Overview of economic performance of GCC countries
The Gulf Cooperation Council comprising of Kuwait, Bahrain, United Arab Emirates, Qatar, Saudi Arabia and Oman are oil rich nations representing an aggregate of 35.7 percent of global oil reserves. These nations are the largest exporter and producer of petroleum and have experienced excellent economic growth since the year 2008. The economic growth rate of the GCC nations has increased threefold to $1.4 trillion in the year 2011. The estimated growth of Gross Domestic Product for the GCC nations in the year 2013 is forecasted to reach around $1.5 trillion. The aggregate growth of Gross Domestic Product in the GCC nations has grown to around 7.5 percent in the year 2011. This was mainly due to an increase of more than 10 percent in the production of oil other than Bahrain which suffered a setback due to social chaos (Qatar National Bank, 4).
The gas and oil sector is one of the primary sources of revenue for the GCC nations and accounts for 43 percent of combined GDP for these six nations. The service sector in these nations is rather small and comprises only 39 percent of combined GDP. The past five years have witnessed augmented production of gases and augmented energy prices thereby leading to strong economic performance for these six nations. Qatar has mainly contributed to high gas production increase with a gas production increase of 24 percent in the 2011 (Qatar National Bank, 2).
Expansion of infrastructure and economic diversification
The GCC nations are at a stage of economic development and are currently modernizing and expanding infrastructure and increasing the standards of education so as to slowly shift towards an economic framework supporting services and technology.
Economic diversification had initially commenced around five decades ago especially after the increase in oil revenues post the price hike in oil around the years 1973 – 1974. But, time has seen the evolution for the motivation behind economic diversification in the GCC nations. The 1970s witnessed economic diversification needs due to the finite oil resources available with the GCC nations. On the other hand, the 1980s and 1990s witnessed a need for economic diversification to correct fluctuations in the income derived by states (Beidas-Strom, Rasmussen & Robinson, 3).
In order to promote economic diversification, a host of measures have been either fully or partially applied from the year 1990 by these nations. These are as follows:
- Expanding social and physical infrastructure – the GCC nations are investing heavily on education, infrastructure and health services. This is mainly because these investments are needed for countries not rich in oil.
- Development of capital intensive markets which further helps in utilizing the comparative advantage enjoyed by the GCC nations in hydrocarbon resources. These nations have facilitated the development of manufacturing firms related to the production of petrochemicals, fertiliser, steel, aluminium and the like. Other than these, the countries have encouraged several other manufacturing industries like electrical products, construction materials, cement, household items, furniture, clothing and textiles.
- The nations have also pushed for the growth of the service and productive sectors like agriculture, financial services and banking, trade, tourism and real estate.
- These nations have strived to lessen the direct function of public sector to be the principal agent of economic growth by privatising several public sector utilities and firms and lessening the subsidies on domestic products (Hvidt, 12).
Despite these measures there has been significantly weak economic diversification in these nations. The below table displays that nearly four decades of diversification policies have not changed much as the main source of revenue still results from the export of hydrocarbon.
Oil as percentage of economic indicators in the Gulf countries
Source: Europa Publications, 2013
Scholars maintain that the GCC nations still emphasize on the export of oil products primarily as it relies principally on revenues acquired from oil exports (Hvidt, 14).
The nations have now emphasized on attracting global firms by providing them a favourable business environment with low taxes and the establishments of financial centres and free economic zones. They are trying to erect a knowledge economy by investing in research, science and education and encouraging the formation of technology parks. Basic infrastructure is being developed by investing heavily on housing, new cities, universities and schools, transport and hospitals.
Diverse characteristics of economic development in GCC nations
Despite the fact that the Gulf Cooperation Council members have similar developmental characteristics, there are certain significant differences in their developmental features.
Saudi Arabia is the largest of the GCC nations if compared with population, GDP and land. It has the largest reserves of oil in the world with a dominant oil economic accounting for around 50 percent of its aggregate revenue. However, this nation has the lowest per capita income among the six GCC countries. Revenue from the export of oil is employed by the Saudi Arabian government to make heavy investments in education, heavy and health industry and social and basic infrastructure (Qatar National Bank, 5).
United Arab Emirates comprises of total seven emirates and the hydrocarbon industry is dominant in Abu Dhabi which provides around 60 percent of the GDP of this nation. However, UAE emerged as one of the most diversified economies in the year 2011 with a non oil sector GDP adding up to 63 percent. This is mainly because the concentration of hydrocarbons is significantly less in the other six emirates and hence the focus is mainly on developing service and tertiary industries with emphasis on service and financial sectors and the encouragement for large scale trade. A direct outcome of this is Dubai which now accounts for 30 percent of the nation’s GDP.
Qatar has registered maximum economic growth mainly due to the quick development taking place in the North Field over the past ten years. Qatar accounts for a fourth of international exports and is the largest exporter of liquefied natural gas along with crude oil and condensate. The government is also investing heavily on revenue garnered from the export of hydrocarbons to boost education, research and science, heavy industries and infrastructure (Qatar National Bank, 3).
One of the oil dependent economies in the GCC cluster is Kuwait which garnered around 56 percent GDP from the export of oil products in the year 2011. The nation is currently stressing on distributing fuel globally (Qatar National Bank, 6).
Oman has a total GDP share of 52 percent from the gas and oil industry. The nation is striving to increase its oil production by facilitating improved methods for oil recovery and using its gas for export and industrial projects. It has grown to be one of the hotspots for tourism. Moreover citizens have started getting employment in the private sector in this nation as this country has around 65 percent nationals.
The most diversified but smallest of the GCC members is Bahrain. Its non oil industries principally dominated by the service sector has contributed to a GDP of 70 percent in the year 2011. It has limited hydrocarbons and hence has taken increased initiative to develop a modern economy (Global Investment House, 26).
Trends in principal economic indicators
The GCC nations are experiencing economic boom due to increased oil prices thereby facilitating expansion among these nations thereby boosting the nominal GDP. This healthy economic performance is attributed to excellent environment in geopolitics, strong international demand for oil till the year 2008, strong focus on privatization, strong GCC corporate sector, central bank growth in assets and accelerated reform measures.
The economic growth had boosted from the years 2002 – 2008 to 19.9 percent and has experienced a decline of 19.3 percent in the year 2009 as an outcome of the international economic and financial crisis. The past decade had experienced steady oil prices and the change in economic growth has been mostly derived post 2000. The worst consequences of the recession were experienced by Saudi Arabia, Oman and Kuwait with contraction in their nominal GDP to 21%, 23% and 28% respectively in the year 2009. However these countries quickly boosted their economies and the nominal GDP for the aggregate GCC countries registered an increase to 17.7 percent in the year 2010. The below table traces the nominal GDP from 2004 – 2011 for the GCC nations.
The GCC region has highly low rates of inflation since the year 2000 and this is mainly because of the careful management of monetary and fiscal policies and enough availability of services and commodities in these nations. The period 2001 to 2004 has experienced inflation levels to remain between 0.2 to 2.1 percent. The inflation levels in the consumer price index of GCC nations had soared to around 11.2 percent in the year 2008 which was mainly due to the rapid price escalation of food and housing expenses. This was very high as compared with the inflation rate of 6.7 percent in the previous year. However the inflation in consumer price index declined to 2.7 percent in the year 2009 due to decrease in housing costs. However the inflation level escalated from 2.8 percent in 2010 to 3.3 percent in the year 2011 (International Monetary Fund, 8).
The international average rate of inflation stands at 4.5 percent and is comparatively high as compared with inflation rate in GCC nations. One of the main reasons for low inflation in these nations is attributed to fuel subsidies.
Fiscal position in the GCC nations is robust. These nations have derived a surplus in budget of 25.3 percent of GDP in the year 2008 as compared with 17.7 percent GDP the previous year. The strong spending in capital is mainly attributed to increased revenues from oil exports. The year 2009 witnessed a decline in fiscal surplus to 3.3 percent as a direct outcome of the oil market slump and the financial crisis over the world. The GCC nations are well aware of the reforms in fiscal policy which are needed in order to lessen reliability on oil in order to attain discipline in fiscal policy. This, coupled with pressures from the society has forced the government to spend the revenue derived from oil exports on current expenditure by introducing benefits for employment seekers (Saudi Arabia and Oman) and increasing the wage bill. Saudi Arabia also augmented its capital expenditure (International Monetary Fund, 8).
The monetary policy of GCC nations have emphasized on maintaining a fixed rate of exchange except for Kuwait which experienced a de-pegging of Kuwaiti dollar to USD on May 2007. The health oil market will further ensure less pressure on currencies and will further promote the regions reserves of foreign currencies.
The United Arab Emirates have enjoyed a surplus in current and trade accounts from 2004 – 2008 as a result of high earnings from non oil and oil segments and re-export. However, the GCC suffered a slump of 3.1 percent of GDP in the year 2009. However, the year 2011 has experienced surplus current and trade accounts for the GCC nations at 23 percent and 38 percent of GDP respectively. One of the main reasons for current account surplus is the surplus in the trade account.
The GCC nations have experienced an economic growth mainly due to their exports of oil products. Oil is still a dominant industry and one of the main sources of revenue in these nations. However, these countries are striving to bring about industrial growth in tertiary and service sectors. United Arab Emirates have managed to succeed in this economic diversification effort to quite some extent by developing Dubai as one of the tourism hotspots as well as encouraging foreign investors by providing low tax rates, free economic zones and so on. The other states are also putting in their bit to develop infrastructure and education from the revenues earned from oil exports.
Beidas-Strom, S. Rasmussen, T. & Robinson, D.O. Gulf Cooperation Council Countries: enhancing economic outcomes in an uncertain global economy. International Monetary Fund. 2011. Web. 02 December 2013.
Global Investment House. GCC Economic Overview. Global Investment House. 2013. Web. 02 December 2013.
Hvidt, M. Economic diversification in GCC countries: past records and future trends. Kuwait Programme on Development, Governance, and Globalisation in the Gulf States. 2013. Web. 02 December 2013.
International Monetary Fund. Economic Prospects and Policy Challenges for the GCC Countries. 2012. Web. 02 December 2013.
Qatar National Bank. Qatar Economic Insight. Qatar National Bank, 2012. Web. 02 December 2013.
Qatar National Bank. GCC Economic Insight. Qatar National Bank, 2012. Web. 02 December 2013.