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29 March 2024

GCC urged to tear down investment barriers

Published
By Nadim Kawach

Gulf oil producers need to tear down investment barriers and facilitate the expansion of the private sector to ensure jobs for their citizens given the limited capacity of the public sector, according to a key Qatari bank.

International Bank of Qatar (IBQ) said the six Gulf Co-operation Council (GCC) countries, which sit atop 45 per cent of the world’s proven oil wealth, face a serious challenge in creating sufficient jobs for the fast-growing number of nationals as their public sector has become saturated and a possible decline in oil prices could plunge them back into painful budget deficits.

In a study on the GCC economy, IBQ said more than half the GCC nationals who entered the labour market in 2008 were employed by the government sector.

Its figures showed the number of national employees in the pubic sector stood at nearly 50 per cent of the total work force in Saudi Arabia and as high as 88 per cent in Qatar, 85 per cent in the UAE and 82 per cent in Kuwait.

“The GCC countries face two serious challenges in the coming decade. They include their ability to create enough jobs for their people and the possibility of the return of large deficits to their budgets,” IBQ said.

“The public sector is expected to have a limited capacity to absorb new employees and its ability could weaken further in the future as it has become saturated and a possible drop in oil prices could curb high public spending and push the budgets of member states into shortfalls again.”

IBQ said such challenges should prompt the GCC, where expatriates workers are a majority in most members, to take measures to encourage the private sector to absorb the new national entrants to the labour market.

“The GCC countries must allow the private sector to play a bigger role in the domestic economy with the aim of creating sufficient jobs for nationals…it also should be enabled to become the main provider of public services instead of the government…to do so, GCC governments must adopt policies that will facilitate the expansion of the private sector and remove unnecessary barriers for investors… despite some progress in this regard, a lot more needs to be done.”

In a recent study, a key Kuwaiti bank warned that efforts by the GCC nations to create jobs for their citizens could be hampered by the repercussions of the global fiscal crisis on the grounds private sector retrenchment policies would scare off citizens, who already prefer the public sector for better incentives.

"With the ongoing discharge of workers taking place in the GCC private sector, it is feared the existing preference of nationals for public sector employment will gain momentum, putting recent gains at risk," National Bank of Kuwait said.

“To prevent this, serious measures are required to restore confidence in theprivate sector," NBK added, referring to progress made by GCC countries in job nationalisation through setting quotas in the private sector.

Several companies in the GCC have been reported to have sacked employees or have plans to sharply cut their workforce within a new retrenchment strategy triggered by the global economic downturn and prevailing uncertainty.

Another study by a Saudi investment firm said private investment could be smothered by a sharp rise in public sector spending as part of counter-crisis fiscal expansion measures taken by most regional nations.

While the surge in government expenditure has largely contributed to mitigating the downward economic impact of the 2008 global fiscal distress, it has created a misallocation of resources and needs to be scaled down, said NCB Capital (NCBC), an affiliate of the Saudi National Commercial Bank.

“GCC governments have largely increased spending since the start of the second oil boom in 2003…official figures show the re is a 16 per cent growth in public expenditure annually during 2003-2008 and spending is projected to increase further by around 12 per cent this year,” IBQ said.

“This could weaken the GCC countries’ ability to deal with economic challenges in the future and raise the specter of fresh deficits in case oil prices decline.”

Official figures showed the combined budgetary spending in the six members swelled to a record high of about $269.3 billion (Dh987bn) in 2010 from a budgeted $235.4bn in 2009.

The fiscal expansion was aided by relatively high oil prices, which averaged justabove $60 in 2009 and are projected to rise to nearly $70 this year. Both price levels are far higher than the $35-50 price range assumed by the GCC.

“The principal risks in the GCC are twofold. Firstly, government spending crowding out private investment, further amplified by a ratchet effect if government stimulus is not scaled back in a timely manner,” NCBC said.

“Secondly, a misallocation of resources.  While the Japanese bridges to nowhere are an extreme case, this tends to be a corollary of large-scale government spending everywhere….the risk in the GCC is made greater by the heavy reliance on government subsidies in key areas such as energy and water.”