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The sharp decline in oil prices in 2014 brought to an end a decade-long period of high economic growth and budget surpluses for the countries of the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). While the GCC states have experienced such downturns in the oil markets before, this time has proven different given most expectations that the oil price is unlikely to recover soon and actually might never again reach the above $100 levels seen for much of the decade from 2003 to 2013.

The impact could immediately be seen. Given the region’s heavy reliance on oil revenues for its national budgets, GCC governments faced a cumulative $119 billion budget deficit in 2015. For 2016, the projection is that the deficit will reach $153 billion, and that the region’s budget deficits will not drop below $100 billion until 2021.[1] Compared to 2014, oil revenues are projected to be $400 billion less in 2016.[2] 

As a result, all GCC economies were forced to react to the changing circumstances. Saudi Arabia, where oil continues to represent three quarters of total export revenues and 90% of government revenue, initiated a number of measures to trim its budget deficit and curtail spending. Most dramatically, this included cutting energy subsidies on water and electricity rates in addition to instituting salary reductions for public sector employees, composed of nearly 70% by Saudi nationals.[3] [4] The Sultanate of Oman also significantly reduced its 2016 budget by imposing salary and subsidy cuts, increasing visa fees and raising corporate taxation rates.[5] The IMF has urged a further 35% reduction for 2017.[6] Similar steps could be seen in the other GCC states as well.[7] For the first time in a long time, the public was therefore engaged in the economic adjustment plans thus indicating an on-going recalibration of state-society relations happening in the GCC countries.   

Coupled with a reduction in state spending, GCC governments also announced or reiterated their plans to diversify their economies in order to survive the low oil-price era. Most important was the announcement of the National Transformation Plan (NTP) in Saudi Arabia known generally as the Saudi Vision 2030 document whereby the kingdom would implement a wide-ranging diversification effort to ensure that its economy would remain competitive and could meet its medium to long-term budget requirements.[8] The main objective, as is the case with the other so-called vision document released by their respective governments – whether it is Bahrain Vision 2030 launched in 2008, Kuwait Vision 2035 released in 2015, Qatar National Vision 2015 announced in 2008, Oman Vision 2020 launched in 2013 or UAE Vision 2021 released in 2010 - is to develop a knowledge-based economy, strengthen and increase private sector participation, attract foreign investment, and create jobs for the national population.[9]  

While the GCC governments are thus seen to be responding to the changing economic circumstances, what has become equally clear with these responses is that income from oil has in the past never been sufficiently utilized to introduce economic diversification throughout the GCC. Up to this stage, none of the numerous state-led plans that have been put forth have in fact seen the respective vision translated into lasting action.[10] In fact, all of the GCC countries, with the exception of the UAE’s emirate of Dubai, are more dependent on oil export receipts than they were 30 years ago.[11]   

The result therefore is a mixed picture with a great deal of uncertainty about whether current reform efforts will indeed be successful. While the International Monetary Fund (IMF) has praised initial efforts to reign in budget deficits, it has also cautioned that the reform momentum must not be lost and that structural adjustment policies should kick in sooner rather than later.[12] This is, of course, easier said than done given that the GCC economies face long-term challenges where quick fixes will not be sufficient. These challenges include a regional environment marred by numerous conflicts, the fact that oil prices are expected to stay low for a persistent period, the potential for domestic turmoil, as well as the likelihood of significant institutional resistance to structural change.

For the moment, there exists a broad commitment to reform efforts and the GCC populations are supportive of the steps announced so far. The key aspects, however, will be timing and sense of fair distribution in terms of the spending cuts being instituted. Enacting reform too quickly and unevenly will lead to a breakdown in the national consensus thus endangering overall future prospects.  The dissolution of the Kuwait Parliament in October 2016 due to protests against higher fuel prices could be a harbinger of how governments deal with adverse reactions from the wider public. As such, the unfolding story is indeed one of unknown destination and trajectory but that is not to undermine genuine efforts exerted at all levels to guarantee a smooth landing.