief summary of monetary policy in the GCC is therefore relevant to set the context for the estimation of fiscal multipliers. Monetary policy in the GCC generally manages to keep inflation at low and stable levels. Since 2020, average annual inflation rates were amounting to 0.46 percent in Bahrain, 3.03 percent in Kuwait, 1.14 percent in Oman, 1.76 percent in Qatar, 2.61 percent in Saudi Arabia, and 1.37 percent in the UAE. GCC-wide minimum and maximum annualized inflation rates amount to –2.54 percent and 4.99 percent, respectively. Price stability has therefore been maintained despite the absence of quanti- tative inflation targets. While the present analysis does not estimate the effects of monetary policy in the GCC, Espinoza, et al. (2012) provide com- prehensive and conclusive evidence on monetary policy transmission in the GCC. They find a limited pass-through of policy rates to retail bank rates, but they provide evidence on a broad pass-through of US monetary policy changes to GCC domestic non-hydrocarbon activity and inflation rates. 34 According to the Central Bank of Kuwait, that peg was stopped due to the then ongoing depreciation of the US$ against most major global currencies, contributing to domestic inflation (Marzovilla, et al., 2010). 51 CHAPTER 4 GULF ECONOMIC UPDATE There is low interest rate pass-through from US to GCC monetary policy sitting at 30 percent for lending rates and 50 percent for deposit rates, respectively (Espinoza, et al., 2012). Bahrain and Kuwait boast higher pass-throughs, relatively speaking, for both lending and deposit rates relative to other GCC economies. Espinoza, et al. (2012) also provide a headline estimate on the efficacy of monetary policy on real and nominal variables. Their results imply that a 1 percent change in the Fed Funds Rate decreases non-oil economic activity in the GCC by 0.1 percent and furthermore reduces inflation by 0.8 percent through a corresponding decrease in global commodity prices of 2 percent. These monetary policy pass-through estimates must be appreciated with caution. Their analysis is restricted to annual data, caused by data limitations prevalent at that time. With annual data, however, the estimation of truly exogenous monetary policy shocks is almost impossible (Ramey, 2016). Also, the assumption that “GCC shocks do not contemporaneously influence U.S. variables” is far from innocuous, since any type of oil supply shock can be GCC-specific and might influence US economic variables (Känzig, 2021). PART III The Effects of Government Spending and Income Changes in the GCC Fiscal Multipliers This section provides a novel quantitative analysis however, it is possible for this effect of fiscal policy on of fiscal multipliers in the GCC. Fiscal multipliers de- output to be less than one-for-one. This case would be fine the total response of output following a change in related to crowding-out effects, by which the addition- fiscal income and/or spending and are a broad measure al fiscal spending leads private firms and households of the effectiveness of fiscal policy. Fiscal multipliers to spend less than they otherwise would. Most of the are of interest to policymakers and economists alike, literature, surveyed in Ramey (2016), finds fiscal multi- since they gauge the ability of fiscal policy to influence pliers smaller than 1. A more precise definition for the output. This is relevant because fiscal policy might interested reader is provided below in Box 3: Existing not translate one-for-one into output changes. Fis- estimates of fiscal multipliers in the GCC. The first cal policy could change output more than one-for-one part of the analysis focuses on short-run multipliers, over time due to multiplier effects. Intuitively, in this which capture the ability of fiscal policy to stabilize case, an additional dollar spent by the government is business cycles around a long-run trend. Later parts of earned by the private economy, which then is spent by this chapter will focus on the possible measurement of those who earned it again, causing a cumulative output long-run multipliers. change larger than the initial fiscal impulse. Likewise, 52 CHAPTER 4 GULF ECONOMIC UPDATE BOX 3 Existing estimates of fiscal multipliers in the GCC. A number of studies have already considered the efficacy of government spending and taxation for aggregate em- ployment and growth outcomes as implied by fiscal multipliers in GCC countries. The literature has been surveyed in (IMF, 2024), with a particular focus on the size of fiscal multipliers in Saudi-Arabia, the largest of the GCC economies. Hemrit et al. (2018) find multipliers for fiscal spending in the magnitude of 0.1-0.8, using a structural VAR approach with annual data. This approach is shared by Al Moneef et al. (2020), who find a spending multiplier of 0.3, and Al Marzoqi et al. (2023), who find a spending multiplier of 0.45. All three papers therefore face the significant drawback that the identifying assumption, namely that there is no contemporaneous feedback of output on government spending, is extremely strong given the use of annual data, as pointed out by Ramey, et al. (2018). Other approaches, likewise, face econometric challenges. Hasanov, et al. (2022) estimate an ARDL model relating government expenditure to non-oil GDP and find a spending multiplier of 0.25, forgoing a de- tailed treatment of the simultaneity bias. Finally, the IMF (2024) estimate relies on a ‘bucket approach’ with limited quantitative evaluation. Their spending-to-output multiplier estimate lies at 0.6. Obtaining internally valid and unbiased estimates econometric methods. However, given the short sam- of fiscal multipliers is econometrically challenging ple size, the estimate is uncertain and not statistically and requires sophisticated estimation methods. To significantly different from zero. This is evidenced by estimate the effect of fiscal policy on output, research- the very wide confidence bands. Following the impact ers must overcome a fundamental causality problem, period, the fiscal multiplier generally remains insignifi- since fiscal policy might influence contemporaneous cant in the estimation, with the point estimates varying GDP, but the reverse is clearly possible. Annex 3 ex- between values slightly above and slightly below zero. plains how institutional arrangements of the GCC are exploited in this chapter to provide quasi-causal esti- Kuwait: On impact, a 1 unit change in government mates with a reduced risk of biasing the results. expenditure in Kuwait is associated with an impact change in non-hydrocarbon output of 0.11 units, The quantities provided here measure the cumu- which is the impact fiscal multiplier. Subsequently, the lative response of output from period 0 until the effect of the fiscal impulse on output is increasing, with period depicted (in units) for a cumulative one unit a peak estimate of around 0.23 eight quarters after the fiscal impulse. Figure 63 considers instrumented total initial fiscal impulse. This is in line with existing litera- government expenditure, which for the most part con- ture estimates for other small open economies under sists of government spending, and how such expendi- fixed exchange rates (Ilzetzki, et al., 2013). The esti- ture influences real output. There is broadly a signifi- mates for Kuwait are furthermore broadly statistically cantly positive effect of government expenditure on significant until 10 quarters after the initial impulse, output. This reinforces the idea that fiscal policy in the which is far from trivial given the limited sample size. GCC can be considered effective at combating cyclical variation in non-hydrocarbon output. The patterns Oman: Fiscal multipliers in Oman, too, are broadly displayed, however, are very different across the GCC positive, but their precise magnitude is arguably member countries and warrant further discussion. time-varying. On impact, the non-hydrocarbon out- put response to the fiscal expenditure impulse is bare- Bahrain: The Fiscal Multiplier point estimate is ly significantly different from zero. But in Oman, too, among the highest on impact in Bahrain, at around fiscal multipliers initially grow after the fiscal impulse 0.35, but it is statistically insignificant. On impact, a period, peaking locally at around 0.3 one year after the 1 unit change in government expenditure leads to a 0.35 initial fiscal impulse. At that point, the estimated fiscal unit change in non-hydrocarbon output. This is at the multiplier is statistically significantly different from upper end of estimates commonplace in the literature zero at conventional confidence levels. on fiscal multipliers estimated with state-of-the-art 53 CHAPTER 4 GULF ECONOMIC UPDATE Qatar: Displays a generally significant response of the initial shock remain positive but are statistically (non-hydrocarbon) output in response to expan- insignificant. sionary fiscal shocks. For Qatar, a maximum cumu- lative fiscal multiplier on expenditures of 0.43 after 10 UAE: The UAE is broadly speaking an outlier in the quarters occurs, meaning that an initial 1 unit fiscal ex- estimation. While the multiplier on fiscal expenditure penditure shock causally relates to a cumulative output is decidedly positive on impact, lying at around 0.34, it increase of 0.43 units over the subsequent 2.5 years. becomes insignificant after one quarter. This implies that no statistically significant change in cumulative Saudi Arabia: As all other previously mentioned non-hydrocarbon output following the fiscal expendi- GCC contemporaries, Saudi Arabia displays ro- ture impulse can be found. The estimate of the effects bustly positive fiscal multipliers in response to of this fiscal policy on output remains insignificant, changes in fiscal expenditures. The estimates in the with point estimates becoming occasionally negative. initial four quarters following the fiscal expenditure While this may at first seem surprising, it is broadly impulse display significant changes in non-hydrocar- in line with the literature that finds the possibility of bon output, peaking at almost 0.4 units both on impact non-positive effects of fiscal expansions when private as well as one year after the fiscal impulse. Subsequent activity is crowded out to a significant degree. fiscal multiplier estimates for up to 12 quarters after FIGURE 63 Estimates of fiscal multipliers on government expenditure using the preferred local projection. BAH AIN K WAIT OMAN 1.5 0.6 0.6 1.0 0.4 0.4 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier 0.5 0.2 0.2 0 0 0 –0.2 –0.2 –0.5 –0.4 –0.4 –1.0 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) SAUDI ARABIA QATAR UNITED ARAB EMIRATES 0.6 0.6 0.6 0.4 0.4 0.4 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier 0.2 0.2 0.2 0 0 0 –0.2 –0.2 –0.2 –0.4 –0.4 –0.4 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) Source: World Bank staff estimates 54 CHAPTER 4 GULF ECONOMIC UPDATE To sum up, fiscal multipliers are significantly pos- cal stabilization to broad non-hydrocarbon output dy- itive, but at the same time significantly less than 1, namics. There is, however, no “multiplier effect” from across the board in the GCC. The results imply that fiscal expenditures in terms of its impact on business fiscal policy in the GCC is effective at providing cycli- cycle stabilization. Multiplier estimates for income-side instruments: gross income, hydrocarbon sale income, non-hydrocarbon sale income While headline fiscal expenditures are usually the of the fiscal impulse for the three years after it. In the instrument of choice to pursue proactive fiscal case of Oman, the multiplier estimates are even signifi- policy especially during economic downturns, in- cantly negative, hinting at the possibility of a decrease come-side policy, too, remains important. So far, the of 0.3 units in non-hydrocarbon GDP around one year present analysis concerned the effects of fiscal expen- after a 1 unit shock to fiscal income. diture on output. The chosen measure of fiscal expen- diture was influenced (instrumented) by unexpected Finally, Saudi Arabia’s income-side fiscal policy as shifts to income from hydrocarbon income. Linking fis- measured through fiscal multipliers appears to cal income to these shifts in hydrocarbon income and have barely any effect on non-hydrocarbon output, relating this measure to output is, likewise, plausible. being broadly insignificant except for a small positive impact multiplier of around 0.17. Figure 64 shows the main estimates of interest on the income side, capturing the cumulative effects of Because of the limited sample size, all estimates changes in fiscal income on non-hydrocarbon out- display relatively wide confidence bands, as is to be put in GCC economies. The results here are decidedly expected with the estimation methodology. In terms less clear than in the case of fiscal expenditures. Unlike of persistence, Oman has to be singled out as being fiscal spending, there is no clear statistically significant the one country displaying the widely expected slight positive relationship between fiscal income and non-hy- negative multipliers in response to a sovereign income drocarbon output in the preferred estimation method. surprise. Bahrain displays the most significant response The bottom line is that the effects of fiscal income across the GCC in general, with significantly pos- on non-hydrocarbon output are not as clear as for itive fiscal income multipliers of around 0.5 on fiscal expenditures. Since the instruments for fiscal impact. A measured 1 unit increase in fiscal income income are rooted in hydrocarbon sales dynamics, this therefore relates to a 0.5 unit increase in the preferred is in line with expectations. One possible reason for this output measure. Over time, the cumulative multipliers might be that the estimates conflate the possibly posi- decrease to being slightly negative three quarters after tive effects of higher hydrocarbon sale income with the the impulse, and the estimates are generally statisti- possibly negative effects of changes in taxation. In sum, cally insignificant outside of the initial periods. the two effects might even out in the presented estima- tion. Such an instrument-specific analysis, however, Kuwait and Qatar display quite similar patterns, is not possible with the limited data available. From a with fiscal multipliers on government income being policy perspective, income-side policy does not appear marginally below zero on impact. Subsequently, the to meaningfully influence cyclical non-hydrocarbon multipliers are increasing to above zero around two output in the GCC when estimated with the methodol- years after the fiscal impulse. These estimates point at ogy presented in Annex 3. In terms of macroeconomic a gradual ability of fiscal income policy to be related to stabilization of the non-hydrocarbon environment, the increases in cyclical non-hydrocarbon output, albeit in message is that changes to fiscal income do not perpet- a quantitatively very limited sense. uate directly to output dynamics. Instead, once such changes to income are passed through to fiscal expen- Oman and the UAE make up another group of coun- ditures, output-stabilizing motives of fiscal policy can tries displaying similar patterns. Expenditure-side be attained. multipliers are generally below zero from the onset 55 CHAPTER 4 GULF ECONOMIC UPDATE FIGURE 64 Estimates of fiscal multipliers on government income using the preferred long-difference local projection. 1.0 BAH AIN 0.3 K WAIT 0.6 OMAN 0.2 0.4 0.5 0.2 0.1 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier 0 0 0 –0.2 –0.1 –0.4 –0.5 –0.2 –0.6 –1.0 –0.3 –0.8 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) 0.25 QATAR 0.6 SAUDI ARABIA 0.4 UNITED ARAB EMIRATES 0.2 0.2 0.4 0.15 0 0.2 0.1 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier –0.2 0.05 0 –0.4 0 –0.2 –0.6 –0.05 –0.4 –0.8 –0.1 –0.15 –0.6 –1 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) Source: World Bank staff estimates An aggregate GCC perspective The previous exercises and analyses were con- advantage is the increase in statistical power by pool- strained by the limitations caused by the short sam- ing all GCC economies for which data are available.35 ple size of at most 58 quarter-year observations With that increase in statistical power, it is possible to for the six GCC economies. However, more granular consider the effects of specific fiscal sub-instruments, questions related to fiscal multipliers in the GCC are such as investment or day-to-day spending, on the out- of importance to policymakers, such as state-depen- put measure. dence or instrument-specificity of fiscal multipliers. To answer such questions, the statistical power used in This in-depth exercise therefore considers the abil- the estimation process must be increased. ity of individual fiscal instruments to provide the short-sun stabilization desired of fiscal policy. To Instead of a country-level analysis, it is possible to that end, government expenditures are separated into use the previous estimation method to pin down government investment and government spending, and the effects of each fiscal instrument on the aggre- fiscal income is separated into hydrocarbon income gate GCC level. The country-level data is here pooled and other income, labelled non-hydrocarbon income and used in a single estimation with time-invariant here for simplicity. country-specific fixed effects. The one very simple 35 For Bahrain, Saudi Arabia, and UAE, complete data on all variables is available. For Kuwait and Oman, there are only limited data samples for the individual fiscal instruments spanning at most 5 years; and for Qatar, there exists only data on aggregate income and spending, but nothing specific on specific income or expenditure instruments. 56 CHAPTER 4 GULF ECONOMIC UPDATE Figure 65 presents the headline fiscal multiplier es- The estimates of the effects of government income timates in an estimation for the entire panel of GCC changes on non-hydrocarbon output dynamics, too, economies for each fiscal instrument considered. confirm the previous findings. In particular, changes The results are generally reassuring and confirm the to sovereign income are generally statistically insig- previous findings, although the point estimates are nificant, except for a brief period two quarters after slightly lower. Leveraging the statistical power of the the initial fiscal impulse with a negative government GCC-wide panel dataset, gross government expendi- income multiplier of -0.08. Changes to government in- ture displays significant and persistent multipliers of come themselves do not seem to be related to subse- around 0.1 – 0.25 from the impact period until three quent positive changes in non-hydrocarbon output. years after the expenditure impulse, meaning that a 1 unit change in fiscal expenditures in the GCC trans- Dividing government income into general income lates to a 0.1-0.25 unit change of non-hydrocarbon GDP (mostly from taxes) and hydrocarbon income con- on average. This change persists well into the medium firms the robustness of the estimation methodol- term, as the fiscal multipliers remain significantly pos- ogy. The estimated multipliers are largely driven by itive 10 quarters after the initial impulse. changes to non-hydrocarbon income, which are gener- ally insignificant and centered around zero. Zooming This change in non-hydrocarbon output following into hydrocarbon income, multiplier estimates are or- government expenditure arises from the govern- ders of magnitude smaller, being effectively zero. This ment spending component. The instrument-specific is a direct consequence of the estimation approach: estimates clearly indicates that government expendi- because the estimation leverages exogenous changes tures (excluding investment) are associated with the to hydrocarbon demand as instruments for changes positive fiscal multipliers. As for government invest- in the government income variable of interest, virtual- ment, no plausible significant effect of such investment ly all variation in that fiscal measure coming from the on cyclical fluctuations in non-hydrocarbon GDP is shocks is absorbed by the first-stage estimation. Ad- found. This should not come as a surprise, since the ditionally, as the output measure concerns non-hydro- positive effects of investment can take years, or even carbon output, hydrocarbon income is exempt from decades, to materialize fully. Such government invest- the output measure in an accounting sense. ment primarily influences potential output, not its cy- clical variation.  57 CHAPTER 4 GULF ECONOMIC UPDATE FIGURE 65 GCC-wide aggregate fiscal multiplier estimates by instrument. Govt. Expenditure Govt. Investment Govt. Spending 1 1 1 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier 0.5 0.5 0.5 0 0 0 –0.5 –0.5 –0.5 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) Gross Income Non-Hydrocarbon Income Hydrocarbon Income 1 1 1 Fiscal Multiplier Fiscal Multiplier Fiscal Multiplier 0.5 0.5 0.5 0 0 0 –0.5 –0.5 –0.5 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Horizon (in quarters) Horizon (in quarters) Horizon (in quarters) Source: World Bank staff estimates Fiscal Multipliers are effective at managing GCC business cycles Our preferred methodology (Local Projections) As this state-dependence imposes another restric- facilitates an easier estimation of otherwise hid- tion on the estimation process, the panel local pro- den aspects shaping the efficacy of fiscal multipli- jections approach is again preferred to yield the ers. Since the main goal of fiscal policy measures is to statistical power necessary to conduct this estima- measure their ability to influence cyclical variation in tion exercise. The econometric specification broadly non-hydrocarbon output, a condition of interest is the follows the description in Annex 3, but the equation is business cycle status of the economy. That is, wheth- now estimated separately for periods of recession and er the economy is in an expansion or in a recession at expansion. The resulting estimates therefore allow the a given point in time. Policymakers using fiscal policy measurement of the efficacy of fiscal policy depending as a cyclical stabilization tool would ideally hope to ob- on the underlying business cycle status of each econ- serve that fiscal policy is particularly effective at times omy. This can be done without imposing any further of economic dearth.36 restrictions on the estimation process. As the fiscal impulse variable of interest, gross government expen- 36 It would likewise be easily possible to use this tool to infer state-dependence of fiscal multipliers with respect to any reasonable measure of interest, such as the exchange rate regime, or the debt-to-GDP ratio. 58 CHAPTER 4 GULF ECONOMIC UPDATE ditures are utilized. These have shown to be the most tures do not appear to boost output during ‘good’ eco- comprehensive and promising in yielding significant nomic times. effects on the cyclical variation of non-hydrocarbon output. Figure 66 summarizes the estimates yielded by During recessions (red line), there is a significantly this exercise. positive effect of fiscal expenditures as evidenced through the fiscal multiplier, peaking at around The observed effects paint a positive picture of fis- 0.35 around 5 quarters after the impulse. A 1 unit cal interventions in the GCC. The blue line depicts increase in fiscal expenditure increases non-hydrocar- the fiscal multiplier estimate in periods of economic bon output by 0.35 units over five quarters when that expansion. Here, the estimates are not statistically fiscal impulse is sent in a recession. Therefore, pro- significantly different from zero for up to three years active fiscal policy aiming at cyclical stabilization of after the fiscal expenditure impulse. This hints at a lim- non-hydrocarbon output is effective during recessions. ited ability of fiscal policy to influence cyclical non-hy- However, expenditure policy does not yield expansion- drocarbon output when the economy is doing well, i.e., ary outcomes when the economy is not in a recession. when it is likelier to operate at capacity. Fiscal expendi- FIGURE 66 State-dependence of fiscal multipliers on government expenditure depending on business cycle state. Recession Expansion 0.8 0.6 Multiplier on Government Spending 0.4 0.2 0 –0.2 –0.4 0 2 4 6 8 10 12 14 16 Horizon (in quarters) Source: World Bank staff estimates 59 CHAPTER 4 GULF ECONOMIC UPDATE Long-term effects of fiscal policy So far, the focus has exclusively been on the abili- This is a question of the long-term effects of fiscal poli- ty of fiscal policy to influence cyclical fluctuations cy, effectively asking whether fiscal policy is in any way in non-hydrocarbon output. This focus aligns with able to help raise non-hydrocarbon output in the long- the literature and the expected primary effect of fis- run. Since the nature of this exercise differs from the cal policy measures. However, a broadly relevant estimation of short-run multipliers, a number of addi- topic within the GCC has generally been the ability tional considerations must be made before conducting of fiscal policy to support the transformation of the the estimation. real economy away from hydrocarbon dependence. BOX 4 Long-run multiplier estimation. Measuring the long-term effects of fiscal policy in a causal sense is generally not possible without invoking further very strong assumptions. It certainly is not possible using the quarterly data utilized thus far, as it is only available from 2010 to 2024. This relatively short data availability does not allow a measurement of the long-run effects of fiscal policy. To provide an estimate nonetheless, a similar estimation methodology to that specified in Annex 3 is now applied to a longer-running sample of annual GCC data. The identification strategy is broadly similar to the short-run Fiscal Multiplier estimation. The estimation is again conducted using a ‘Local Projections-Instrumental Variables’ framework. However, the focus now rests on the effect of the growth rate in government investment on the growth rates of non-hydrocarbon output. Govern- ment spending is excluded, as it is generally not considered to have an effect on long-run growth rates. The previously utilized normalization of Gordon et al. (2010) is also removed to change the focus on the growth rates in place of cyclical variation. As instruments, the unexplained component in world oil demand changes from Baumeister et al. (2019) is retained, which is again supplemented with the unpredictable component of government investment as in Blanchard et al. (2002). The identifying assumptions are naturally much stronger. In particular, the exogenous shock components must be uncor- related with the error term in the estimation of now-annual growth rates in government investment on the annual growth rate in non-hydrocarbon output. While this is not completely unplausible given that the effects of investment on long-run output growth rates take some time to manifest, the assumptions are difficult to validate.37 Trying to sideline other possible confound- ers of both long-run non-hydrocarbon growth and long-run government investment is very difficult to achieve. More fundamentally, the estimation requires a provision of estimates of potential output in the first place, to be able to infer changes to its growth rates. Trying to infer the effect of fiscal investment on the time trend of output is not a correct approach as it brushes over changes in the production structure of the GCC that have been underway since the 1990s. To remain relatively parsimonious, log real output is estimated through a Cobb-Douglas production function, based off available measures of TFP, the real capital stock, and employment. Relative to the estimation of short-run multipliers, here we regress growth rates on growth rates, changing our inter- pretation of the estimates. Where the multiplier estimates for the short-run provided a quantity of the unit change of output following a 1 unit change in fiscal variables, our estimation of the long-run effects depicts the percentage change in potential output following a 1 percentage point change to government investment. 37 An important component of policy unlocking long-run growth is regulation and legislation outside of the confines of quantitatively measurable fiscal policy. Under this category fall regulations, the ease of doing business, long-term policy stability, and similar factors capable of spurring economic growth (Acemoglu, et al., 2005). As these factors fall under the realm of political economy and generally lie outside of the realm of fiscal multipliers, they are not considered in further detail here. 60 CHAPTER 4 GULF ECONOMIC UPDATE Of relevance for policymakers is the question of In economic terms, the estimates imply an increase how fiscal investment should be financed. As invest- in the growth rate of potential output of 0.07 per- ment expenditures are more likely to be driven by long- cent for a 1 percent change in the growth rate of fis- run considerations, government investment can be cal investment. The left-hand panel provides the esti- distributed across time with more ease. This opens up mate without invoking any type of state-dependence, the policy decision to finance such investment through and hints at a small but significant effect of fiscal in- remaining surpluses, or through an issuance of govern- vestment on the growth rate of non-hydrocarbon GDP ment debt. 1-5 years onwards, with a cumulative ‘fiscal growth mul- tiplier’ peaking at 0.07 one year after the shock. Therefore, it makes sense to control for the effect of debt consolidation or expansion on the efficacy The right-hand panel utilizes the state-dependent of government investment. Debt consolidation here estimation method, showing that government in- proxies periods of leftover surpluses being used for vestment is more effective for growth during debt government investment, while periods of debt expan- consolidations. This estimation categorizes peri- sion proxy deficit-financed government investment. ods of impulses with fiscal investment depending on Building on the previous estimation exercise that con- whether they were occurring during a debt consolida- sidered the state-dependence of fiscal multipliers, this tion process or during an expansion process. The re- exercise considers such a state-dependence in line sults are striking: government investment appears to with the literature on fiscal investment (e.g., Nickel et be a positive contributor to potential output growth al., 2014). The goal is to distinguish debt-fueled gov- when it is not fueled by an expansion of government ernment investment from investment coinciding with debt. The fiscal growth multiplier amounts to values debt consolidation. At the same time, an estimate with- above 0.1 from 1 to 5 years after the fiscal impulse, in- out a sample split into debt consolidation and expan- clusive. During periods of debt expansion, injections to sion processes is provided as a reference point. Figure fiscal investment do not alter potential output growth 67 provides the evidence from this exercise for the con- rates in a statistically significant way. solidated GCC-wide annual data sample. FIGURE 67 Long-run Fiscal Multiplier estimates, reflecting the effect of government investment on potential output. Overall Estimate Debt Consolidation Debt Expansion 0.30 0.30 Multiplier on Government Investment Multiplier on Government Investment 0.25 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0 0 –0.05 –0.05 –0.10 –0.10 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 Horizon (in years) Horizon (in years) Source: World Bank staff estimates 61 CHAPTER 4 GULF ECONOMIC UPDATE The results in this section generally indicate that in economic downturns, while investment appears to fiscal policy seems to be effective with respect to be useful for long-run growth when sovereign debt is achieving standard fiscal policy goals in the GCC consolidated. This concludes the discussion of fiscal across the board. Expenditure-side policy appears multipliers across the GCC in terms of their ability to particularly fruitful in terms of influencing real eco- influence cyclical output fluctuations and, with some nomic outcomes in the way desired. Expenditures caveats, their ability to influence long-run growth. are useful for business cycle stabilization especially Conclusion This Special Focus chapter described fiscal policy in In terms of policy messages, fiscal expenditures the GCC area both descriptively and quantitatively are not a panacea for influencing economic activ- using state-of-the-art econometric methods. An ini- ity, but when deployed in the right circumstances, tial brief depiction of fiscal expenditures in the GCC re- they are a powerful economic tool. Considering first vealed that the government sector defines a significant the role of fiscal policy for cyclical output stabilization, share of overall economic activity across the region. the estimates indicate generally positive fiscal multi- When accounting for the hydrocarbon dependence of a pliers for government expenditures in the GCC and in part of economic activity, the importance of the sover- most member countries. The estimates are generally eign sector in the GCC is even more pronounced. There larger during times of economic recessions, such that has also been a time trend of higher significance of the fiscal policy is more effective at influencing output sovereign sector in the GCC since the Global Financial during times of economic dearth in the GCC. Even in Crisis, although that increase in importance is not uni- such cases, however, fiscal expenditure multipliers are form across countries. generally significantly below one. The long-term con- sequences of fiscal policy are measured by relating fis- As the main quantitative exercise of interest, this cal investment to long-term potential output. Here, a Special Focus chapter provided fiscal multiplier es- slight positive effect of fiscal investment on the output timates for all individual GCC members and across trend is found when such investment does not occur the whole GCC together. The main policy tool of inter- alongside an expansion of sovereign debt. The results est are short-term fiscal expenditures, which are relat- for the longer-term must be appreciated with caution, ed to subsequent changes in non-hydrocarbon output. as the underlying assumptions made for the estima- The multiplier estimates both for individual countries tion are much more sensitive. and for the entire GCC range between 0.1 and 0.4 one year after the impulse. This indicates that a 1 unit Finally, the results presented in this chapter can change in government expenditures can be general- and should be made even more robust in the future. ly related to a 0.1-0.4 unit change in output. The only While the use of modern econometric methods allows outliers are Bahrain and the UAE, for whom no signif- the sidelining of a number of concerns previously pres- icant positive effects can be found one year after the ent in the literature, limited data availability prior to impulse. In both instances, however, data limitations 2010 hinders the ability to attain results with a very might have hampered the estimation more than for the high degree of precision. Supplementing the empirical other four GCC economies. While the effect for fiscal analysis presented here with a model-based evaluation expenditures is generally positive and significant, little of fiscal multipliers is a further useful step to rational- to no effects are found for changes to fiscal income. ize the mechanisms at work in the GCC. 62 CHAPTER 4 GULF ECONOMIC UPDATE References Recent Development and Outlook bne IntelliNews. “Oil Shipments from Saudi Arabia and Iraq to Europe Delayed amid Red Sea Tensions.”  bne In- telliNews, January 20, 2024.  Chow, Emily, and Marwa Rashad. “Tankers Carrying Qatari LNG Change Course amid Red Sea Tension - Data.” Re- uters, January 16, 2024. CME Group. “Crude Oil Conversion Calculator.” Accessed April 2025. 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Table 2: Bahrain Selected Economic Indicators 2021 2022 2023 2024 2025 2026 2027 Real GDP Growth, at constant market prices 4.4 6.2 3.9 3.0 3.5 3.0 2.8 Private Consumption 5.8 6.9 4.7 4.8 4.9 4.2 3.3 Government Consumption 7.0 2.1 7.3 5.3 5.0 3.5 3.1 Gross Fixed Capital Formation -3.3 18.7 2.1 2.4 4.0 4.2 4.1 Exports, Goods and Services 29.5 9.2 -9.1 2.0 2.6 3.5 3.6 Imports, Goods and Services 15.2 11.9 2.6 3.5 3.7 4.7 4.6 Real GDP Growth, at constant factor prices 4.2 4.3 3.8 3.0 3.5 3.0 2.8 Agriculture 7.2 4.4 4.7 2.1 3.0 3.2 2.8 Industry 3.9 1.7 0.1 4.1 6.5 5.8 4.0 Services 4.5 6.2 6.5 2.3 1.4 1.0 1.8 Inflation (Consumer Price Index) -0.6 3.6 0.1 0.9 1.8 2.2 2.4 Current Account Balance (% of GDP) 6.4 14.7 5.8 4.8 4.4 3.9 3.5 Net Foreign Direct Investment, Inflow (% of GDP) 4.2 0.0 12.4 5.1 4.2 4.1 4.2 Fiscal Balance (% of GDP) -10.6 -5.1 -8.4 -7.9 -7.7 -7.9 -8.5 Revenues (% of GDP) 20.1 22.4 19.4 21.0 19.3 18.2 17.5 Debt (% of GDP) 122.3 111.1 123.0 124.5 127.1 131.0 134.3 Primary Balance (% of GDP) -7.2 -1.7 -4.4 -3.7 -4.3 -4.2 -4.2 GHG emissions growth (mtCO2e) 1.7 4.3 2.7 5.2 4.1 3.4 3.1 Energy related GHG emissions (% of total) 59.4 59.8 59.7 60.5 60.8 60.8 60.5 Bahrain has actively pursued diversification efforts as tural reforms. Growth is expected to average 3.1 part of its Economic Vision 2030. The non-oil sector percent during 2025-2027, driven by robust non-hy- now accounts for over half of GDP, led by infrastruc- drocarbon growth and by the expansion of Sitra oil re- ture, gas, logistics, financial technology and tourism finery. Higher non-hydrocarbon revenues along with sectors. Estimates suggest that the economy grew by the implementation of the newly announced corporate 3 percent in 2024, driven primarily by an expansion in tax and the expanding capacity of Sitra oil refinery are the non-oil sectors, reflecting ongoing diversification expected to partially offset the current decline in oil efforts. On the fiscal front, a 5 percent VAT was in- prices. However, absent further fiscal consolidation troduced in 2019, with the rate doubling to 10 percent measures, a potentially sustained downturn in global in 2022. Since January  1, 2025, Bahrain has applied energy prices and high interest burden will continue to a Domestic Minimum Top-Up Tax  (DMTT) to levy a pressure fiscal balances and debt in 2026-27. minimum 15 percent rate of tax on the profits of mul- tinational enterprises with global revenue exceeding Key downside risks to the outlook arise from uncertain US$828 million. However, debt levels remained elevat- oil prices, elevated spending and delays to undertaking ed at 124.5 percent of GDP in 2024 requiring strong fis- additional fiscal adjustments. On the upside, leverag- cal consolidation efforts. ing additional fiscal reforms and higher oil prices would reduce fiscal and external vulnerabilities and put debt Bahrain’s economic outlook depends on oil market on a firm downward path. prospects and accelerated implementation of struc- 70 ANNEX GULF ECONOMIC UPDATE Table 3: Kuwait Selected Economic Indicators 2021 2022 2023 2024 2025 2026 2027 Real GDP Growth, at constant market prices 1.8 6.3 -3.6 -2.9 2.2 2.7 2.7 Private Consumption 3.2 1.8 1.1 2.8 2.6 2.5 2.5 Government Consumption 2.9 3.9 1.2 1.4 2.1 2.4 2.8 Gross Fixed Capital Formation 3.9 2.2 0.6 3.8 2.4 2.6 2.6 Exports, Goods and Services 2.2 12.0 -3.6 -5.4 2.4 2.9 2.7 Imports, Goods and Services 5.7 6.3 5.7 4.8 2.9 2.6 2.6 Real GDP Growth, at constant factor prices 1.8 6.3 -3.6 -2.8 2.2 2.7 2.7 Agriculture 0.5 1.1 0.1 0.3 1.2 1.2 1.2 Industry 2.2 7.9 0.1 -2.1 2.5 2.4 2.3 Services 1.4 4.2 -8.8 -3.8 1.8 3.1 3.4 Inflation (Consumer Price Index) 3.4 4.0 3.6 3.0 2.5 2.3 2.1 Current Account Balance (% of GDP) 23.9 32.4 26.2 23.8 15.0 17.6 20.2 Fiscal Balance (% of GDP) -7.2 12.5 -4.8 -5.0 -7.2 -5.4 -5.0 Revenues (% of GDP) 44.8 55.0 43.5 44.0 44.0 46.6 46.1 Debt (% of GDP) 8.6 2.3 3.2 7.3 12.3 13.5 16.1 Primary Balance (% of GDP) -5.4 12.7 -4.8 -4.9 -7.1 -5.3 -4.9 GHG emissions growth (mtCO2e) 6.1 4.6 2.3 1.8 5.0 5.9 6.0 Energy related GHG emissions (% of total) 66.6 66.5 65.6 64.5 64.1 64.0 63.8 Kuwait’s economy remained in recession in 2024, con- monetary stability under the currency basket peg. The tracting by 2.9 percent due to reduced oil output un- external position remained strong but softened, with der OPEC+ cuts. A recovery is projected in 2025, with the current account surplus declining to 23.8 percent growth at 2.2 percent as oil production gradually re- of GDP in 2024 and projected to narrow to 15 percent sumes. The non-oil sector showed resilience, expand- in 2025. FDI inflows remained weak due to structural ing by 1 percent in 2024 and expected to grow by 1.6 barriers, despite recent reforms. Reserves declined to percent in 2025, supported by credit growth and large US$ 44.5 billion but remain adequate. infrastructure projects. Despite sizable financial buf- fers, fiscal vulnerabilities remain elevated. The fiscal Structural reform delays and political gridlock contin- deficit widened to 5.0 percent of GDP in 2024 and is ue to impede diversification and private sector devel- projected to reach 7.2 percent in 2025, driven by lower opment. High youth and female unemployment per- oil revenues. Inflation eased to 3.0 percent in 2024 and sist, underscoring the urgency of advancing fiscal and is forecast to decline to 2.5 percent in 2025. The Cen- structural reforms to ensure long-term sustainability tral Bank cut its policy rate to 4.0 percent, maintaining and inclusive growth. 71 ANNEX GULF ECONOMIC UPDATE Table 4: Oman Selected Economic Indicators  2021 2022 2023 2024e 2025f 2026f 2027f Real GDP growth, at constant market prices 2.6 8.0 1.2 1.7 3.0 3.7 4.0   Private Consumption   1.7 7.1 5.4 3.3 2.8 2.7 2.8   Government Consumption   5.3 0.9 4.0 2.0 2.3 2.5 2.4   Gross Fixed Capital Investment   -15.7 1.8 2.2 2.6 3.0 3.7 3.9   Exports, Goods and Services   20.2 9.1 1.9 1.5 3.0 4.3 4.7   Imports, Goods and Services   13.3 7.6 1.6 1.8 2.4 3.0 3.0 Real GDP growth, at constant factor prices 2.7 7.9 1.4 1.7 3.0 3.7 4.0   Agriculture   9.5 6.8 5.9 2.8 3.2 3.4 3.8   Industry   1.2 8.0 -0.2 2.6 3.0 3.6 3.8   Services   4.2 7.8 3.0 0.6 3.0 3.8 4.3 Inflation (Consumer Price Index)   1.7 2.5 0.9 1.0 1.6 2.0 2.3 Current Account Balance (% of GDP) -5.5 4.0 2.5 2.4 0.9 1.2 1.4 Fiscal Balance (% of GDP)   -3.2 10.5 6.9 5.4 2.0 2.4 2.8 Total expenditures (% of GDP)   36.5 30.9 27.5 28.6 28.4 26.9 25.9 Total Revenues (% of GDP)   33.3 41.4 34.3 34.0 30.4 29.3 28.7 Debt (% of GDP)   61.9 41.7 37.5 35.2 35.0 34.2 33.1 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices .Note: f = forecast. Oman has achieved significant economic progress in lower oil prices following global trade uncertainty will recent years. The expansion of non-hydrocarbon ac- pressure government revenues, leading to a lower fiscal tivities has helped support economic activity despite surplus in 2025, before starting to gradually improve OPEC+ oil production cuts, notably in construction, during 2026-2027 as rising oil and gas production and manufacturing, and services. In 2024, real GDP growth continued fiscal adjustment would partially offset the accelerated to 1.7 percent y/y, up from 1.2 percent in impact of lower oil prices. Accordingly, public debt is the previous year, reflecting robust growth in non-oil expected to continue its downward trajectory over the activities and gas production. The non-oil sector grew medium term. by 3.9 percent, led by a robust expansion in manufac- turing, construction and resilient services sectors. Despite progress, the economy remains dependent on Prudent fiscal discipline under Vision 2040, and higher the hydrocarbon sector, which contributes heavily to non-hydrocarbon exports have turned fiscal and exter- government revenue and export proceeds. As such, the nal balances into surpluses since 2022. Using the hy- risk of downward pressure on oil prices could pose sig- drocarbon windfalls to pay debt has markedly reduced nificant challenges to the fiscal and external accounts government debt, by almost half of its peak of nearly 68 and disrupt the government’s reform program. Other percent of GDP in 2020. risks are related to rising trade uncertainty. The imme- diate impact of trade uncertainty on Oman is expected Notwithstanding rising trade uncertainty, Oman’s eco- to be limited, given that oil and refined products are ex- nomic outlook remains positive, with real GDP growth empted. Indirect risks arise from the slowdown in glob- expected to average 3.6 percent in the medium term al oil demand, economic deceleration in China – a major 2025-2027, prompted by a rebound in oil production trading partner–and steeper decline in oil prices which along with solid growth in the non-hydrocarbon activ- could weigh on growth and debt dynamics. ity amid continued diversification efforts. However, 72 ANNEX GULF ECONOMIC UPDATE Table 5: Qatar Selected Economic Indicators 2021 2022 2023 2024 2025 2026 2027 Real GDP Growth, at constant market prices 1.6 4.2 1.4 2.6 2.4 5.4 7.6 Private Consumption 3.4 5.2 2.0 2.7 2.5 3.1 3.9 Government Consumption 2.8 4.1 1.2 1.6 0.7 2.0 2.4 Gross Fixed Capital Formation 2.3 3.1 1.4 1.9 2.1 2.4 3.2 Exports, Goods and Services -0.6 3.0 0.5 1.8 0.8 4.2 6.8 Imports, Goods and Services 1.6 6.0 3.2 3.7 3.2 3.2 3.4 Real GDP Growth, at constant factor prices 1.6 4.2 1.4 2.6 2.4 5.4 7.6 Agriculture 0.5 7.7 5.4 2.5 2.4 2.9 2.9 Industry 0.7 1.7 0.3 1.5 1.8 6.0 9.0 Services 2.9 7.5 2.8 4.0 3.0 4.7 5.9 Inflation (Consumer Price Index) 2.3 5.0 3.1 1.1 1.5 1.9 2.1 Current Account Balance (% of GDP) 14.6 26.8 16.9 17.4 13.1 15.5 16.2 Fiscal Balance (% of GDP) 0.2 10.4 5.5 0.7 1.5 4.2 6.1 Saudi Table 6: (% Revenues Arabia of GDP) 29.6 34.7 32.4 26.8 29.6 32.1 33.7 Debt (% of GDP) 58.4 42.6 44.2 40.2 38.8 38.8 34.8 Primary Balance (% of GDP) 0.2 10.4 5.5 0.7 1.5 4.2 6.1 GHG emissions growth (mtCO2e) 1.4 3.4 0.8 1.7 2.4 4.8 6.4 Energy related GHG emissions (% of total) 71.1 71.9 72.1 72.7 73.3 74.5 75.9 Qatar’s economy experienced modest growth in 2024, rowed slightly due to softer energy exports, offset by with real GDP rising by 2.6 percent, driven by strong strong tourism and transportation services. non-hydrocarbon activity, particularly in education, tourism, and services. The hydrocarbon sector re- Looking ahead, real GDP is projected to grow by 2.4 mained broadly flat as output was held steady in antic- percent in 2025 and accelerate to 5.4 percent in 2026 as ipation of LNG capacity expansion. The government’s the North Field LNG expansion comes online. Non-hy- strategic investments under the Third National De- drocarbon growth is expected to remain robust, un- velopment Strategy (NDS3)—notably in education, AI, derpinned by continued infrastructure upgrades and and renewable energy—continue to support long-term major international events. The hydrocarbon sector diversification goals. is forecast to see a significant boost in 2026 with a 40 percent rise in LNG output. While global trade uncer- Despite an 18 percent decline in hydrocarbon reve- tainties present downside risks, Qatar’s stable trade nues, prudent fiscal management helped maintain environment and long-term gas contracts provide a small fiscal surplus (0.7 percent of GDP), with a re- some insulation. Fiscal and external surpluses are pro- bound expected in 2025 as LNG earnings improve. In- jected to remain in 2025, at 1.5 percent and 13.1 percent flation remained low at 1.1 percent, supported by subsi- of GDP, respectively, supported by LNG revenues, VAT dies and stable food and fuel prices. External balances implementation, and tourism inflows. remained in surplus, though the current account nar- 73 ANNEX GULF ECONOMIC UPDATE Table 6: Saudi Arabia Selected Economic Indicators 2021 2022 2023 2024 2025 2026 2027 Real GDP Growth, at constant market prices 5.1 7.5 -0.8 1.3 2.8 4.5 4.6 Private Consumption 9.5 4.9 5.3 3.3 2.9 3.0 3.1 Government Consumption 0.8 9.3 5.7 0.7 4.9 3.5 3.5 Gross Fixed Capital Formation 10.5 21.3 5.3 2.6 3.7 3.9 4.4 Exports, Goods and Services 5.6 20.5 -6.5 -5.5 4.0 8.0 7.6 Imports, Goods and Services 8.3 12.4 9.9 4.3 4.9 5.3 5.1 Real GDP Growth, at constant factor prices 4.6 8.2 -1.4 1.1 3.0 4.5 4.6 Agriculture 2.2 4.0 4.1 2.0 2.0 2.0 2.0 Industry 1.7 12.4 -6.0 -3.4 1.3 4.5 4.0 Services 7.6 4.5 2.9 5.1 4.3 4.7 5.2 Inflation (Consumer Price Index) 3.1 2.5 2.3 2.1 2.3 2.2 2.0 Current Account Balance (% of GDP) 4.8 13.7 3.2 2.5 3.9 5.7 7.8 Net Foreign Direct Investment, Inflow (% of GDP) 3.2 2.4 2.1 1.1 1.1 1.1 1.1 Fiscal Balance (% of GDP) -2.2 2.5 -2.0 -2.8 -2.3 -2.9 -3.1 Revenues (% of GDP) 29.5 30.5 30.3 30.9 30.4 30.6 30.8 Debt (% of GDP) 28.6 23.8 26.2 27.8 29.4 31.6 30.1 Primary Balance (% of GDP) -1.4 3.2 -1.1 -1.9 -1.4 -2.0 -2.1 GHG emissions growth (mtCO2e) 3.1 3.7 4.1 -0.4 0.2 1.2 2.3 Energy related GHG emissions (% of total) 68.6 68.4 68.4 66.9 65.6 64.5 63.7 Economic growth in Saudi Arabia partially recovered Looking ahead, growth is projected to increase in the to 1.3 percent in 2024. This was due to a lower contrac- medium term from 2.8 percent in 2025 to 4.6 percent tion of the oil sector (-4.5 percent) and robust non-oil in 2027. This would be driven by the phasing out of the sector growth (4.3 percent). Services, especially whole- voluntary production cuts by OPEC+ and resilient non- sale, restaurant services, hotels, transport, and com- oil growth. Inflation is projected to stay low and stable munication are driving non-oil growth, reflecting the in the medium term. Fiscal pressures are estimated government’s efforts to promote tourism. The volatil- to increase in the medium term (fiscal deficit of 3.1 ity of the oil sector due to OPEC+’s production deci- percent of GDP in 2027), driven by expenditures and sions and geopolitical tensions weigh on the Kingdom’s downward pressure on oil prices. fiscal and external stability. Fiscal pressures increased in 2024 as the fiscal deficit increased to 2.8 percent of Key risks include declining productivity and global en- GDP. Inflation remained low and stable throughout 2024 ergy market uncertainty. The decline of Total Factor Productivity since 2016 (-1.6 percent per annum on av- erage) hinders the country’s economic diversification agenda. 74 ANNEX GULF ECONOMIC UPDATE Table 7: UAE Selected Economic Indicators 2021 2022 2023 2024 2025 2026 2027 Real GDP Growth, at constant market prices 4.4 7.6 2.9 3.9 4.6 4.9 4.9 Private Consumption 5.0 9.0 5.1 4.6 3.5 3.1 3.0 Government Consumption 1.4 3.5 3.0 3.5 3.8 3.8 3.7 Gross Fixed Capital Formation 9.6 6.0 5.9 4.2 2.9 3.1 3.3 Exports, Goods and Services 6.8 8.1 3.3 5.0 5.9 6.1 5.9 Imports, Goods and Services 8.8 7.4 5.3 5.6 5.0 4.8 4.8 Real GDP Growth, at constant factor prices 4.4 7.6 2.9 3.9 4.6 4.9 4.9 Agriculture 3.8 3.4 3.5 2.9 2.7 2.5 2.5 Industry 1.3 8.8 1.2 2.5 1.3 2.0 1.7 Services 7.4 6.5 4.5 5.2 7.6 7.3 7.5 Inflation (Consumer Price Index) -0.1 4.8 1.6 2.3 2.2 2.1 2.1 Current Account Balance (% of GDP) 11.5 11.9 9.7 8.2 6.2 6.4 6.8 Fiscal Balance (% of GDP) 3.6 3.6 3.6 4.6 4.2 4.5 4.6 Revenues (% of GDP) 26.9 27.0 27.0 27.4 26.4 25.7 25.0 Debt (% of GDP) 35.1 31.5 29.8 29.8 30.7 30.2 29.7 Primary Balance (% of GDP) 3.8 3.8 3.9 4.9 4.4 4.8 4.9 GHG emissions growth (mtCO2e) 2.5 2.9 -1.3 -1.0 -1.2 -0.1 0.1 Energy related GHG emissions (% of total) 72.9 73.3 72.5 72.9 73.6 74.4 75.0 The UAE’s macroeconomic performance remains at 2.3 percent, with monetary conditions balanced to strong, underpinned by effective policy frameworks, support growth while preserving price stability under substantial buffers, and continued structural transfor- the US$ peg. The external position is strong, with a cur- mation. Real GDP grew by 3.9 percent in 2024 and is rent account surplus of 8.2 percent of GDP in 2024, un- projected to accelerate to 4.6 percent in 2025, driven derpinned by diversified exports and resilient services by robust non-oil activity and a gradual normalization receipts. Rising reserves (US$ 223 billion in 2024) and of oil production following OPEC+ adjustments. The active trade integration through CEPAs are reinforc- non-oil sector has become the main engine of growth, ing external resilience. supported by targeted public investment, governance improvements, and expanding external partnerships. Key risks stem from oil price volatility, global trade The fiscal position remains in surplus (4.6 percent of fragmentation, and regional geopolitical tensions. GDP in 2024, projected at 4.2 percent in 2025), reflect- While buffers and reform momentum mitigate near- ing disciplined expenditure management and strong term vulnerabilities, continued progress on diversifi- oil and non-oil revenues. Implementation of tax poli- cation, labor market inclusion, and energy transition is cy reforms, including the Domestic Minimum Top-up essential to sustain macroeconomic stability and resil- Tax, is expected to support medium-term revenue mo- ience over the medium term. bilization and enhance sustainability. Inflation remains 75 ANNEX GULF ECONOMIC UPDATE ANNEX 3 Methodology to estimate fiscal multipliers in GCC economies. There is a fundamental causality problem that measures the cumulative response of output in unit needs to be overcome in estimating fiscal multipli- terms following a fiscal impulse (through expenditure ers. It is generally possible that government spending or income changes) of 1 unit. A multiplier of 0.1, for in- boosts aggregate output; likewise, it is feasible for ag- stance, implies that a 1 unit cumulative change in the gregate output to feed back to government spending. fiscal variable changes output by 0.1 unit. The defini- The task of overcoming this econometric identification tions of output and fiscal variables matter hugely for problem has been at the heart of estimating the effects the correct interpretation of the multiplier, as will be of fiscal policy for decades. For long periods of time, detailed below. data and methodological limitations led to the con- struction of quasi-exogenous variation with specific Possible estimation techniques: Two popular econo- identifying assumptions being chosen for a given data metric approaches are commonly used for the estima- context. This was done, for instance, in Blanchard, et tion of fiscal multipliers. al., (2002). Other approaches included the exploitation of a very limited degree of truly exogenous variation, • Identified Structural Vector Autoregressions in particular military expenditures, as in Auerbach, et (SVARs): SVARs estimate a simultaneous system of al. (2012). Recent methodological improvements, high- equations jointly. That system features coefficient lighted in particular by Ramey (2016) and Jordà, et al. matrices, which link current values of all variables in (2025), allow the estimation of fiscal multipliers despite the system together, as well as relate the variables to the present data limitations. This box discusses the their own (and other) past variables. To make direc- technicalities underlying Fiscal Multiplier estimation, tional (causal) statements about the observed rela- including modelling choices made within the context of tionships between variables, researchers estimating each estimation as well as the identifying assumptions SVAR systems impose restrictions on the coefficient that are undertaken. matrix that limit certain same-period correlational relationships. The most popular choice is a Cholesky Defining the fiscal multiplier: Before describing the triangularization of the matrix of contemporaneous estimation, the fiscal multiplier must first be clear- coefficients, by which the same-period relationships ly defined. Two types of multipliers have been used between two variables are restricted to work in one in the literature, the present-value multiplier and the direction only. The choices of such restrictions are peak-value multiplier. The present-value multiplier is usually informed through economic theory. In most defined as the discounted sum of output changes, divid- common applications of SVARs in the literature on ed by the discounted sum of changes in the fiscal vari- fiscal multipliers (Blanchard, et al., 2002 and Ilzetz- able. The peak-value multiplier, instead, is defined as ki, et al., 2013, for instance), this so-called ordering the maximum change in output from the moment of allows fiscal expenditure to influence same-period the fiscal policy change until 10 quarters ahead, divided output and fiscal income, as well as for output to in- by the maximum change of the fiscal impulse variable. fluence same-period fiscal income, but restricts the inverse of these relationships to be zero. While such Recent evidence highlights that the peak-value methods tend to provide identified responses to gov- multiplier can significantly bias the true effects of ernment spending, this entire identification scheme fiscal policy by forgoing intertemporal consider- relies on intricate assumptions, as laid out by Ramey ations of households and firms alike (Ramey, et al., (2016). Finally, due to the cross-equation restrictions 2018). This stands in contrast to much of the semi- imposed in the SVAR estimation process, any estima- nal work on fiscal multipliers, which worked with the tion biases multiply as they propagate through the peak-value multiplier as the specification of interest system, as described by Montiel Olea, et al. (2025). (e.g., Blanchard, et al., 2002). Therefore, the analysis here utilizes the present-value multiplier, which has • Local Projections (with instrumented shocks): Lo- by now been established as the literature standard in cal Projections (LPs) perform parametric estimations the academic literature. That multiplier effectively that effectively also restrict the same-period feedback 76 ANNEX GULF ECONOMIC UPDATE between fiscal and real variables in the same way as the identification of a truly exogenous and relevant SVAR estimations do. But their single-equation nature component as an instrument for the fiscal impulse of allows for a number of significant benefits in finite sam- interest, quasi-causal statements on the effect of fiscal ples. First, because they are a single-equation method, variables on real (and nominal) variables can be made possible biases arising from misspecifications do not through a semi-parametrically efficient estimation accumulate, which is the case in SVAR estimations. procedure (Montiel Olea, et al., 2025). Consequently, The method thus minimizes biases in small-sample this analysis utilizes LPs as the preferred estimation estimations, which is necessary here as fiscal multiplier method to pin down fiscal multipliers. To be precise, the estimations are susceptible to biases (Jordà, et al., analysis utilizes a long-difference specification, which 2025). Second, the single-equation estimation allows is the established literature standard. For the inclined for a number of easy-to-implement manipulations, reader, the following formula presents the long-differ- such as state-dependence or panel estimation with ence LP specification that we estimate, which is effec- manageable econometric cost. Third, conditional on tively a time series regression estimated using OLS. Here, refers to the measure of output, is the fiscal In small samples, local projections on average per- impulse of interest, summarizes other fiscal control form better, i.e., the estimation biases are gener- variables, and describes time fixed-effects. is a ally smaller. That being said, both estimation tech- constant, and and are the coefficients of niques should yield the same estimates in the limit the control variables. The crucial point of a local pro- (Plagborg-Møller, et al., 2021).38 While the advantage jection estimation is that it is a single-equation estima- of Local Projections comes at the cost of increased tion for each estimation horizon intended to analyze. To estimation variance, the lower estimation bias makes estimate, for instance, the effect of a fiscal variable on Local Projections more attractive and the resulting es- the change to output one year (four quarters) ahead, timates more plausible in relatively short samples rela- the above specification would be estimated setting tive to SVAR estimation methods (Montiel Olea, et al., . The coefficient of interest is , which captures 2025). the marginal effect of the fiscal impulse on output that we want to analyze. The fiscal impulse is instrumented Further modelling choices: For the estimation, several with the following equation: additional modelling choices must be made that all influence the exact estimates to a limited degree. where is unexplained variation in the fiscal im- • Normalization of variables: To rid the data of seasonal pulse following Blanchard, et al. (2002), and and variation, the data is normalized with the help of the are shocks to global hydrocarbon demand fol- X13-ARIMA-SEATS routine provided by the US Census lowing Baumeister, et al. (2019). By instrumenting the Bureau when significant seasonal factors were found to fiscal impulse with exogenously identified shocks, it is be present, as determined by the Kruskal-Wallis test. possible to restrict the contemporary effect of the fis- Thereafter, all relevant financial variables are deflated cal variable on output to one direction only, such that using the 2018Q4 GDP deflator and, where necessary, directional statements can be made. converted into US$ equivalents using the prevailing 38 Technically speaking, as the sample size increases, both estimation techniques are consistent with respect to the true underlying data-generating process and with respect to each other. 77 ANNEX GULF ECONOMIC UPDATE exchange rate. Since the stated goal is to assess the exogeneity condition (which is verified empirically ability of fiscal policy to stabilize business cycles, the using the Sargan-Hansen test), allowing quasi-causal trend of the real output measure is estimated with a statements about the efficacy of fiscal policy, condi- fourth-degree polynomial. This trend is then used to tional on the instrument relevance condition being calculate the country-specific deviation of measured fulfilled. This is generally indeed the case.40 output from trend – a ‘cyclical output gap’. The fiscal multiplier estimates measure the effects of fiscal policy Some limitations: With the method having been laid out on this output gap quantity, following Gordon, et al., in detail, a number of important limitations that might 2010, who pioneered this method of measuring the impact the estimation are worth highlighting. efficacy of fiscal policy.39 • Sample Size limitations: First, the estimates are based • Output variable: Traditionally, a measure of gross on a limited sample of arguably imperfect data. All real output, such as real GDP, is used as the target- country-specific data samples but Bahrain and the ed outcome variable. However, within the context UAE begin in Q1-2010 and range until Q2-2024, yielding of the GCC, it makes sense to distinguish between a total of at most 58 quarter-country observations. This hydrocarbon output and non-hydrocarbon output. In is, if anything, the lower bound that makes it economet- particular, fiscal policy has a more direct influence rically feasible to estimate fiscal multipliers. The data on non-hydrocarbon output, since hydrocarbon sample for the UAE begins only in Q1-2011. The data output is mainly shaped by determinants outside of utilized for the analysis on Bahrain begins only in Q1- fiscal expenditures. Given that hydrocarbon output 2015. While official data on quarterly fiscal policy and contributes to 15-50 percent of aggregate output in output for the years 2010-2014 is available for Bahrain, GCC economies, separating these two contributors the quarter-on-quarter variation of fiscal variables in is useful. The main estimation of interest considers the data is minimal. This impedes the estimation of the whether fiscal policy is effective in stabilizing business effects of fiscal policy. The data on Bahrain in the years cycles outside of the hydrocarbon market dynamics. 2010-2014 is therefore excluded from the analysis. • Identification scheme: As stated above in the intro- • Exogenous variation in government income: The duction to local projections, finding an instrument for exogenous measures of government budget variation the fiscal measure of interest is of utmost importance. induced by shifts to oil demand are informative, but That instrument must be uncorrelated with the esti- due to the relatively small sample size, statistical power mation error of the effect of fiscal policy on the output is limited. Estimated biases induced through the IV measure, but highly relevant for the fiscal measure of first-stage are, at most, of a magnitude of 15-20 percent interest. Thanks to the choice of non-hydrocarbon out- according to standard testing routines. Still, this issue put gaps as the output quantity to target, and thanks rooted in the combination of the estimation strategy to the institutional setup of the GCC, this problem can and the sample size limitations needs to be mentioned. be addressed robustly. Leveraging surprises to global hydrocarbon demand, identified by Baumeister, et al. • Normalizing the data: The presented exercise isolates (2019), as exogenous variation in fiscal income yields the stabilizing component of fiscal policy, effectively such an instrument for fiscal variables. In the analysis, nullifying by assumption any long-term effects of fis- these shocks are supplemented with a surprise com- cal policy that go beyond business cycle stabilization. ponent leveraged from previous fiscal policy choices, While this assumption is relaxed when estimating long- as in Blanchard, et al. (2002). Jointly, these exogenous run multipliers of fiscal investment, that estimation components are used as instruments in a first-stage itself suffers from several significantly stronger as- regression that estimates an exogenous fiscal policy sumptions laid out in the report when the estimates measure .This measure satisfies the instrument are introduced. 39 In the estimation of the effects of long-run fiscal investment, the last step is excluded, and all variables are replaced by their respective growth rates. This effectively measures the effect of fiscal investment on the growth trend. 40 The likeliest concern for the exogeneity restriction is that global demand shocks can affect domestic non-hydrocarbon output through changes to exports. But in the preferred measure, there is zero correlation between real exports and the exogenous variation that government income and/or spending are instrumented with. 78 ANNEX GULF ECONOMIC UPDATE