Publication: Gulf Economic Update, June 2025: Smart Spending, Stronger Outcomes - Fiscal Policy for a Thriving GCC
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Date
2025-06-20
ISSN
Published
2025-06-20
Author(s)
Chattha, Muhammad Khudadad
Maseeh, Ashwaq Natiq
Luan, Zhao
Thelejane, Morakane
Ftomova, Olena
Youssef, Hoda
Kawalec, Tobias
Wang, Xinyue
Yacine, Ouahioune
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Abstract
This special focus chapter analyzes the effectiveness of fiscal policy in fostering economic growth in the Gulf Cooperation Council (GCC) region. In doing so, the principal focus of the chapter is on fiscal multipliers, which measure the effect of changes in government spending or revenue on the country’s output (GDP). In simple terms, they quantify how much economic activity is generated by each dollar of fiscal policy action. The need to evaluate the effectiveness of fiscal policy is especially relevant for GCC countries given their intensified economic diversification efforts in recent years. Globally, fiscal policy has been playing a growing role, with public expenditure as a share of GDP growing in more than 70 percent of all countries since the Global Financial Crisis. In the GCC, the share of fiscal expenditure in non-hydrocarbon GDP ranges between 36 percent and 84 percent. As public spending is often undertaken through large-scale public investments, this calls for a better understanding of the returns on GDP from those investments, the effectiveness of capital allocation, and whether fiscal policies are well designed to maximize employment and job creation, among other objectives. On the revenue side, most of the income is related to sales of hydrocarbon products, as hydrocarbon sales revenue makes up between 40 and 90 percent of overall government revenues in 2023. The main policy takeaway is that fiscal policy is broadly effective at stabilizing cyclical fluctuations of (non-hydrocarbon) output, especially during times of economic dearth. While fiscal multipliers in the GCC appear to be positive across the board, they are generally weak and less than one, in line with the estimates in the literature for a multitude of other countries. Policymakers should therefore not expect multiplying effects in response to stabilizing fiscal policy measures, which occur for fiscal multipliers that are larger than one. This does not, however, imply a total absence of fiscal policy impact on output. As the estimated multipliers are significantly larger during recessions, the findings make a robust case for adopting countercyclical fiscal policy. Such countercyclical policy should aim at an expansion of demand through fiscal stimulus only during demand-driven downturns.
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“Chattha, Muhammad Khudadad; Maseeh, Ashwaq Natiq; Luan, Zhao; Thelejane, Morakane; Ftomova, Olena; Youssef, Hoda; Kawalec, Tobias; Wang, Xinyue; Yacine, Ouahioune; Bogetić, Željko. 2025. Gulf Economic Update, June 2025: Smart Spending, Stronger Outcomes - Fiscal Policy for a Thriving GCC. © World Bank. http://hdl.handle.net/10986/43355 License: CC BY-NC 3.0 IGO.”
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Publication Gulf Economic Update, December 2024(Washington, DC: World Bank, 2024-12-09)The Gulf Economic Update (GEU) is the product of the Economic Policy unit for Middle East and North Africa at the World Bank Group. It provides an update on key economic developments and policies in the Gulf Cooperation Council (GCC) countries over the past six months, places them in a longer-term and global context and assesses the implications of these developments and other changes in policy on the outlook for the GCC. Its coverage ranges from the macroeconomy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in the GCC.Publication Gulf Economic Monitor, June 2017(World Bank, Washington, DC, 2017-06)This first edition takes a close look at recent economic developments and short-term prospects for Gulf countries. It also includes forecasts for the individual Gulf nations and an analytical section that explores structural reform priorities in the region. The Monitor describes a region where green shoots of recovery are emerging, helped by a partial recovery in global energy prices over the past year. The salutary effect on public finances, along with past fiscal consolidation efforts are providing the space for governments to slow fiscal austerity and also buoying investor sentiment. Accordingly, aggregate growth in GCC countries is expected to rise from 1.3 percent in 2017—the weakest pace since 2009—to 2.6 percent in 2019 supported by a gradual strengtheningof activity in the non-oil sector and as oil prices stabilize at close to current levels. Fiscal and current account deficits are also on the mend, but are unlikely to return to the double-digit surpluses of the commodity boom years.Publication Gulf Economic Update, Fall 2021(World Bank, Washington, DC, 2021-10)The economic outlook for the Gulf Cooperation Council (GCC) economies appears far rosier now than it did even six months ago. Increased investment and consumption both public and private are contributing to growth while inflation remains subdued in most economies except for Saudi Arabia where it is currently at 5.5 percent and expected to fall sharply as the impact of last year’s Value-Added Tax (VAT) hike falls away. Despite this rosy picture, the authorities should continue to follow the path of prudent macroeconomic management consolidating their fiscal balances, moving ahead with the introduction of VAT in Qatar and Kuwait and focusing on reducing the role of the state in economic management. UAE’s government related entities especially those in the construction sector deserve a careful review to ensure that their borrowing remains sustainable and to adjust to the new conditions.Publication Gulf Economic Update SPRING 2022(Washington, DC, 2022)The Gulf Cooperation Council (GCC) countries were characterized by a robust economic rebound from the pandemic in 2021 and the beginning of 2022 as well as a partial restoration of external and fiscal positions following deep plunges in 2020. The war in Ukraine is projected to provide a windfall for the GCC; it has also placed energy security at the forefront of major importers’ agenda, which could accelerate the global green growth transition. The faster and bolder efforts to decarbonize the global economy, which the war in Ukraine is likely to speed up, implies that it is critical to invest the windfall in the GCC’s economic and environment transition. GCC countries are facing limits to the oil economy on which they have flourished for the last seventy years. GCC countries face twin challenges of (i) how to move to a more sustainable growth model that is less dependent on oil and downstream petroleum sectors and that can provide valuable jobs for their inhabitants while (ii) managing the transition to a global low-carbon economic environment that could see oil revenues greatly reduced within the next few decades. The current situation has sometimes been portrayed as a threat to the GCC or at the very least as a trade-off between faster growth and climate sustainability. However, this special focus section reframes the discussion by focusing on the opportunities for the region to restructure energy subsidies. to become renewable-energy powerhouses, and the importance of getting prices right for an enabling environment that can place the private sector at the forefront of the new growth model. The section also highlights the fiscal space that can be created by re-thinking energy subsidies and provides a political economy sensitive approach to addressing the concerns of households and industry. Linking the expected savings to investments in renewables and incentives for increased entrepreneurship and innovative sectors could represent a solution to one of the GCC’s greatest challenges, producing high income jobs for its youth.Publication Gulf Economic Update, August 2021(World Bank, Washington, DC, 2021-08-04)The COVID-19 pandemic and the decline in global oil demand and prices dealt the GCC countries a health crisis and a commodity market shock. The GCC’s aggregate GDP contracted by 4.8 percent in 2020 from 2019, with the growth outturns ranging from -3.7 in Qatar to an estimated -6.3 percent in Oman. The authorities responded to the pandemic with stringent health measures which helped contain the spread of the disease and saved lives but hurt economic activity. Following a year of economic distress, the GCC economies are expected to return to growth in 2021, buoyed by the global economic recovery, projected at 5.6 percent (upgraded by 1.5 percentage points from the projection in January 2021), the revival of global oil demand, expected at 96.5 billion barrels per day (from 91 billion barrels per day in 2020), and the rebound in international oil prices to an annual forecast average US$56 per barrel (now outpaced by an actual average US$61.45 in January-May 2021). The forecast is for an aggregate GCC GDP growth of 2.2 percent in 2021, roughly tracking the turnaround in high-income countries, with the outcomes ranging from 1.2 percent for the UAE to 2.4 percent for Saudi Arabia and Kuwait. Thereafter, economic growth in the GCC is expected to firm up to an annual average 3.3 percent for 2022-23. With rising oil prices in the first half of 2021, a potential upside scenario for the second half of the year sees improved current account balances being channeled directly to public sector savings. Because of the exposure to global oil demand and personal service industries and the continuing effects of the pandemic, downside risks to the outlook are also high. In this issue of the Gulf Economic Update, the focus is on fiscal revenues and structural reforms including strategic investments in digitalization and telecommunications. Strategic investment in advanced telecommunications technologies, including 5G, is underway in the GCC. But beyond capital spending on infrastructure, the telecommunications sector would benefit greatly from improvements in the legal, regulatory, and competition frameworks under which service providers operate.
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