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Gulf states in desperate need of reforms

Ibrahim Mohamad / mbNovember 4, 2015

The rapid decrease in oil prices has caused widespread fear in the Gulf states. Far-reaching economic reforms are inevitable. The question is, can reforms work in an absolute monarchy?

Symbolbild Saudi Arabien Finanzmarkt Ölfelder Öl
Image: picture-alliance/dpa

In the Gulf states, numerous savings measures are currently under way. In the United Arab Emirates and Kuwait, subsidies were reduced, and fuel prices were raised. Saudi Arabia has withdrawn dozens of billions of dollars from its gold reserves, and it is selling government bonds to reduce its budget deficit. Since oil prices dropped by over 60 percent since the summer of last year, these countries' deficits have reached new highs.

Too dependent on oil

In Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman, a high percentage of the state budget is dependent on the oil sector - between 80 percent in Saudi Arabia and 45 percent in Oman. The Gulf states' dependence on the price of oil is a concern, also among government officials. The emir of Kuwait, Sheik Sabah Al-Ahmad As-Sabah, adopted an uncharacteristically decisive tone in his latest speech when he asked for "speedy and serious economic reforms to diversify the economy and to find new sources of financing."

Saudi Arabia hardest hit

Saudi Arabia was hit hardest by the drop in oil prices. Like all other Arab Gulf states, the country subsidizes numerous basic supplies such as fuels, electricity and water with dozens of billions of dollars. At 30 million people, the country's population is larger than the population of all other Gulf states combined - thus, the burden is even bigger here. b#

Adding to the country's financial struggle is the fact that Saudi Arabia is at war with Yemen - a war that is particularly costly for the Saudis. Furthermore, Riyadh is paying billions of dollars to finance Islamist and militant movements and to allies such as Egypt, Morocco, Jordan, Pakistan and Yemen. Last but not least, Saudi Arabia has become one of the biggest importers of weapons worldwide in the last few years - a costly development.

Gold reserves to last another 5 years

According to the International Monetary Fund (IMF), Saudi Arabia's gold reserves, valued at approximately $670 billion (613 billion euros), will be used up within five years if the oil price remains at $50 per barrel. At the beginning of this year, the country's gold reserves were still valued at $750 billion.

If the oil price stagnates at the current level, analysts expect the Gulf states will have to deal with a deficit of at least $1 trillion.

But not all experts are that worried. Nail Aljoabra, a financial expert from the United Arab Emirates (UAE), argues that "the Gulf states will be able to handle the deficits thanks to their large gold reserves and measures passed to fight the deficit, such as price increases for fuels."

What reforms are needed?

Since the first big decrease of the oil price in the second half of the 1980s, calls for diversification have got louder and louder. While there have been a few success stories - Dubai, Bahrain and Oman managed to branch out into tourism, finance and exporting of consumer goods - economies in the Gulf region still revolve around the oil trade. Because, so far, the oil price always recovered quickly, the pressure to diversify has remained relatively low in the past. But many indicators suggest that a quick recovery isn't likely this time.

Even though the market is saturated, Iran, Iraq, the US, Saudi Arabia and other oil-producing countries are flooding the market with more and more fuel. The oil price is driven down by high domestic oil reserves in countries with a big demand for fuel and by the weak state of the world economy. The International Monetary Fund (IMF) suggests the oil price could fall by up to $20 per barrel.

Call for radical measures

The Gulf states are thus likely at the cusp of their biggest, most urgent economic reforms ever. Measures such as scaling back subsidies, raising fuel prices and using gold reserves, though praised by some experts like Aljoabra, won't be enough.

The gulf countries' one-sided economies are in desperate need for more radical reforms. Above all, a fair tax system, legal parameters for subsidizing private initiatives, humane working conditions for foreign workers and an attractive environment for foreign investorsare needed.

Kampfpanzer vom Typ Leopard 2
Saudi Arabia is a big market for weapons exportersImage: picture-alliance/dpa/K.-M. Wegmann

The Gulf states should also abolish costly prestige projects - gigantic airports and high rises that were mainly built to create an impressive skyline and are now barely used at all.

Are absolute monarchies capable of reforms?

The big question is - how can liberal economic reforms work without corresponding political reforms?

In his book "The Economics and Politics of Transition to an Open Market Economy - Egypt", Dieter Weiss, a former professor at The Free University Berlin, who specilizes in Middle Eastern economies, and his colleague Ulrich Wurzel show how economic reforms in Egypt failed in the 1980s and 1990s because of the resistance of the political elites. This shows that in absolute monarchies - ie most countries in the Gulf region - serious reforms are even more difficult than elsewhere.