An IMF staff discussion note published on 23 December praises the economic progress of the GCC but calls for action to reduce the number and attractiveness of government jobs.
“Firm limits need to be placed on public sector jobs and wages, and it should be clearly communicated to people that they should not expect to obtain a public sector job,” the note says. “Transitioning to a model with smaller public sector employment could be accomplished in the context of a civil service review to ensure that nonessential positions are eliminated as they become vacant.”
The recommendation, made in the report’s 26th page, will be privately accepted by GCC policymakers but will prove challenging to implement in practice, economists say.
Government departments and agencies and state-owned corporations, including national oil companies, are the single largest employer of GCC nationals in all GCC states. All provide on average higher wages and better terms and conditions than equivalent jobs in private sector firms.
The IMF note, which comes at the end of a 13-year period in which the economies of the GCC have been the fastest-growing on earth, praises the GCC’s achievements.
“The GCC growth model has delivered strong economic and social outcomes over several decades,” the note says. “Over the years, GCC governments have increased public sector employment and spending on infrastructure, health, and education. This has helped raise standards of living and support private sector activity, particularly in the nontradables sector.”
“The current growth model has weaknesses, however, and increasing economic diversification is paramount,” the note says. “Greater diversification would reduce exposure to volatility and uncertainty in the global oil market, help create private sector jobs, increase productivity and sustainable growth, and establish the non-oil economy that will be needed in the future when oil revenues start to dwindle.”
The note says the GCC will need more effective policies to promote non-oil output.
“The share of non-hydrocarbons output in GDP has increased steadily but is highly correlated with oil prices, and progress with export diversification, a key ingredient to sustainable growth, has been more limited,” the note says. “Going forward, diversification in the GCC will require realigning incentives for firms and workers. At present, the distribution of oil revenues within the economy crowds out non-oil tradables production. Producing nontradables is less risky and more profitable for firms because they can benefit from the rapid growth in government spending, while the easy availability of low-skilled, low-wage foreign labor has helped extract larger rents.”
The note says the continued availability of public sector jobs discourages nationals from pursuing entrepreneurship and private sector employment.
“In addition to measures that improve the business environment, there is a need to fundamentally alter these incentives—to fill a “missing link” in current policies,” the note says. “Measures could include reorienting public spending, strengthening the role of private sector competition, developing backward and forward linkages across sectors with a comparative advantage, and implementing labor market reforms to incentivize private sector employment of nationals and improvements in productivity.”
The GDP of the GCC increased from $35bn in 2001 to almost $1.7trn in 2014. The high rate of growth was mainly due to higher production of crude oil, which increased from just over 13 million barrels a day (b/d) in 2002 to almost 17 million b/d in 2014. The average price of the OPEC basket of crude oil rose rose from under $25 a barrel in 2002 to $98 a b/d in 2014.
MEED forecasts that if oil prices average $65 a barrel in 2015 and 2016, GCC GDP will contract by 15 per cent next year but stage a non-oil output driven recovery in 2016. Higher global economic activity stimulated by lower oil prices will start increasing demand for GCC oil after 2016. GCC economies will experience current account deficits in 2015-16 but surpluses should return from 2017. The GCC will record budget deficits in aggregate equivalent to up to 10 per cent of GDP in 2016, but GCC governments’ reserves and borrowing capacity are sufficient to meet the region’s financing needs to 2018 and beyond.
Economic Diversification in the GCC: Past, Present, and Future by Tim Callen, Reda Cherif, Fuad Hasanov, Amgad Hegazy, and Padamja Khandelwal published by the IMF December 2014.