The impact from the introduction of VAT will be different across GCC countries, and it will have the biggest boost on government revenues in the UAE, given its larger consumer base and the importance of retail spending, especially from overseas visitors, according to BMI Research, a Fitch Group company.
Saudi Arabia and the UAE are the two countries that introduced VAT from 1 January 2018, highlighting their respective governments’ commitment to reform on the fiscal front.
The UAE has been a first mover in the region in terms of revenue diversification and fiscal management, having for instance started to cut utilities and fuel subsidies as early as 2015. Meanwhile, hydrocarbons accounted for 38.2% of its revenues in 2016 — the lowest among the GCC.
“With Abu Dhabi and Dubai attracting wealthy visitors, we believe that consumers will be able to absorb higher costs. In Saudi Arabia, the fiscal impact of VAT will be lower, especially as the government introduces cash transfers to the most vulnerable households to limit the negative impact of VAT,” said BMI Research.
The low rate of VAT at 5% suggests that widespread discontent is unlikely in the UAE and Saudi Arabia.
However, in Saudi Arabia, the economy has been struggling in recent years – real GDP growth contracted by 0.5% in 2017 with Saudi consumers having suffered the impact of subsidy cuts and fiscal austerity. Further tariffs could fuel discontent.
Bahrain is expected to follow the UAE and Saudi Arabia by introducing VAT around mid-2018, as reaffirmed by its Ministry of Finance earlier in January. Fiscally, Bahrain is in one of the most vulnerable positions in the Gulf, with BMI Research forecasting a budget deficit of 10% of GDP in 2018 and government debt to reach 84.5% of GDP.
Committing to the introduction of VAT would signal Bahrain’s efforts to put public finances on a healthier footing.
Although Qatar’s implementation of VAT is delayed by the political stalemate in its dispute with neighbouring countries, BMI Research analysts expect the country to move forward with the introduction of VAT, probably in the second half of 2018.
Kuwait and Oman have already announced that they would postpone the introduction of VAT to 2019, and BMI Research analysts said that they believe further delay is likely, given limited political willingness to introduce fiscal reforms in both countries.
In Kuwait, the political gridlock continues to impede economic and fiscal reforms, while the strong opposition in the popularly elected National Assembly is pushing for populist measures, limiting political scope to introduce new taxes such as VAT.
Kuwait will see limited fallout from a near-term failure to introduce VAT. The country benefits from tremendous oil reserves and financial buffers, with the Kuwait Investment Authority – the country’s sovereign wealth fund – holding an estimated US$524 billion worth of assets.
Impact on consumer spending power
Consumer spending power in the GCC could take a hit in 2018 and 2019 due to slower growth in the employment sector and the imposition of VAT, according to research released by Oxford Economics.
The report forecasts that per capita consumer spending power in the UAE would decline by 3.3% and 3.1% in 2018 and 2019, respectively. In Saudi Arabia, it will fall 1% in 2018 and remain static next year.
“GCC households remain constrained by several drags to their spending power, particularly from slower employment and earnings growth largely due to ongoing government spending restraint and the introduction of VAT in 2018,” said Mr Tom Rogers, Associate Director at Oxford Economics.
“Some countries will be able to offset the impact of these measures via targeted support to low-income households such as those recently announced in Saudi Arabia, but others have less fiscal room to manoeuvre,” he said. M