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KUWAIT CITY, May 9: The IMF Middle East Center for Economics and Finance and the Arab Fund for Economic and Social Development held a symposium on the topic of fiscal reforms in Kuwait and the Arab world with the key aim of identifying the core ingredients of successful fiscal reform strategies in light of Arab countries’ specific institutional constraints. The sixth in a series of talks on, the event was took place Monday evening at the AFESD headquarters.
The panel discussion was moderated by the CEF’s Director, Oussama Kanaan, and included Stéphane Roudet, who leads the yearly IMF mission to appraise Kuwait’s economic situation, Eric Le Borgne, Practice Manager for the Middle East and North Africa in the Macroeconomics and Fiscal management Global Practice of the World Bank and Chadi Abdallah, economist and leading expert on subsidy reform in the International Monetary Fund’s Fiscal Affairs Department, and Mission Chief for the course on “Reforming Fuel Subsidies” delivered at the IMF’s Middle Center for Economics and Finance in Kuwait.
CEF Director Oussama Kanaan stated that the topic of fiscal reform has become increasingly important for a number of Arab countries, especially given rising pressures due to heightened conflict, a migration and refugee crisis, and, especially for GCC countries, low oil prices. A common challenge for most countries in the region has been the design and implementation of prudent fiscal policies with socially desirable patterns of public expenditures and efficient tax systems that are conducive to inclusive, equitable economic growth.
Le Borgne highlighted the recent developments, risks and major challenges facing the MENA region in his talk. In his overview, he touched upon the sharp slowdown in the GCC and weak growth on account of the oil stock, war and conflict spill-overs, slow recovery in key trading partners such as the EU, and fiscal retrenchment, but acknowledged green shoots of reform wherein fiscal consolidation had led to an improving fiscal outlook with measures such as the dismantling of energy subsidies along with other reform areas of taxation, civil service and public sector reforms, private sector development and improvements in the business environment, exchange rate and immigration reforms.
While he predicted a modest pick-up in growth, he urged that more needs to be done and pointed out that the MENA region lags behind other developing regions of the world in having rules-based policies. In oil exporting countries, a lack of rules-based fiscal frameworks has facilitated a direct transmission of volatility in commodity prices to the budget and slowed progress on the diversification agenda.
He identified short term risks as being excess volatility in oil prices, escalation of conflict and violence in the region and rising global uncertainty such as new US government policies and the implications of Brexit. For the long term risks and challenges, he highlighted conflict and proxy wars and political instability, the difficulty of maintaining political momentum for reforms, redefining the implicit social contracts that exist between governments and citizens as well as post-conflict reconstruction in conflict areas.
He added that, by and large, fiscal policies in MENA countries still largely reflect an implicit “social contract” between governments and citizens. This is evident among oil importers and oil producers alike, where fiscal policy is directed towards consumption spending, generous subsidies and large public sector workforce. This has affected fiscal sustainability, limited the amount of fiscal resources available for growth enhancing expenditures, and also created major distortions. He shared that developing MENA and some GCC countries under-spend on infrastructure and in cases where the level of spending in key sectors in adequate, the quality of spending is weak.
Le Borgne stressed that the social contract needs renewing and the sustainable distribution of wealth had to move from sharing a fixed and shrinking pie plagued with vast leakages that undermine the future to investing in the growth of the non oil private sector.
Roudet, started by highlighting the new environment in which GCC countries operate, that is characterized by durably lower oil prices and a deterioration in fiscal positions with significant increase in financing needs. He urged that fiscal reforms were needed to bolster fiscal positions and create room for investment. He noted that reforms should aim at gradually reducing the government deficit and financing needs. Raising government savings, he explained, will help reduce the deficit and financing needs, preserve buffers, limit debt accumulation, preserve strong sovereign credit rating, avoid crowding out and create room for growth enhancing investment over the medium term.
He stressed the need to ensure that Kuwait continues saving a sufficient part of its oil wealth for future generations. He maintained that fiscal reforms were necessary to reduce oil-driven volatility by delinking delinking revenue and expenditure from oil prices, reducing growth volatility and bolstering private investment.
He acknowledged the steps taken by the Kuwaiti authorities in several important areas and the structural fiscal reforms laid out in the government’s six-pillar reform strategy.
He informed that tax revenue in Kuwait constitutes an exceptionally small part of total revenue and that the envisaged VAT and excise taxes would help diversify resources and reduce vulnerability to oil price movements. He also underscored the importance of reforming the profit tax system by reducing and unifying the tax rate, which would not only increase tax revenue but would also level the playing field for businesses operating in Kuwait. He shared that expenditure reforms in the areas of subsidies, wage bill and social transfer programs were crucial to underpin durable adjustment and reduce budget rigidities.
Chadi Abdallah discussed the recent developments in energy subsidy reforms in MENA countries and the challenges that lie ahead. He pointed out that the distribution of petroleum subsidies among income groups shows that subsidy promotes inequality by mostly benefitting the upper income groups despite the best intentions of the State. He affirmed that many MENA countries have recently taken important steps towards reducing energy price subsidies and in a promising move, all MENA Arab oil exporters have recently increased domestic prices for energy products, ranging from a total elimination of fuel price gaps relative to opportunity cost as in the case of the UAE to sharp increases but with sizable remaining price gaps in countries of Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia.
Abdallah noted that most MENA countries still have not adopted automatic pricing mechanisms for fuel products, potentially making ad-hoc price increases unsustainable and in most MENA countries, the energy price setting mechanisms have not yet been depoliticized. He warned that overall ad-hoc price increases that are not accompanied by deeper reform measures are not sustainable and emphasized that, looking forward, a successful strategy is urgently needed and should build on a clear communication strategy, a de-politicization of the price setting process, and a proper compensation for vulnerable groups that will potentially be affected by the reform.
He presented evidence indicating that the macroeconomic impact of energy price reforms can be very large. Energy subsidy reform will ensure that, in the medium to long term, capital and labor will be re-allocated towards more efficient labor and skill intensive sectors. Estimates suggest that the GCC countries could generate permanent real income gains of up to 1.4 percent of GDP if domestic energy prices are increased to reflect cost recovery levels, with the gains being even much larger if savings were invested. Meanwhile, potential negative impacts associated with the reform may present some challenges in the short term, but these could be carefully managed, including by adopting a more gradual approach to reform and by devising temporary policies that provide support for the most tradable and energy-intensive sectors, conditional on their competitiveness as well as the functioning of capital markets that provide credit for investments.
By Cinatra Fernandes
Arab Times Staff