ECONOMY-MIDEAST: IMF Urging Fees, Taxes for Oil-Rich Gulf States

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Jan 5 2002 (IPS) - Oil-rich Persian Gulf states should reconsider their cradle-to-grave welfare systems and start imposing taxes on their citizens to offset a decline in oil revenues, according to an International Monetary Fund (IMF) official.

“If I was to address the leaders of the Arab Gulf I would tell them they should stick to diversification, integration and move away from their dependence on oil by tapping revenues from taxes and fees,” said the official. Other commentators, citing the example of Argentina, said this would require deft political handling.

An economist in the IMF’s Middle East department, the official spoke with IPS on condition of anonymity Friday, in the wake of a two-day summit of the six monarchies of the Gulf Cooperation Council (GCC). Members agreed to move toward uniting their economies and said they might consider other sources for revenues.

The Arab sheikhdoms have announced they will start with a joint five-percent customs tariff in 2003 and move toward a single market by 2010.

The IMF official said the advice to the GCC bloc is for spending to be cut and taxes to be levied as oil revenues are expected to drop 25 percent this year.

The Fund had said in a working paper released last month that the 20-year-old Gulf economic, defence and political bloc cannot continue to depend on crude oil sales alone to achieve sustainable economic growth. It recommended a regime including income tax, corporate tax, consumption tax, and value added tax.

The six GCC members, which account for nearly 45 per cent of the world’s oil supply, earned more than 150 billion dollars in oil revenues in 1980 but this income plummeted to 56 billion dollars in 1998, when crude prices fell below 10 dollars per barrel.

The earnings recovered to around 85 billion dollars in 1999 and surged to 135 billion in 2000 after prices shot to around 27 dollars, according to the IMF.

The GCC countries depend on oil for 70 percent of their revenues. In Saudi Arabia, which has the largest reserves of petroleum in the world, at 26 percent of proven reserves, the petroleum sector accounts for roughly 75 percent of budget revenues, 40 percent of gross domestic product (GDP), and 90 percent of export earnings.

“With the labour force in those countries growing fast and oil revenues dwindling, we should ask the question who is going to provide jobs for them?” the IMF official said.

The GCC member states – Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates (UAE) – provide birth-to-death benefit systems for, and generally shy away from imposing taxes on, their citizens, whose incomes are among the highest in the world.

Rather, the IMF official said, most of these countries restrict taxes to foreign and national oil companies and other multinational corporations but not on local consumers and businesses. Saudi Arabia stands alone in levying a compulsory Islamic tax system known as Zakat at a rate of 2.5 percent of individual income; the other GCC members make this voluntary.

Referring to the IMF’s December report, the official said that as the countries move toward a common market and currency, along the lines of the European Union, they would find it inevitable to unify their tax codes and impose taxes across the board.

GCC states had begun to take serious steps to increase tax revenues, the official said, but it remains unlikely that individual incomes will be taxed significantly any time soon. Rather, taxation of corporations and businesses will be increased gradually before the focus shifts to individual incomes. He declined to give a timeframe for implementation of Fund’s recommendations.

“There are some serious efforts exerted there. What they are doing is really important,” the Fund economist said. “They are starting a gradual process. But they should be careful to keep the non-oil economic activity going and that there must be more jobs for the newcomers into the market.”

Tarik Allagan, information supervisor at the Saudi embassy in Washington, said GCC countries could impose taxes on more businesses and, down the road, on citizens, ending a near century- old welfare system.

“We’ve had a very good run so far,” Allagan said. “We hope it could last longer. But all good things must come to an end. For now it doesn’t look necessary. And that’s why the governments haven’t imposed it yet.”

However, an IMF-based international economist whose duties include representing member government perspectives said the issue of taxation was very sensitive in the volatile region and governments there would have to handle it with care.

“It’s a touchy issue both economically and politically,” he told IPS. “Look what happened in Argentina. But, you know, life is dynamic and they may find it optimal to impose taxes at the end.”

In recent years, the six states have introduced fees to defray the costs of previously free social services and to build up non-oil state revenues. They also have stepped up efforts to attract foreign direct investment in a bid to diversify their economic base and labour markets.

The Gulf states have attracted nearly 40 billion dollars in foreign investment over the past 25 years but the level is still less than one percent of the world’s total capital flows, according to the IMF.