Gulf Cooperation Council (GCC) economies are expected to return to growth of 2.2% in 2021 following a year of economic distress, according to the World Bank’s Gulf Economic Update (GEU) titled “COVID-19 Pandemic and the Road to Diversification”. A strong global economic recovery, projected at 5.6%, as well as rising global oil prices and demand are both contributing to this growth.
The COVID-19 pandemic and the decline in global oil demand and prices caused the GCC countries to experience a health crisis and a commodity market shock that caused the economies to contract by 4.8% in 2020. Most forecasts, however, suggest that fiscal deficits will persist. Kuwait, Bahrain, and Oman – the three countries that had the highest deficits in 2020 – are projected to remain in deficit throughout 2021-23, but at lower ratios to GDP in 2023 than during the economic downturn in 2020.
As a result of reduced oil supply and the low oil price, the goods and services exports of the GEU fell by 8.1% in real terms in 2019 and turned a surplus of 6.8% of GDP into a deficit of 2.9% in 2020, according to the GEU. There is a considerable amount of work yet to be done to increase the non-oil GDP in all GCC countries from its previous level. Kuwait, Qatar, Saudi Arabia, and Oman still remain highly dependent on oil and gas exports, which make up over 70% of all their exports, and on oil revenues, which account for more than 70% of all government revenue in Kuwait, Qatar, Oman, and Bahrain.
The GEU’s sixth issue examines fiscal revenues and structural reforms, including financial investments in digitalization and telecommunications, which can contribute to greater economic diversification. Economic diversification efforts in national and regional economies depend on promoting the development of the private sector. It was a difficult year for commerce and investment in all of the GCC, despite the completion of two privatization transactions and two public-private partnerships (PPPs).
Furthermore, advancing the telecommunications frontier is a strategic investment sector for diversification and post-COVID-19 economic recovery, and will benefit the GCC. During the recent pandemic, investments in the sector allowed the GCC to reap significant benefits, which included increased public health surveillance, wholesale and retail commerce, public and private education, financial and banking services in Dubai, and government and private customer support. The GCC is investing strategically in advanced telecommunications technologies, including 5G. Apart from infrastructure spending, the telecommunications industry would also greatly benefit from improvements in the legal, regulatory, and competition frameworks under which service providers operate.
One year into the pandemic, the global outlook is highly uncertain. In spite of growing vaccine coverage and new virus mutations raising concerns, sentiment is improving. The extent of policy support and the effects of pandemic-induced disruptions influence the pace of economic recovery across countries and sectors. Not only is the outlook influenced by the outcome of the battle between the virus and vaccines, but also by the effectiveness of economic policies in dealing with this unprecedented crisis under conditions of high uncertainty.
According to projections, global growth will reach 6 percent in 2021 before slowing to 4.4 percent by 2022. The World Economic Outlook for October 2020 had stronger projections for 2021 and 2022. A few large economies have received additional fiscal assistance, a vaccine-driven recovery is expected in the second half of 2021, and economic activity continues to adjust to subdued mobility. An uncertain landscape surrounds this outlook, centered on how the pandemic will progress, the effectiveness of vaccine-powered normalization, and subsequent policy support.
Despite the unprecedented contraction of economic activity in 2020, extraordinary policy support prevented even worse economic outcomes. As the COVID-19 pandemic enters its second year, signs of a solution are becoming increasingly obvious, but prospects remain uncertain. Vaccinations that are effective across the globe must be quickly rolled out to make recovery possible. To deal with the pandemic and to avoid persistent increases in inequality within countries and income disparities among economies, there is much more work to be done.
- The impact of the COVID-19 pandemic shock on the labor market continues, hitting particularly young and low-skilled workers. The trend towards moving away from jobs vulnerable to automation is becoming more pronounced. Supporting job retention policies reduces scarring and mitigates the disparities created by the acute pandemic shock. The adjustment to the persistent effects of the COVID-19 shock on the labor market may be easier and more rapid once the pandemic subsides and the recovery normalizes. Switching from pandemic to recovery-led management of reallocations could help reduce unemployment more quickly.