Gulf Cooperation Council countries keep their eyes on structural reforms during the pandemic

COVID-19 represents a “twin-shock” for the Gulf Cooperation Council (GCC); as the drop in oil prices weighed heavily on fiscal revenues, pandemic-related disruptions brought general economic activity to a virtual standstill, especially in the initial lockdown. How then are GCC countries coping with the recovery?

Prior to the pandemic GCC countries faced long-term structural challenges to their economies. All had to lessen their dependence on oil, improve the competitiveness of the private sector and the efficiency of the public sector, and rethink social safety nets. COVID-19 has simply accelerated this process. Even before the pandemic, economic growth in the GCC countries had weakened; dropping to just 0.8 percent in 2019. In the aftermath of the crisis this figure is expected to drop to -5.7 percent in 2020.

Post-pandemic recovery will require sustained commitment to a policy mix that pursues reforms to facilitate more private sector activities that would help diversify their economies.  State entities occupy large shares of GCC economies, providing direct employment to their citizens. But they also crowd out private activities from financial and product markets. Setting up frameworks for Public-Private Partnerships will be important across the GCC, not only to better manage public investment, but also to attract more private (and foreign) investment. Improving competition across factor markets will be key so to reform rigid labor markets, which are often designed to channel cheap foreign labor to firms in non-traded sectors whose business model is heavily dependent on state spending (e.g. payrolls that finance household consumption and procurement) [See “Kafala” system]. Labor market reforms that reduce distortions and allow women to participate fully will be critical. This requires a fundamental rethink of the social contract in the GCC and a move away from omnipresent government to increased reliance on robust competition and private-sector-led job creation.

GCC countries continued to pursue important structural reforms during the pandemic, despite a large emphasis placed on combatting the health and economic crisis.  All GCC countries have introduced sizable stimulus packages in support of their ailing economies in 2020 (see for instance for Saudi Arabia and the UAE here). Battling the pandemic absorbed most policy-makers’ attention, but a number of key structural reforms were also pursued. The World Bank’s GCC team is now tracking those reforms. We found a number of key themes addressed in structural reforms carried out during the pandemic, which gives cause for optimism going forward. These include:

·   Labor market reforms: As part of their new Labor Strategy, Saudi Arabia replaced the existing sponsorship system (Kafala), which governed foreign worker mobility and introduced a minimum wage to decrease the unemployment rate among domestic workers. Bahrain established an Al-Amal (Hope) Fund to support young entrepreneurs and businesses to provide start-up investment for young Bahrainis’ business ideas.

·   Competition policies: Kuwait established a Competition Protection Law to bring more independence to the Kuwait Competition Agency, making it a purely technical and professional body to reduce political pressures in performing its mission. In Qatar, a new Cabinet Resolution confirm the areas in which non-Qataris may own and benefit from real estate, and the terms, conditions, benefits and procedures for their ownership and use of them. In the UAE a new decree allows full foreign ownership of onshore companies.

·   Social services reforms: In Oman, subsidies for water and electricity are now better targeted towards the poorest segments of the population to increase impact and reduce the fiscal burden. In Saudi Arabia, a Water Transmission and Technologies Company was launched, a state-owned entity that will manage the transmission, distribution, and storage of desalinated water across the country in a more holistic way; also, new regulations for the social assistance system (including a minimum transfer payment for eligible households) were established to increase the spending and operative efficiency.

·   Women’s empowerment and legal reform: The UAE eased laws against cohabitation (which had constrained long-term expatriate residency) strengthened the status of women vis-à-vis settlement of intra-family disputes. In Saudi Arabia, high-profile reforms allowing women to drive were reinforced by laws allowing women to get their own passports and change names without a guardian's consent. And the World Bank report "Women, Business, and the Law 2020"h recognized Saudi Arabia as the top reformer globally in last year’s report. 

Whether the region pulls quickly out of the crisis depends largely on policy responses of the authorities and their appetite to take bold actions in the face of unprecedented uncertainty, volatility, and risk. It is encouraging to see that, for now, the reform momentum continues. GCC countries can take succor from this strong performance and continue to learn from each other going forward.