Dr N. Janardhan :
Oil prices have crashed from over $100 to sub-$60 a barrel in just five months. While this is good news for consumer countries, it also means only half the revenue for the energy producers, especially the Gulf Cooperation Council (GCC) countries. Hydrocarbon incomes are set to reduce from $743 billion in 2012 to about $410 billion in 2015. The bloc may, therefore, record a current account deficit for the first time since the late 1990s.Test for non-oil economy
However, rather than worry, it is business as usual because they have accumulated about $2.3 trillion in current account surpluses since 2003. Even Oman, with the weakest balance of payments, added about $200 billion surplus. Thus, shortfall in revenues could be offset with private and public savings.
Aided by foreign assets, even a break-even oil price will enable the UAE, for example, to pursue infrastructure projects worth about $700 billion until 2030. A few weeks ago, Saudi Arabia unveiled its 2015 budget – the largest in its history. Despite an expenditure of $230 billion against a projected $191-billion income, Riyadh is optimistic about growth because of a vibrant private sector, which has benefited from integration with the public sector.
A massive sovereign wealth fund and billions in a ‘future generations fund’ means Kuwait plans to spend $155 billion on projects over the next five years despite the oil price plunge. And, Qatar’s infrastructure projects pipeline is set to soar with $30 billion worth of new project deals in 2015.
More than the assets and savings, the GCC countries will be able to weather the storm better than the low oil price era in the 1980s and 1990s because of the conscious policy to invest in a diversified economy. It is a matter of irony that the GCC governments pursued economic diversification during the high oil price era of the last decade, rather than attempt it when prices slumped. The rationale for diversification could be any or many of the following – longstanding pressure from international financial institutions to develop a non-oil economy; consideration that oil may not last forever; effort to conserve and prolong the longevity of hydrocarbon resources since oil prices were high; confidence that they can develop an efficient non-oil economy; and importantly, perhaps, the realisation that this is one way of encouraging private sector development to tackle the impending unemployment of nationals, which has political underpinnings.
These compulsions led the GCC countries, like other emerging economies, to bite the sustainable development mantra and target a diversified economy. To facilitate non-oil economic growth, projects worth about $2.4 trillion were reportedly planned in the region. Many of these may be complete before 2020, including the Gulf railway project, the first nuclear energy plant, economic cities and a regional ele-ctricity grid, among others. It is interesting to note that sports, tourism, airlines, real estate, hospitality, and hi-tech chip-making industries, among others, are part of the diversification mix. In the sports arena, two F1 events and some of the world’s richest horse races and golf tournaments, are held here; the International Cricket Council’s headquarters is located in Dubai; and, Qatar will host the 2022 FIFA World Cup.
The most ironical diversification is in the renewable energy sector – Abu Dhabi is now the headquarters of the International Renewable Energy Agency. The West Asia and North Africa region is expected to see solar projects worth $2.7 billion unveiled in 2015, six times more than in 2014. Saudi Arabia, the world’s largest oil exporter, announced in 2012 that it would install 17 giga-watts of nuclear power by 2032 and around 41 GW of solar capacity.
Less said the better about the trade, transit and tourism hub Dubai, which is now also famous as a city of several cities – Internet City, Media City, Sports City, Healthcare City, Academic City, and the like. Winning the bid to host the 2020 World Expo gave ‘oil-less’ Dubai a new lease of life as well.
Bahrain and Oman have also taken steps towards economic diversification, though less than its neighbours, which partly explains the repercussions of the Arab uprisings there a few years ago.
Overall, the GCC countries learnt a lesson after squandering oil wealth during the 1970s. The stability in the GCC region has not just been a consequence of possessing oil wealth, but ensuring pragmatic politics while disbursing it. Economic reform is encouraging private sector growth, which, in turn, is now capable of providing competitive and underprivileged nationals opportunities to take up challenging jobs, rather than rely just on the public sector. Another dimension of the low oil price era is the opportunity to correct some prevalent socio-economic ills. Better planning and implementation of policies may help reduce subsidies and make the transition from a ‘welfare state’ to an ‘economic state’.
Finally, how the diversification process and the creation of an economic state intersects with the ongoing ‘knowledge economy’ development will not only determine the health of the non-oil economy in the near future, but also condition long-term sustainable growth.
Dr N. Janardhan is a Dubai-based political analyst, author on Gulf affairs and honorary fellow of the University of Exeter, UK.
