Recent events in the Middle East have led to a range of short-term responses from governments in the region, especially increased government expenditures to relieve cost of living pressures and to create jobs. However, it is medium to longer term fiscal policy matters that continue to require major reform to be sustainable.
Currently, there are two global phenomena at play that have profound impacts on budgets in the Middle East.
Rising oil prices can be a two-edged sword. On one hand, it increases government revenues for the major oil exporting Gulf states, Libya, Iraq and Algeria (although it also increases the cost of the subsidies related to local petrol prices further distorting demand for this product). On the other hand, it also increases attention on government spending policies and demands for greater equity and transparency in national wealth. For oil importing states such as Egypt and Jordan, it only increases fiscal and economic pressures.
Unlike rising oil prices, rising food prices are universally a problem for all MENA countries. These countries are heavily reliant on imported food (MENA countries import more than 50 percent of their food) and food often constitutes a very high proportion of household spending (from averages of 15 percent in UAE and Qatar, where housing is the major cost, through 30 percent in KSA and Kuwait, to over 50 percent in most Levant and North African countries). For the poorer members of society, food can often constitute over 75 percent of their income.
In the short term, this means that regional governments will be focused on trying to balance cost-of-living concerns with other fiscal imperatives.
Meanwhile, PricewaterhouseCoopers’ 14th Annual Global CEO Survey, which was undertaken late last year, found that CEOs in the Middle East identified three major challenges for governments (in order of priority): improving national infrastructure, ensuring financial stability and access to finance, and creating a skilled workforce. These priorities are fundamental to the creation of employment, enterprises and a sustainable economic growth model.
In order to respond to these challenges, governments need to rethink the role of the state in the 21st century, develop policies to achieve “good growth,” tackle their finances, and innovatively consider doing fewer things or doing them very differently. Even those governments in the region that are not under such extreme budgetary pressures will benefit from taking a fresh look at ‘future-proofing’ their activities so they are genuinely sustainable and reduce the risks for the future.
Given the need for investments in infrastructure, occurring at a time when many governments are scrutinizing their budgets, the opportunity for collaboration with private capital in financing and developing infrastructure seems more critical than ever. The scale of this infrastructure funding requirement means it is unlikely to be met solely through public finance.
There is a need for governments to collaborate with the private sector and reinvigorate capital markets as a source of funding. In a similar vein, the pressing need for employment and skills requires government to work closely with the private sector to develop new approaches in order to meet the needs for business and a young population.
Governments in the region who have traditionally been oil or gas dependent have been unsuccessful in their stated efforts to diversify their economies and create sufficient well-paid jobs or business opportunities to satisfy the needs of burgeoning young populations. Notable exceptions, such as Dubai (with limited oil reserves), have encountered their own difficulties as they diversified into a real estate bubble on the back of abundant liquidity pre-global economic crisis.
How can fiscal diversification be achieved?
1) Oil and gas wealth should be separated from annual budget revenues. Wealth should be placed in separate funds (like the sovereign funds) and then a predetermined long-term rate of return from the fund established from which the budget will derive revenue. This would allow a smooth revenue stream to the budget — not subject to market price volatility — and allow the separately administered fund to manage the volatility, maximize returns and, independent of the annual budget, invest for the future.
2) Governments need to diversify revenue sources, including introducing alternative revenue streams from taxation and/or consistent returns/dividend policies from government investment funds and trading enterprises.
3) Greater reliance placed on private sector financing of infrastructure and/or issuing government bonds to fund longer term assets, which would also assist in deepening the financial markets in the region.
4) Distortionary subsidies, especially for energy usage, should be phased out both to address excessive over-consumption/wastage of precious energy and water sources, and to begin tackling environmental sustainability and responsible resource management.
Finally, governments in the region should, in the wake of greater accountability and transparency pressures, consider the type and form of fiscal structure they wish to adopt for the longer term. For example, do they want low taxes, small government with limited public service provision (such as the US and much of Asia), or do they prefer more public provision and payment for services and infrastructure to be accompanied by higher and broader levels of taxation (such as in much of western Europe). This is a longer term project. But with no certainty as to the future value of the existing oil and gas wealth in 10 to 20 years time, now is the time to decide what future models are being strived for and therefore what planning for longer term infrastructure and public service provision is required.
David Stevens, PricewaterhouseCoopers’ Middle East Government Industry Leader, and Simon Leary, PwC’s Middle East Health Industries Leader. This article was written exclusively for Daily News Egypt.
