Is coronavirus the beginning of the end of Gulf wealth?

The deep plunge of oil prices and the novel coronavirus pandemic are proving disastrous for the oil-rich Middle Eastern countries.

Oil collapsed to less than $16 a barrel on Wednesday, hitting its lowest price since 1999, with the market awash with oversupply as the economic fallout from the coronavirus pandemic hammers demand for fuel.

The International Monetary Fund (IMF) expects demand will decrease still further, which means that there will be a surplus in oil supply despite the oil-producing countries deciding to lower production. On the other hand, the oil suppliers do not have any place to store their surplus oil, which prompts them to sell their products at low prices.

Amidst the double crisis, these oil-producing countries are facing real financial difficulties.

Saudi Arabia, followed by the United Arab Emirates, Kuwait, Iraq, Iran, Oman, Bahrain and Qatar all depend on oil trade. 

The Gulf countries, whose economies are heavily relying on oil revenue, have been sounding the alarm in recent years.

Many countries in the region have been trying to distribute their incomes to other sectors such as tourism and technology.

Despite all these efforts to build non-oil based economies, many reports illustrate the Gulf economies have had major budget deficits in recent years.

IMF warns the end of Gulf countries’ wealth in 15 years

The IMF said on Thursday that the Gulf Arab states, some of the world’s richest countries, could see their financial wealth depleted in the next 15 years amid lower hydrocarbon revenues if they don’t step up fiscal reforms.

The IMF estimates the six-nation Gulf Cooperation Council (GCC), with a net financial wealth at $2 trillion, accounts for over one-fifth of global oil supply.

While lower crude prices have put pressure on governments to generate non-oil revenues and fix their finances, “the effect of lower hydrocarbon revenue is yet to be fully offset,” the IMF said in a report. 

“At the current fiscal stance, the region’s existing financial wealth could be depleted in the next 15 years,” it said.

The region’s rulers used oil revenue to provide millions of citizens with government jobs, part of a social contract by rulers that rewards political acquiescence

Negative economic data from the region

Saudi Arabia, the biggest oil-based economy of the Arab World and the world’s largest crude oil exporter, expects a deficit of $50 billion this year, up from $35 billion in 2019. 

The kingdom relies on oil revenues for 87 percent of its budget, and oil-related industries account for 42 percent of its GDP. It introduced a 5 percent value-added tax (VAT) in January 2018 to improve non-oil revenue generation after a plunge in oil prices from mid-2014 bruised its revenues. 

However, the IMF suggested Riyadh raise the VAT rate from 5 to 10 percent last year.

Furthermore, the Saudi monarchy has continued to increase its government expenditure in recent years.

For example, the 2020 report of the Stockholm International Peace Research Institute (SIPRI) said: “Saudi Arabia was the world’s largest arms importer in 2015–19.”

“Its imports of major arms increased by 130 percent compared with the previous five-year period and it accounted for 12 percent of global arms imports in 2015–19,” the report followed.

Saudis and Emiratis have been carrying out proxy wars in Yemen and Libya in recent years, which have cost the lives of thousands of innocent civilians.