DUBAI/RIYADH: The Gulf states’ economies could contract by 7.6 percent this year in their deepest decline in decades, as the coronavirus and low oil prices take their toll, a top IMF official said. The new projection for the six-nation Gulf Cooperation Council (GCC) is dramatically worse than the 2.7 percent contraction the IMF forecast just two months ago.

Oil revenues in the GCC, the Gulf Arab monarchies that supply nearly a fifth of the world’s crude, are also expected to decline by $200 billion in 2020, said Jihad Azour, director of the IMF’s Middle East and Central Asia Department. “The oil sector will shrink sharply by around 7.0 percent and it will be accompanied by a drop in the non-oil sector also,” he said in a webinar on the prospects for a post-coronavirus recovery in the region.

Azour however predicted a faster rebound in 2021 as Gulf economies grow by 2.5 percent – “a full 10 percent turnaround”. The GCC comprises regional powerhouse Saudi Arabia and the United Arab Emirates along with Bahrain, Kuwait, Oman and Qatar. Azour said that oil prices in real terms (adjusted for inflation) dropped to their lowest level since 1973 earlier this year before recovering partially following a deal among major exporters to slash production.

The IMF last week kept its projections for Brent oil prices unchanged at around $36 a barrel, almost half of last year’s average. Azour said the sharp drop in oil prices and the impact of the pandemic would lead to more debt in GCC economies, a problem he warned must be tackled. In its World Economic Outlook released last week, the IMF projected the Saudi economy, the largest in the region, would shrink by 6.8 percent – the lowest growth in more than three decades.

Ahmed Al-Kholifey, governor of the kingdom’s central bank, the Saudi Arabian Monetary Authority, downplayed the projection as too gloomy. “We see the IMF forecast as more pessimistic than our projections or even the (experts’) consensus,” Kholifey told the virtual forum, although he declined to provide figures. Saudi Arabia’s General Authority of Statistics published figures on Tuesday showing that the kingdom’s economy shrank by 1.0 percent in the first quarter. But Kholifey acknowledged that the second-quarter performance would be weaker. In the neighboring UAE, Dubai said Tuesday that its GDP had declined by 3.5 percent in the first quarter of 2020 compared to the same period in 2019. The emirate’s official media office said however that its troubled real estate activity had registered 3.7 percent growth.

Meanwhile, Saudis braced yesterday for a tripling in value added tax, another unpopular austerity measure after the twin shocks of coronavirus and an oil price slump triggered the kingdom’s worst economic decline in decades. Retailers in the country reported a sharp uptick in sales this week of everything from gold and electronics to cars and building materials, as shoppers sought to stock up before VAT is raised to 15 percent.

The hike could stir public resentment as it weighs on household incomes, pushing up inflation and depressing consumer spending as the kingdom emerges from a three-month coronavirus lockdown. “Cuts, cuts, cuts everywhere,” a Saudi teacher in Riyadh told AFP, bemoaning vanishing subsidies as salaries remain stagnant. “Air conditioner, television, electronic items,” he said, rattling off a list of items he bought last week ahead of the VAT hike. “I can’t afford these things from Wednesday.”

With its vast oil wealth funding the Arab world’s biggest economy, the kingdom had for decades been able to fund massive spending with no taxes at all. It only introduced VAT in 2018, as part of a push to reduce its dependence on crude revenues. Then, seeking to shore up state finances battered by sliding oil prices and the coronavirus crisis, it announced in May that it would triple VAT and halt a cost-of-living monthly allowance to citizens.

The austerity push underscores how Saudi Arabia’s once-lavish spending is becoming a thing of the past, with the erosion of the welfare system leaving a mostly young population to cope with reduced incomes and a lifestyle downgrade. Shopping malls in the kingdom have drawn large crowds in recent days as retailers offered “pre-VAT sales” and discounts before the hike kicks in. A gold shop in Riyadh told AFP it saw a 70 percent jump in sales in recent weeks, while a car dealership saw them tick up by 15 percent.

Once the new rate is in place, businesses are predicting depressed sales of everything from cars to cosmetics and home appliances. Capital Economics forecast inflation will jump up to six percent year-on-year in July, from 1.1 percent in May, as a result. The kingdom also risks losing its edge against other Gulf states, including its principal ally the UAE, which introduced VAT at the same time but has so far refrained from raising it beyond five percent. But the kingdom has few choices as oil revenue declines.

Its finances have taken another blow as authorities massively scaled back this year’s hajj pilgrimage, from 2.5 million pilgrims last year to around a thousand already inside the country, and suspended the lesser umrah because of coronavirus. Together the rites rake in some $12 billion annually. The austerity drive would boost state coffers by 100 billion riyals ($26.6 billion), according to state media. But the measures are unlikely to plug the kingdom’s huge budget deficit. The Saudi Jadwa Investment group forecasts the shortfall will rise to a record $112 billion this year. – Agencies