IMF Report On GCC

Gulf Cooperation Council
Economic Prospects and Policy Challenges for the GCC Countries -

2022
Prepared by Staff of the International Monetary Fund
I N T E R N A T I O N A L M O N E T A R Y F U N D
*The views expressed herein are those of the authors and should not be reported as or attributed to
the International Monetary Fund, its Executive Board, or the governments of any of its member
countries.
GCC: ECONOMIC PROSPECTS AND POLICY CHALLENGES FOR THE GCC COUNTRIES
CONTENTS
EXECUTIVE SUMMARY, __________________________________________________________________________ 4

A. Global Developments and Outlook ____________________________________________________________ 5
B. The Economic and Financial Outlook in the GCC Countries ____________________________________ 9
C. Policy Priorities ________________________________________________________________________________ 24
D. Concluding Remarks __________________________________________________________________________37
BOXES
1. Oil and Gas Market Developments _____________________________________________________________ 7
2. Impact of the Russian Invasion of Ukraine on the GCC ________________________________________ 12
3. Food Security and the GCC ____________________________________________________________________ 14
4. Corporate Sector Vulnerabilities in the GCC ___________________________________________________ 20
5. Digital Transformation in the GCC _____________________________________________________________ 34
FIGURES
1. Global PMIs and GDP Growth __________________________________________________________________ 5
2. Fertilizer and Food Price Indices ________________________________________________________________ 6
3. Global Supply Chain Pressure Index ____________________________________________________________ 6
4. Global Financial Conditions Indices_____________________________________________________________ 6
5. Crude Oil Production ___________________________________________________________________________ 9
6. Real GDP Growth, 2014-2023__________________________________________________________________ 10
7. Real Non-Oil GDP Growth, 2018-2022_________________________________________________________ 10
8. High-Frequency Indicators ____________________________________________________________________ 10
9. Monthly Inflation ______________________________________________________________________________11
10. Food CPI Weight, Food Imports Share of Total Imports and Dependency on Russia-Ukraine
Imports __________________________________________________________________________________________ 11
11. Labor Statistics _______________________________________________________________________________15
12. Fiscal Developments _________________________________________________________________________16
13. Difference of Primary Balance Between 2021 April and 2022 April WEO Projections for
2022-26 __________________________________________________________________________________________ 17
14. Credit to the Private Sector __________________________________________________________________ 18
15. Stock Market Indices _________________________________________________________________________ 18
16. Financial Soundness Indicators _______________________________________________________________ 19
17. Selected Corporate Sector Indicators ________________________________________________________ 21
18. Policy Rates __________________________________________________________________________________ 22
19. Current Account and Net Foreign Assets _____________________________________________________ 22
20. Share of Oil Exports to Total Exports and REER_______________________________________________ 22
21. US Financial Condition Index and Oil Prices __________________________________________________23
22. Spreads and Capital Flows ___________________________________________________________________ 23
23. Oil Price Projections Under Net-Zero 2050 ___________________________________________________ 24
2 INTERNATIONAL MONETARY FUND

24. Energy Subsidies _____________________________________________________________________________ 26

25. Effective Exchange Rates, 2019-2022 _________________________________________________________ 30
26. Diversification Index__________________________________________________________________________ 30
28. Average Trade Centrality Indicator Relative to EM Average __________________________________ 36
27. Value of GCC Exports Within GCC ____________________________________________________________ 36
TABLES
1. Population Fully Vaccinated for Covid-19 ______________________________________________________ 9
2. Selected Economic Indicators _________________________________________________________________ 38
APPENDICES
I. GCC’s Fiscal Policy Responses to Hydrocarbon Windfalls: Past and Present ____________________ 39
II. Inflation Dynamics in the GCC _________________________________________________________________43
III. Impact of U.S. Monetary Policy Decisions on the GCC Economy and the Banking Sector _____47
INTERNATIONAL MONETARY FUND 3

EXECUTIVE SUMMARY1,2
GCC policymakers have managed to quickly mitigate the economic impact of the twin COVID-
19 and oil price shock. Commodity prices have surged, and the outlook is more positive for GCC
countries, with new challenges linked to Russia’s invasion of Ukraine and tighter global financial
conditions expected to have a limited impact on GCC economies. While GCC countries have overall
benefited from higher, albeit volatile hydrocarbon prices, numerous risks still cloud the outlook—
notably a slowdown in the global economy. In this context, the reform momentum established
during the low oil price years should be maintained—irrespective of the level of hydrocarbon prices.
Overall fiscal balances have improved strongly, in line with higher oil prices and receding
effects of the pandemic. The cumulative primary balances are expected to average 25 percent of
GDP during 2022-2026, with the rise in expenditures—particularly on wages—contained so far.
A comprehensive package of policies should be implemented to respond to near-term shocks

and firmly address medium-and long-term challenges:
 Fiscal policy in the near term should avoid procyclical spending, with the windfall from
higher oil prices used to rebuild buffers and strengthen policy space. Given the available
fiscal space, targeted support to deal with shocks that affect the most vulnerable should be
privileged while leveraging on the progress achieved in the provision of targeted social
benefits.
 Medium-term fiscal policy should remain geared towards achieving growth friendly
consolidation to ensure fiscal sustainability and increase savings for intergenerational equity
through a credible rules-based medium-term fiscal framework. while preparing a smooth
energy transition. This should be supported through non-oil revenue mobilization, energy
subsidy phase-out, containment of public sector wages, and increasing spending efficiency.
Proper assessment of the fiscal stance would require full incorporation of the operations of
the sovereign wealth funds, which are increasingly involved in national development.
 Maintaining financial sector stability is essential to sustain strong economic growth.
Overall, financial sectors appear sound, with GCC bank balance sheets shielded from tighter
global financial conditions by a concomitant period of high oil prices and abundant liquidity,
which are facilitating credit expansion. But bank soundness should continue to be carefully
monitored.
 Policies for a sustained private sector-led economic growth and diversification will be
as key as ever. Ongoing structural reforms should be accelerated and distortions reduced,
including by raising female labor force participation, increasing flexibility for expatriate
workers, improving education quality, further leveraging technology and digitalization,
enhancing regulatory frameworks, strengthening institutions and governance, deepening
regional integration, and addressing climate change.
1
Prepared by Jerome Vacher (Lead), Abdullah AlHassan, Yevgeniya Korniyenko, Charlotte Sandoz, Fei Liu, Aidyn
Bibolov, Fozan Fareed, Weining Xin, and Dalia Aita under the guidance of Amine Mati. Editorial support was provided
by Esther George.
2
This paper was prepared for the GCC Ministerial Meeting that took place on October 3, 2022, in Riyadh. It reflects
the information available to IMF staff at this date.

A. Global Developments and Outlook
1. The global economy is under pressure with new shocks and growth stalling (Figure 1).
Global growth contracted in 2022 Q2 by 2 percent, although the Euro area’s growth was positive,
driven by resurgent tourism demand in southern Europe. Although vaccination has significantly
progressed and the latest Covid-19 variants have inflicted less damage on public health, the
pandemic continues to affect economies in various parts of the world, and in some cases with
significant scarring. Lockdowns in China to contain outbreaks of the Covid-19 pandemic have
negatively affected growth and put further pressures on global supply chains. In the U.S., rapid
monetary policy tightening, in response to persistently high inflation, was associated with slowing
domestic demand and cooling housing prices. The combined U.S. dollar appreciation and higher
interest rates has negatively affected capital flows to emerging and developing economies, which
led to increasing spreads on their debt and additional pressures for countries with significant dollar
denominated liabilities. Global growth is projected to slow from 6 percent in 2021 to 3 percent in
2022 and 2.8 percent in 2023.
Figure 1. GCC: Global PMIs and GDP Growth
Sources: Haver Analytics, and IMF Staff Calculations.

Note: GCC PMI reflects unweighted averages for Qatar, Saudi Arabia, and UAE PMIs. AE= Advanced Economies;
EM= Emerging Markets; LIC=Low-income Countries.
2. The war in Ukraine has negatively shocked growth and contributed to higher inflation
globally. The war in Ukraine has exacerbated some developing vulnerabilities and added significant
pressure on oil and gas markets already affected by supply constraints as economies recovered
(Box 1). As the war has significantly raised global geopolitical risks, European economies have been
particularly hard hit by falling growth prospects. It has also put additional pressures on energy and
food supplies resulting in a temporary decrease in global food supplies and increase in the price of
staple foods, in particular in countries dependent on food imports.
3. Inflation has proven to be higher and more persistent than expected. Inflation in
advanced economies—which reached 8.3 percent in August in the US and 9.1 percent in the Euro
area—rose to a new 40-year high. Core inflation has also been elevated, reflecting pass through
from energy prices, supply chain pressures, and labor cost increases. The economic and social

impact of the higher inflation is more pronounced in emerging and low-income economies where
food prices comprise a larger share of the consumer basket as food supply constraints are also
further exacerbated by the war in Ukraine (e.g., for wheat, sunflower oil). Export restrictions that
were implemented in several countries further contributed to the global food price increases. While
they have softened somewhat since their peaks in March, the price of wheat remains 30 percent
higher in June 2022 than in December 2021 and fertilizer prices 17 percent higher than in December
2021 (Figure 2), and are not immune to further shocks (e.g., climate related - like drought - or
energy related for the production of fertilizer). There are also indications that supply chain pressures
have been easing somewhat (Figure 3).
Figure 2. GCC: Fertilizer and Food Price Figure 3. GCC: Global Supply Chain
Indices Pressure Index (GSCPI)
(Dec 2019=100) (Standard deviations from the average value)
Sources: Federal Reserve Bank of New York, Global

Supply Chain Pressure Index
http://www.newyorkfed.org/research/gscpi.html.
Sources: Bloomberg L.P., and IMF staff estimates.

Figure 4. GCC: Global Financial Conditions
Indices
(Standardized)
4. Global financial conditions have
tightened (Figure 4).3 As central banks around
the world increased policy rates to respond to
inflation, the monetary policy cycle has
synchronized globally. However, financial
conditions have tightened more strongly in
emerging markets where increases in policy
rates combined with weaker currencies have
led to higher borrowing costs. Asset prices
have become volatile given the uncertainty
around growth and inflation outlooks and the Sources: Bloomberg L.P, Haver Analytics; and National
Authorities.
future path of monetary policy. Note: The Financial Conditions Indices capture the price of
risk based on a range of variables (see Online Annex 1.1 of
the October 2018 GFSR). An increase (decline) in the index
denotes tighter (looser) financial conditions.
3
Global Financial Stability Report, October 2022 (imf.org)

5. Risks to the global outlook are firmly on the downside.4 The Covid-19 virus is still active
and spreading, while potential variants would pose a threat to the recovery, in particular in countries
where vaccination rates are low. Inflation is high and central banks will have to play a delicate
balancing act of fighting inflation while not overtightening and risk abruptly slowing down growth.
Increases in interest rates would further tighten financial conditions and exert pressures on countries
with high debt, in particular emerging and developing economies already hit by the energy and
food price shocks. A complete halt to Russian gas supplies to Europe in 2022 would lead to severe
economic disruptions in European countries heavily dependent on gas imports from Russia. The war
in Ukraine has already increased geopolitical risks and further fragmented the world economy and
energy markets, with potentially further negative spillover effects on growth.
Box 1. Oil and Gas Market Developments
The global flow of oil and gas has been significantly affected by the Russian invasion of Ukraine. The
global oil market experienced a strong rebound in 2021 as global oil demand recovered and OPEC+ continued
to gradually ease production curbs that were put in place in 2020, with Average Petroleum Spot Prices (APSPs)
prices reaching an average of $69.4 per barrel in 2021. However, global oil prices— which had already
increased significantly as a result of lack of upstream and downstream investment and a steady depletion of
existing inventories— spiked up to highs of $117 per barrel in the first quarter of 2022 spurred by the war in
Ukraine– a level not seen in the last 8 years. More recently, in July and August, oil prices have declined due to
fears of an economic slowdown in advanced economies, lockdowns in China and a strong dollar, but remain at
elevated levels. Oil futures curves show that oil is projected to peak in 2022 and then decrease gradually
reaching $71 per barrel in 2027, close to 2021 levels.
Global oil demand is expected to hit its pre-pandemic level and then jump higher in 2023. However,
there is substantial uncertainty regarding future growth of oil demand considering the uncertain global
economic prospects and possible shifting demand patterns. According to IEA estimates, global crude oil
demand has increased from 94.3 mb/d in Q2 2021 to 98.49 mb/d in Q2 2022 and is estimated to reach 99.7
mb/d by end-2022 and further increase to 101.8 mb/d in 2023. OPEC foresees a surplus in the oil market in
2022 as it revised down its outlook for demand and increased estimates for non-OPEC production (mainly from
Russia) in August. Recent developments have also put to the fore the issue of energy security as supply
constraints have become more evident (e.g., with the modest cut in OPEC+ agreed oil production and the
ongoing discussion about a price cap on Russian oil), but also underlined the need for a fine balance of energy
security with climate mitigation objectives.
Gas markets have also been severely impacted. With Russia being the largest gas exporter, global gas
supplies have experienced major disruptions with regional supply deficits, especially in Europe and the Asia-
Pacific region, also as the gas market tends to be dominated by long term contracts rather than spot
transactions, making adjustments to supply or demand slower (e.g., around 80 percent of Qatar LNG sales are
through long term contracts mainly with Asia). According to recent IMF staff estimates, flows from Russia’s
pipeline have declined by about 80 percent and volume is expected to decline further to even lower levels, by
mid-2024, in line with major European economies’ energy independence goals. The benchmark Dutch TTF gas
price has jumped to an all-time high of $70 per MMBtu in August 2022 due to continued supply shortage from
Russia, Europe’s main gas provider.
4
World Economic Outlook, October 2022: Countering the Cost-of-Living Crisis (imf.org).

Box 1. Oil and Gas Market Developments (concluded)
The impact of the high oil prices and a jump in demand for non-Russian gas is likely to expand the role
of GCC producers in global energy flows. Qatar Energy announced joint-venture agreements with 5 of the
biggest oil companies to develop a $29 billion project known as the North Field East, which aims to increase
Qatar’s annual LNG output from the current 78 mn tons per annum (mtpa) to 110 mtpa by end-2027, and
further to 126 mtpa by 2028. Since the war in Ukraine, Qatar has also signed partnership agreements with
several European countries to increase gas supply to these countries over the medium term. Similarly, the Saudi
authorities had already announced medium-term plans to lift oil production capacity by more than 1 mbpd to
reach over 13 mbpd by 2027 (as well as to develop gas production). According to IEA estimates, with an eye on
energy security Middle East National Oil Companies (NOCs) are the only ones among all regions that are
planning to invest more in oil and gas activities in 2022 as compared to 2019.
_______________________
Sources: Bloomberg L.P, International Energy Agency (IEA); and IMF staff calculations .

B. The Economic and Financial Outlook in the GCC Countries
6. With hydrocarbon prices picking up, Table 1. GCC: Population Fully Vaccinated for
relaxation of social distancing measures and Covid-19*
(As of September 2022)
increased spending in some countries in
2021, GCC economies experienced a broad-
based recovery. Liquidity and fiscal support
above or comparable to what was provided by
most emerging economies, successful
vaccination campaigns, reform momentum and
recovery in oil prices and production – in line
with OPEC+ production agreements - have
helped GCC countries recover swiftly and move Sources: Our World in Data; and John Hopkins
to a more sustained growth (Table 1 and Understanding Vaccination Progress by Country - Johns
Hopkins Coronavirus Resource Center (jhu.edu); and
Figure 5). In 2021 GCC countries grew by
national authorities (Bahrain).
3.1 percent, with the strongest recoveries in *The definition of full vaccinations varies by location and
the UAE and Saudi Arabia (Table 2). In addition vaccine type and is subject to change over time. Some locations
may reach vaccination rates close to or over 100 percent, due to
to the positive shock from the hydrocarbon
population estimates that are lower than the number of people
sector, non-oil GDP benefited in most who have now been vaccinated in that place.
countries from a rebound in the retail, trade
and hospitality sectors (e.g., in the UAE with the tourism related to Expo 2020, in Qatar in
preparation of the FIFA World Cup, but also in Saudi Arabia even though Hajj for international
pilgrims only resumed in mid-2022). In Bahrain, the retail trade and hospitality sectors performed
well but remained below pre-crisis levels despite the reopening to non-commercial traffic of the
Causeway to Saudi Arabia in May 2021. Figure 5. GCC: Crude Oil Production
(Thousand barrels per day)
Economic Activity and Outlook
7. The recovery continues with cyclical

momentum going into 2022 and with the pace
and strength of the recovery varying slightly
across GCC countries. In the first half of 2022,
strong hydrocarbon production has continued to
support rapid economic growth in the region. GCC
economies are expected to grow by a strong
6½ percent in 2022, with the highest growth rates
Sources: IEA; and IMF staff calculations
*IEA numbers are somewhat higher than the numbers
reported by the authorities.

expected in Kuwait and Saudi Arabia, on the back of increased hydrocarbon production but also
dynamic non-oil GDP growth (Figures 6, 7, and 8). In the UAE, the rebound in tourism activities in
the wake of the hosting of the Dubai World Expo and potential spillover from the coming FIFA
World Cup in Qatar should also contribute to a strong non-oil GDP growth for 2022. In Bahrain,
growth is projected to accelerate to 3.4 percent in 2022, with non-oil GDP increasing by 4 percent
mainly driven by strong manufacturing and the full opening of the economy. Qatar’s non-
hydrocarbon growth is expected to reach 4 percent in 2022, supported by favorable hydrocarbon
prices and the start of the North Field expansion project, as well as the World Cup-induced
buoyancy. Its hydrocarbon growth, however, is projected to be modest in 2022 as Qatar is already
producing at capacity.5
Figure 7. GCC: Real Non-Oil GDP Growth,
2018-2022
Figure 6. GCC: Real GDP Growth, 2014-2023
(Percent)
(Percent)
Sources: National authorities; and IMF staff

Sources: National authorities; and IMF staff calculations. calculations.
Figure 8. GCC: High-Frequency Indicators
Source: Haver Analytics; and national authorities.
5
Qatar: 2022 Article IV Consultation-Press Release; and Staff Report (imf.org)

8. Inflation is rising but remains

Figure 9. GCC: Monthly Inflation1/
broadly contained (Appendix II). (YoY, Percent)
Inflation in GCC has picked up from 0.7
percent (y/y) in July 2021 to 3.2 percent
(y/y) in July 2022, mainly driven by higher
food prices (Figure 9). Inflation is expected
to reach 3.6 percent on average this year
(ranging from Saudi Arabia at 2.7 percent
to Qatar and Kuwait at 4 ½ percent and
the UAE above 5 percent). Subsidies and
price caps on certain products (e.g., some
food products, gasoline, electricity and Sources: Haver, National Authorities; and IMF Staff
water), a strong dollar that helps reduce Calculations.
import costs, subdued rent prices amidst 1/ UAE as of December 2021.
higher supply in particular for some segments (e.g., villas), a limited share of food in the CPI basket,
and continued labor market slack (e.g., in Saudi Arabia) have helped contain pressures from supply-
side shocks and higher inflation in trading partners. Over the medium term, inflation is expected to
moderate to about 2 percent as global inflationary pressures abate.
9. Direct spillovers on the GCC economies from the war in Ukraine have been small. With
negligible direct trade or financial links to Russia and Ukraine, except potential limited losses from
few sovereign wealth funds’ investments in Russia, the initial direct impact of the war in Ukraine has
been supportive thus far, mostly via higher Figure 10. GCC: Food CPI Weight, Food Imports
oil prices that helped improve fiscal and Share of Total Imports and Dependency on
external positions (Box 2). Only 2 percent of Russia-Ukraine Imports
GCC food imports are from Russia and (Percent)
Ukraine (Figure 10), and the region has
stockpiled food items and begun to tap new
markets to ensure food security (Box 3),
while providing financial support to
vulnerable countries. Nevertheless, the war
in Ukraine could potentially imply further
adverse spillovers to the region, including
through slower global economic activity
affecting demand for oil in the short term
and inflation increasing as a result of rising
Sources: UN Comtrade; and IMF staff calculations.
and volatile international prices for food
and energy, and additional supply chain disruptions.

Box 2. Impact of the Russian Invasion of Ukraine on the GCC
The main impact for most of the GGC of the war in Ukraine is a spillover through higher
hydrocarbon prices. For instance, preliminary estimates for Saudi Arabia-using past patterns of
government spending—suggest that a $10 per barrel increase in international oil prices could also increase
non-oil GDP by about ½ percentage GCC: Crude Petroleum Export Destination, 2020
points, though this impact could be lower
(Percent of total)
going forward if fiscal expenditures
Total: $188.7B
respond less than in the past to shifts in oil
prices. Second round effects in the near
1
term can adversely affect demand for

crude (and to a lesser extent gas) through
a deeper and wider slowdown in major
economies, though the link would mostly
be through a price impact and not
production as GGC countries mostly export
to Asia. Prices on fuel products are
regulated, limiting the fallout of higher
hydrocarbon prices on consumers (see
Appendix II). However, the fiscal position
Sources: The Observatory of Economic Complexity (OEC),
is still expected to improve significantly,
Harvard University; and IMF staff calculations.
even if accompanied by higher energy
subsidies.
Imports of grain and similar commodities from Ukraine and Russia – both countries not major trade
partners of the GCC - are relatively limited. Russia and Ukraine each accounted for about 2 and
1.4 percent respectively of total GCC
agricultural and food imports in 2020 (but a GCC: Imports of Cereals (2020) 1/
combined 44 percent of imports of wheat,
66 percent of barley). In Bahrain for instance,
Russia and Ukraine represented less than
1 percent of food imports. In Qatar though,
Russia and Ukraine reportedly represented
half of the grain imports before the war (vs.
0.1 percent in Kuwait for instance), and in
Oman 60 percent of wheat imports. On the
other hand, there could also be a positive
impact on non-oil exports, through the local
Sources: OEC, Atlas of Economic Capacity, Harvard University;
phosphate production and fertilizer industry
and IMF.
(e.g., in Saudi Arabia).
1/ Excluding Qatar.
Though the GCC is not insulated from
global price developments, food price inflation (at 6 percent in June) has been contained so far. Food
and beverages account for about 16.4 percent of the CPI with price regulation for food items in some
countries, for example in Saudi Arabia covering several items: wheat flour, barley, some types of bread and
infant milk (the latter recently replaced by targeted programs) and in Bahrain covering meat (lamb and beef)
and flour, amounting to about 0.3 percent of GDP in 2020. Saudi Arabia has also subsidy mechanisms
to support domestic producers of wheat, with overall food and agricultural subsidies at 0.4 percent of GDP.
Several countries in the region also had a prudent stockpile policy, which provided for sufficient stocks of
wheat at the beginning of the year.
___________________
1
Saudi Arabia: 2022 Article IV Consultation-Press Release; and Staff Report (imf.org)

Box 2. Impact of the Russian Invasion of Ukraine on the GCC (concluded)
Financial links mostly through Sovereign Wealth Funds (SWFs) are small, though other risks
(including reputational) could affect local financial and service sectors:
 The Saudi SWF Public Investment Fund (PIF) had developed investment relations with Russia since 2015
(mostly initially with Russia’s Direct Investment Fund (RDIF)) which remained at an incipient stage, with
an exposure at less than ½ percent of its assets under management. Bahrain’s Mumtalakat fund has
Russian exposure of 1½ percent of assets (mainly through RDIF), the Kuwait Investment Authority (KIA)
0.1 percent, UAE’s Mudabala less than 1 percent. Qatar reportedly has investments representing the
equivalent of 9 percent of its GDP in Russian companies (mostly Rosneft and VTB). The UAE GREs’ have
direct stakes in Russian and Ukrainian companies and were working on several PPPs, co-development
projects, and strategic investments.
 Links through foreign direct investment appear also small overall (though the Coordinated Direct
Investment Survey offers limited information).
 Most GCC countries do not have Russian or Ukrainian banks presence. However, since the beginning of
the war in Ukraine some GCC countries (in
Cumulative Capital Flows
particular the UAE) experienced increased
(Since Jan 2020, in million USD)
financial inflows, including into real estate
and digital assets. These developments
should be continuously monitored and
assessed against potential risks. The UAE
is developing a comprehensive legislative
framework to regulate Fintech and related
financial services, and is advancing on
regulations for crypto assets, while all GCC
countries remain committed to AML/CFT
in line with international standards.
 Local financial markets were not affected

in a major way by the start of the war (on Sources: Haver Analytics; and IMF staff estimates.
the contrary, inflows and stocks initially
surged on the back of higher oil prices).
 With regard to tourism and retail trade, anecdotal evidence suggests that only the UAE has a large share
of tourists from Russia and Ukraine.

Box 3. Food Security and the GCC

Soaring food and fertilizer prices, combined with supply bottlenecks, have posed threats to food security
globally. Millions of people globally are at risk of food insecurity, with the World Food Program (WFP)
estimating that up to 345 million people across 82 countries are acutely food insecure or at high risk,
compared to an estimated 145 million in 2019.1
While GCC countries are considered more food-secure per the Global Food Security Index than many
other countries, the region has a relatively high reliance on imported food. In the GCC, about 12 percent
of all imported goods are food products, with Kuwait and Saudi Arabia having higher shares of food
imports. GCC countries import about 85 percent of their food consumption, with cereal imports
accounting for over 90 percent and almost all rice consumption imported.
To preserve food security and ease the pressure on households, governments in the GCC have launched
policy measures, including financial exemptions and credits to farmers and agri-businesses, and
subsidies or regulated prices for selected food items, such as wheat and other cereals. This was also
supported by a food supply strategy - whereby GCC governments have announced the establishment of
a common food supply network among its member states in April 2020 to address the challenges posed
by the COVID-19 pandemic- and prudent policies of advance stocking in individual countries (e.g., for
wheat). These steps have helped preserve short-term food security and avoided some of the more
extreme situations that other parts of the world faced. Preoccupations with food security are not new in
GCC countries, as they reflect the longstanding support to local producers and food supply security. For
instance, following tensions on food prices globally in 2008, Saudi Arabia established the following year
the Saudi Agricultural and Livestock Investment Company (SALIC, majority owned by the PIF) which aims
at achieving food security by providing food products and stabilizing their prices, including through
investments in production facilities abroad.
Nonetheless, ensuring food security goes beyond tackling the immediate challenges and beyond one
nation. The GCC region is playing its role in achieving regional and global food security. In the near
term, providing targeted national and international humanitarian support to vulnerable households is a
global immediate policy priority. In this regard, the Arab Coordination Group (ACG) 2 recently announced
financial support of US$10 billion to overcome regional and international food security challenges. Over
the medium term, lifting agricultural productivity and accelerating climate-resilient agriculture would be
key. That includes helping increase the productivity of local farmers, facilitating imports, reinforcing
supply chains, and encouraging private sector involvement in climate-smart investments in agriculture,
food production systems and technologies.
________________________________
1
Hunger Hotspots FAO-WFP early warnings on acute food insecurity June to September 2022 Outlook | World Food
Programme
2
The ACG currently consists of eleven institutions, five of which are national institutions including the Abu Dhabi
Fund for Development, the Kuwait Fund for Arab Economic Development, the Qatar Fund for Development, the
Saudi Fund for Development and the Iraqi Fund for External Development, and six regional organizations.

10. Despite increases in unemployment rates during Covid-19, GCC labor markets have
weathered the pandemic relatively well, though structural challenges remain. For countries
where more recent data is available, employment of non-nationals seems to be rebounding
somewhat, while employment of nationals has held up better or even increased (Figure 11).
Nevertheless, GCC labor markets still suffer from long-standing structural issues. For instance, labor
markets in the region continue to be fragmented, with large public sectors used as an employment
vehicle for nationals, and a private sector dominated by expatriate workers.6 However, recent
increases in participation rates among nationals are welcome and underscore the need for
continued efforts to modernize labor markets to absorb new entrants. Moreover, despite recent
improvements in female labor market participation in the GCC, significant gaps remain as female
Figure 11. GCC: Labor Statistics
Sources: ILOSTAT, World Bank, National Authorities; and IMF Staff Calculations.
6
Though for most GCC countries there is no publicly available and comprehensive data on the respective level of
wages in the public and private sector, anecdotal evidence suggests that wages in the public sector may have
spillover effects on the wage premium offered to nationals in the private sector. Policies have also been implemented
recently in a number of GCC countries to increase the share of nationals in the private sector and increase their
demand.

participation remains less than half of male participation, and even less in managerial positions, and
is well below the average of emerging markets. 7
Fiscal Developments and Outlook
11. Overall fiscal balances have improved strongly, in line with higher oil prices and the
receding effects of the pandemic (Figure 12). The combination of higher oil prices, the benefits of
earlier expenditure and tax policy reforms (e.g., with the introduction of VAT), and continued non-oil
growth will improve the GCC overall fiscal balances to 7.3 percent of GDP in 2022, which are
expected to remain positive over the medium term. Non-oil primary fiscal balances to non-oil GDP
are projected to improve in 2022 and then decrease in 2023 in line with medium-term consolidation
plans, notwithstanding commitments by GCC countries for supporting increasing costs of living with
additional subsidies and incentives.
Figure 12. GCC: Fiscal Developments
Sources: National Authorities; and IMF Staff Estimates.
7
The share of women in managerial positions reached an average of 16 percent in the GCC but 27 percent in EMDEs,
while only 10 percent of ministerial positions were occupied by women in 2020 against an average of 20 percent in
EMDEs, according to ILO data.

12. GCC commitment to growth-friendly

Figure 13. GCC: Difference of Primary
fiscal consolidation, notwithstanding oil
Balance Between 2021 April and 2022
revenue windfalls, is welcome. The cumulative
April WEO Projections for 2022-26
primary balances have sharply increased and are
(Percent of GDP, Cumulative)
expected to average 25 percent of GDP during
2022-2026 (Figure 13). In response to higher
energy and food prices, governments have utilized
the hydrocarbon windfalls to increase social
outlays to mitigate inflationary pressures, support
the economic recovery, and maintain social
cohesion. While some of the fiscal support
measures lacked targeting, the rise in expenditure
was so far contained. In a break from the past,
public sector wages – despite still high wage bills Sources: National authorities; and IMF staff
calculations.
8
- and government capital expenditure increases
have remained prudent, with a caveat that potential additional capital expenditure may be
undertaken by the rest of the public sector (i.e., SWFs and SOEs) and not captured in a general
government fiscal stance. Energy subsidies are also often recorded off budget (for example through
national oil companies) and this could further distort the assessment of the fiscal stance and the
extent of the support provided.
13. Primary fiscal balances and oil revenue projections suggest that most countries are
expected to save the increase in oil revenues between 2021 and 2022. This is reflected in the
near one-to-one or even greater improvement in the projected overall primary fiscal balance for
GCC countries. Over the medium term, governments in the GCC are expected, on average, to save
about 40 percent of their windfall oil revenues despite the projected decline in oil prices, contrasting
their stance to the procyclical fiscal policies of the past.9 However, these results which indicate
significant progress in the management of hydrocarbon windfalls with respect to the past also mask
some heterogeneity in the conduct of fiscal reforms across the region (Appendix I). Fiscal breakeven
prices10 for all GCC countries (with the exception of Bahrain) are expected to remain well below
observed oil prices in 2022. As these have gone down, this confirms that progress in fiscal reforms
undertaken in the past few years have helped reduce fiscal vulnerabilities to oil price volatility in the
region. Nevertheless, expenditure increases in response to spending pressures after the recent
increase in hydrocarbon prices could limit the gains of those fiscal reforms and return the breakeven
prices to higher levels.
8
In 2021, IMF staff estimates that central government wage bills hovered around 9-10 percent of GDP for Bahrain,
Oman and Qatar, with the highest levels for Kuwait (19 ½ percent of GDP) and Saudi Arabia (close to 16 percent of
GDP). In the UAE (general government), it is estimated at a relatively low 7 ½ percent of GDP.
9
Regional Economic Outlook for the Middle East and Central Asia, October 2022 (imf.org).
10
Breakeven prices are prices that would achieve a zero fiscal balance given the level of hydrocarbon production,
government expenditure and non-oil revenue.

14. The pick-up in hydrocarbon prices has improved somewhat debt sustainability
prospects but continued commitment to fiscal discipline remains key. The GCC average public
debt ratio as a share of GDP should decrease in 2022 to pre-pandemic levels of about 46 percent of
GCC GDP while average debt service burdens (amortization and interest payments) remained
elevated as a result of tighter domestic and external borrowing conditions. Some countries (e.g.,
Bahrain and Oman) are implementing fiscal reforms to address an initially less favorable fiscal
situation, while others (e.g., Saudi Arabia and UAE) continue to pursue prudent fiscal policies in the
short term, while keeping an eye on their medium and long-term fiscal objectives. Overall, high
hydrocarbon prices support healthy fiscal buffers in most GCC countries, though staff estimates
suggest that they could deteriorate over the medium term if fiscal reforms are delayed, particularly
given the challenges of adjusting to a low-carbon global economy.11 Fiscal policies will have to play
a key role in addressing mitigation costs (e.g., by at least eliminating energy subsidies in the next
few years) and support a smooth transition, while energy transition risks are high for the region, and
GCC countries are also particularly affected by adaptation needs.
Financial and Monetary Developments Figure 14. GCC: Credit to the Private
Sector
15. The banking system continues to weather
(y-o-y growth, percent)
shocks relatively well, though limited pockets of
vulnerabilities may yet emerge. Private sector
credit continues its strong recovery at a pre-
pandemic level on average, while GCC asset markets
have been performing strongly (Figure 14 and 15).
Financial soundness indicators (Figure 16) appear
healthy, benefiting from strong buffers before Sources: Haver Analytics; and IMF Staff
entering the crisis and pandemic support measures, Calculations.
with banks’ capital adequacy ratios well above Figure 15. GCC: Stock Market Indices
regulatory requirements. NPL ratios remain around (January 1st, 2021= 100)
4 percent on average, with provisioning near or
exceeding 100 percent while profitability has
improved slightly. The loan deferrals, initially rolled
out as a blanket moratorium on total debt service,
have been phased out in all GCC countries and in
some cases (e.g., Qatar), replaced by more targeted
support. Despite little evidence so far, potential asset
quality deteriorations that could have been masked
by pandemic support measures may yet emerge. In
Sources: Bloomberg L.P; and IMF staff
this context, the strong recovery in the non-oil calculations.
11
See Feeling the Heat: Adapting to Climate Change in the Middle East and Central Asia (imf.org) and A Low-Carbon
Future for the Middle East and Central Asia: What are the Options? (imf.org)

economy is particularly welcome for GCC corporates as they have had their financial performance
deteriorating over time already pre-Covid, leaving them with reduced strength to deal with future
economic shocks (Box 4).
Figure 16. GCC: Financial Soundness Indicators

Gross NPLs To Total Loans
Capital Adequacy Ratio
(Percent)
(Percent) 8
22%
2018 2019 2020 2021 2018 2019 2020 2021
7
21%
6
20%
5
19%
4
18%
3
17%
2
16%
1
15%
0
BHR KWT OMN QAT SAU UAE
BHR KWT OMN QAT SAU UAE
Return On Equity Return On Assets

(Percent) (Percent)
18 2.5
2018 2019 2020 2021
16 2018 2019 2020 2021
14 2.0
12
10 1.5
8
1.0
6
4
0.5
2
0 0.0
BHR KWT OMN QAT SAU UAE BHR KWT OMN QAT SAU UAE
Leverage Ratio Provisions

(Percent) (Percent)
20% 350
2018 2019 2020 2021
18%
300
16% 2018 2019 2020 2021
14% 250
12%
200
10%
8% 150
6% 100
4%
2% 50
0% 0
BHR KWT OMN QAT SAU UAE BHR KWT 1/ OMN 1/ QAT SAU 1/ UAE
Sources: Country authorities; Haver Analytics, and IMF staff calculations.

1/ Total (General +Specific) Provisions.

Box 4. Corporate Sector Vulnerabilities in the GCC
Even before the COVID-19 pandemic hit, corporates in the GCC region were exhibiting a trend of
developing vulnerabilities. Corporate-level financial data on 363 GCC corporates over the 14-year period
between 2007 and 2021 suggests that corporate performance—measured by revenue growth, profitability,
leverage, liquidity, and capital expenditure—has deteriorated over time. 1 The double shock of COVID-19 and
oil prices in 2020 exacerbated these vulnerabilities further, even though monetary and fiscal policy support
helped cushion their impact. Although not at critical levels, profitability, debt service, liquidity, and revenue
have been declining - translating into less buffers to cope with the subdued demand and low levels of
capital expenditure.
While some results vary between countries and industries, the trends were observable throughout
the region, suggesting similar drivers. Profitability, measured as return on equity (ROE), of the median
firm in the GCC fell from 15.2 percent in 2007 to 4.1 percent in 2021. Compared to previous crises (i.e.,
global financial crisis and 2014 oil shock), corporates have significantly lower profitability. Corporate
leverage, measured by total debt over total equity, close to 40 percent, resulted in some built up in 2020
due to the collapse in aggregate demand caused by COVID-19 and the easing of financial conditions.
Historically, corporates in the region had abundant income to pay recurring debt costs. However, the
deterioration in the interest coverage ratio (ICR) since 2015 suggests that corporates are more vulnerable to
cope with tighter financial conditions than in the past. This could potentially result in a deterioration in
banks’ asset quality and materialization of contingent liabilities, and thereby the intensification of the
(sovereign-bank-corporates) nexus could increase risks to financial stability. Liquidity, measured as current
assets over current liabilities, is another dimension in which GCC corporates performance has deteriorated,
with short-term liabilities growing at a faster pace than liquid assets, reducing corporates’ excess capacity to
meet unexpected obligations in the short term. With lower revenue, profitability, and higher debt burdens,
capital expenditure as a share of revenue has been declining in GCC countries, though strongly recovered
after the pandemic crisis especially in the communication and health care sectors.
A strong economic recovery and favorable outlook should lead to improving corporate financial
performance. High oil prices, coupled with planned investments and structural reforms, would further
stimulate non-oil activity, and thereby support a more benign profitability outlook and improve debt service
capacity. Nonetheless, a sharp decline in oil prices or a prolonged period of low growth would run the risk
of sparking pockets of corporate distress while with predominantly flexible interest rates on corporate loans
tightening financial conditions will also exert some pressure.
________________________
1
Data constraints limited the analysis of the performance of SMEs, and of financial vulnerabilities in SOEs compared to
private corporates.

Figure 17. GCC: Selected Corporate Sector Indicators
GCC: Revenue growth GCC: Return on Equity
33 20
Q1 18
28
GCC (Median) 16
23
Q3 14
18
12
13
10
8
8
3 6
-2 4
-7 2
-12 0
GCC: Leverage Ratio GCC: Interest Coverage Ratio

70 18
16
60
14
50 12
10
40
8
30 6
4
20
2
10
0
GCC: Liqudity Ratio GCC: Capital Expenditure

40
2.2
35
2
30
1.8
25
1.6
20
1.4
15
1.2
10
1 5
0.8 0
Sources: S&P Global Market Intelligence; and IMF staff calculations.
16. The impact of tighter global monetary policy conditions is expected to be limited in an
environment of high liquidity and oil prices. GCC central banks raised their policy rates following
the U.S. federal funds rate and further hikes are expected in line with the US monetary policy
tightening cycle (Figure 18). In most countries, a banking structure with low wholesale funding and a
large share of non-interest-bearing deposits is expected to improve banks’ net interest margins,
particularly as corporate sector borrowing is at variable rates reset every 3 to 6

months.12 On the other hand, the banking Figure 18. GCC: Policy Rates
sector in Qatar has a large exposure to (Percent)
foreign liabilities (though have declined
recently) and could be more susceptible to
tightening global financial conditions.13
Staff’s analysis indicates that further
tightening is likely to have a limited impact
on non-oil GDP growth, banks’ profitability,
credit growth and asset quality in the GCC in
a high oil price environment that increases
liquidity in the system (Appendix III).
Sources: Haver Analytics, national authorities; and IMF staff
estimates.
External Sector Developments and
Vulnerabilities Figure 19. GCC: Current Account and Net
Foreign Assets
17. The rebound in oil prices has
(Percent of GDP)
substantially improved external balances,
nevertheless some countries remain
vulnerable to shocks (Figure 19). The average
current account surplus for GCC countries is
expected to improve by a further 8 ½ percent of
GDP in 2022, before decreasing to an average of
13.7 percent in 2023. Higher oil and other
commodity prices (i.e., gas and aluminum) more
than offset the rebounding demand for imports,
and increased prices for some imports (food and Sources: National authorities; and IMF staff estimates.
non-hydrocarbon commodities), with real effective Figure 20. GCC: Share of Oil Exports to
exchange rates (REER) only slightly appreciating Total Exports and REER
(Figure 20). Over the medium term, current (Percent)
accounts are expected to return to levels
consistent with medium-term fundamentals and
desirable policies.
18. Reserve accumulation and net foreign

asset positions are also expected to improve as
governments are saving a large share of
hydrocarbon windfalls. With the current account
for the GCC turning back into a surplus in 2021
estimates.
12
Saudi Arabia: Selected Issues (imf.org)
13

and continuing to improve, net foreign asset Figure 21. GCC: US Financial Condition Index and
positions have significantly strengthened Oil Prices
though in some countries’ outflows (e.g., Saudi 2.5 140
Arabia, Qatar) have contained the improvement 2

120
1.5
(Figure 20). External bond spreads remain 100
1
overall significantly lower and more resilient to 0.5 80
shocks than the average of emerging markets, 0 60
despite strong movements in capital flows -0.5

40
(Figures 21 and 22). Positive external spillovers -1
20
-1.5
from the GCC countries, include the recovery of US FCI Oil price
-2 0
outward remittance flows and increased GCC
financial support to vulnerable countries in the Sources: Bloomberg L.P, Haver Analytics; and IMF staff
Middle East, North Africa and Pakistan (MENAP) estimates.
region.14
Figure 22. GCC: Spreads and Capital Flows
Sources: Bloomberg L.P. Haver Analytics; and IMF Staff Estimates.
Risks to the Outlook
19. There are notable risks and uncertainties around the outlook for GCC countries - in
line with the global outlook. On the upside, higher than expected oil production, sustained high
oil prices, and accelerated implementation of structural reforms and investments could further
improve the outlook. On the downside, risks include another COVID surge, domestically or abroad,
lower oil prices due to lower global activity if the war in Ukraine has lasting effects, eventually
combined much tighter-than-expected global financial conditions, pressures to spend oil windfalls
14
For example, in Saudi Arabia outward remittances (which represent the equivalent of 5 percent of Saudi Arabia’s
GDP) increased by 16 percent in 2021 compared to 2020.

and deviate from fiscal prudence (including outside of the central government budgets), and risks to
the reform agenda including due to inflationary pressures. Further global supply chain pressures
could also constrain the imports of capital equipment and thus hamper the rolling out of
diversification and investment strategies.
20. Climate change and related mitigation policies pose additional risks. While oil
companies in the GCC have signaled their commitment to significant investment supporting a
stabilization of the oil market and to ensure energy security, GCC countries face physical risks from
increasing climate stress (high temperature, drought, etc.) and the associated substantial adaptation
costs. Beyond the current issue of energy security, as the world moves to renewables in the longer
term, the demand for fossil fuels will eventually decline, creating a challenge for GCC countries. It is
also likely that achieving the GCC emissions targets will require a combination of both supply
(restricting investment flows into oil
without CO2 carbon capture and Figure 23. GCC: Oil Price Projections Under Net-Zero
storage and investing hydrocarbon 2050 Scenarios
proceeds in renewables) and demand
policies (e.g., shift to low-carbon
consumption).15 During the energy
transition, as the world moves
towards a net zero emissions target,
imbalances between oil supply
(currently constrained due to past
underinvestment) and demand
(which will decline more gradually)
may lead to more volatility of oil
prices. However, if supply constraints
remain binding, then oil prices could
remain persistently high, a positive
shock to the GCC, notwithstanding Sources: IMF staff projections.
the concomitant need for mitigation
policies (Figure 23).16
C. Policy Priorities
Policies for Potential Growth, Fiscal Sustainability, and Financial Stability
As the economic recovery is now well-established following higher hydrocarbon prices and despite
global economic shocks, policies should address medium- and long-term challenges. Most of these
challenges are not new but made more pressing by the effects of the Covid crisis, previous slump in oil
prices and increasing pressures from climate change. This means also that it is critical to maintain the
15
Emissions targets vary between GCC countries, see paragraph 37.
16
The demand shock reflects the IEA net zero emissions scenario.

reform momentum that has been achieved recently, which should not be derailed by high hydrocarbon
prices.
Policies to Ensure Fiscal Sustainability While Aiming for Higher Potential Growth
21. Higher hydrocarbon prices should provide momentum for enhancing fiscal buffers and
pursuing fiscal structural reforms. The COVID crisis accompanied by an abrupt decline in demand
for hydrocarbon had put pressure on government balance sheets and brought forward medium-and
long-term fiscal policy challenges, stressing the need to avoid procyclical fiscal policies. In the near
term, when fiscal space allows it, as in most GCC countries, targeted support to deal with shocks
(e.g., high energy and food prices) that affect the most vulnerable should be prioritized while
leveraging on the progress achieved during the pandemic in modernizing and digitalizing the
provision of social benefits.
22. To secure fiscal sustainability and meet intergenerational equity needs, GCC
policymakers should carefully manage higher hydrocarbon proceeds to rebuild or stabilize
fiscal buffers and reduce public debt burdens, while avoiding past procyclical patterns.
Additional fiscal efforts might also be needed to meet the increasing challenges posed by climate
change and energy transition as well as facilitate the diversification of economies. These efforts
would include measures to diversify and mobilize non-oil revenue, introduce climate related public
investment management strategies, while at the same time developing and updating green finance
frameworks and markets given the potentially high climate change adaptation, mitigation and
transition costs. The growth-friendly medium-term consolidation efforts should be supported by a
combination of revenue and expenditure reforms, including to further greening the economy.
Priority reforms include:
 Mobilizing non-oil revenue, as the tax gap in the GCC remains high (estimated at 16 percent
of non-oil GDP in 2019) and there is evidence of untapped non-oil revenue potential. Based on
current efforts this would include broadening the tax base by reducing exemptions, revisiting
regressive fees and introducing CIT (such as planned to be implemented in the UAE for June
2023) - including in the wake of signed agreements on minimum taxation, introducing (such as
envisaged in Qatar, Kuwait) and increasing (such as done in Bahrain) VAT taxes and excise tax
rates, as well as developing other forms of taxation (e.g., personal income taxes, property
taxation - both types also effective in curbing inequality).17 Improving the efficiency of tax
collection should rest on strengthening tax administration and proceeding firmly with the
digitalization of processes.
 Containing the wage bill by proceeding with planned public wage and employment reforms
(UAE), rationalization of public wage bill (Qatar), as well as streamlining resources and increasing
manpower efficiency (Bahrain). Efforts undertaken early on in Saudi Arabia to rationalize the
17
Four GCC countries have implemented a VAT: Saudi Arabia (with a general rate now at 15 percent), UAE (at 5 percent), Bahrain
(doubled its rate to 10 percent in 2022) and Oman (5 percent). Saudi Arabia has a corporate income tax (at a rate of 20 percent for
foreign companies with local companies paying Zakat).

wage bill are already bearing fruits and should be sustained and well anchored. These efforts will
also help to incentivize private sector employment.
 Revisiting and gradually phasing out poorly targeted subsidies, alongside measures to
strengthen social safety nets. Energy subsidies
Figure 24. GCC: Energy Subsidies
are fiscally costly and crowd out spending on
(In percent of GDP)
education, health, and other social expenditures
that are critical for inclusive growth (Figure 24).18
Gradually removing energy and utility (e.g.,
water) subsidies will also help to promote
efficient energy and water usage and support
GCC mitigation targets in reducing greenhouse
emissions. This effort (e.g., the aim to eliminate
energy subsidies by 2030 in Saudi Arabia or
Qatar’s energy subsidy reform to reduce
Sources: IMF (2021)
subsidies on diesel and gasoline) could usefully
leverage on the progress made in a number of countries (e.g., Saudi Arabia) on targeting,
streamlining, modernizing and digitalizing the provision of social benefits.19
 Scaling up productive investments and investments in renewables, by improving the

targeting expenditures that will achieve climate mitigation objectives.
23. Structural fiscal reforms should be underpinned by rules-based credible medium-term

fiscal frameworks (MTFFs) with fiscal anchors. Some GCC countries have achieved commendable
progress in this area by developing medium-term fiscal frameworks that clearly incorporate multi-
year revenue initiatives and spending priorities (e.g., Qatar, Saudi Arabia) and by working on the
introduction of performance-based budgeting in the medium-term (Saudi Arabia), but more
complete rollouts are still needed across the region. As well as stronger linkages with budget
planning and execution, the MTFFs should be closely coordinated with medium and long-term
government development strategies and plans and supported by sound fiscal institutions.
Additionally, given the increasing role of GCC Sovereign Wealth Funds, there is a need to enhance
sovereign asset-liability management frameworks closely aligning them with MTFFs. To further
enhance the credibility of fiscal policy, regular public communication of fiscal plans and outcomes,
as well as of the government strategy on oil revenue management and its impact on reserves and
domestic liquidity would be beneficial.
24. Credible fiscal rules will help delink government spending from oil price fluctuations
and will support an appropriate medium and long-term fiscal policy path. These rules should
ideally be derived from a long-term fiscal anchor – e.g., based on the permanent income hypothesis
18
Subsidizing the consumption of fossil fuel has also significant negative externalities that can be captured in
estimates of the implicit and explicit cost of subsidies Fossil Fuel Subsidies (imf.org). The combined cost of those is
substantial in GCC countries.
19

– and offer clear guidance for policymakers and economic agents on the long-term objectives for
fiscal policy (i.e., achieving intergenerational equity, supporting development and diversification
strategies, while at the same time taking into account transition risks related to climate change). 20 A
risk-based fiscal framework that takes into account such long-term challenges will be critical to
ensure long-term fiscal sustainability. Identifying specific measures aimed at achieving levels of non-
oil revenue targets can help make the transition less disruptive. In the near term, spending pressures
tend to move in tandem with the global commodity cycle. Fiscal rules that limit spending growth
can be particularly helpful to build buffers during the upcycle of commodity prices. GCC countries
should work towards establishing such credible fiscal rules and if already being devised, as in Saudi
Arabia, strengthening them for better enforcement and credibility.
25. Sound debt management should continue to support fiscal policy and capital market
development. A strategy that includes lengthening debt maturities, reducing refinancing costs, pre-
financing in favorable times, and building a yield curve in domestic and international markets would
support debt sustainability. Plans to develop a framework for assessing and monitoring guarantees
and other potential contingent liabilities linked to increased private sector participation, including
through PPPs, are important steps forward towards sound debt and fiscal risk management
practices (e.g., in Saudi Arabia), as are steps to build capacity in debt sustainability analysis.
Improved coordination among fiscal authorities (central and local governments, GREs, and SWFs)
especially as entities that are not strictly part of the central government take a greater role in
domestic investment strategies - but also central banks would help to improve cash flow
management (including through treasury single accounts) and strengthen risk management
practices. For example, the UAE’s new Dirham Monetary Framework (DMF) and recent federal debt
issuances will support domestic capital market development but will require strong coordination
between the CBUAE and the federal government.
26. Further progress in transparency is needed to strengthen fiscal governance through:
 Fiscal coverage, which should be expanded beyond the operations of central government in
some GCC countries and reflect a more comprehensive picture of fiscal sustainability as data
limitations on general government statistics and more broadly on public sector balance sheets,
including on off budget subsidies (e.g., for energy, contingent liabilities, GREs’ debt, and Public
Private Partnerships (PPPs), Sovereign Wealth Funds (SWFs)) limit the possibility to accurately
assess the underlying fiscal stance and cloud effective policy making decisions. To fully account
for the investment strategies and realizations of SWFs and strengthen governance and policy
making, more transparency on the SWF operations and flows with the central government
would be important.21
 More regular publication. Regular publication of the pre-budget statements, quarterly budget
outcomes, mid-year review and year-end reports (as in Saudi Arabia) and fiscal adjustment
20
Saudi Arabia: Selected Issues (imf.org) for a discussion of fiscal rules and anchors.
21

target (e.g., Bahrain) significantly increases transparency. It is important to continue these

efforts, including by providing additional details on revenue and expenditure items, continuing
to gradually extend institutional coverage, and reporting on the deviations between budget
outcomes and plans.
 Strengthened disclosure and management of fiscal risks, which will help to enhance the
credibility of budget frameworks. This includes risks related to contingent liabilities, PPPs, and
more broadly commitments that go beyond the central government (for example through
development funds or sovereign wealth funds) and should be ideally integrated in an asset
liability management framework.
 Improved transparency in public procurement, where significant progress has already been
made in some countries (e.g., Saudi Arabia) would enhance fiscal management and assist the
government’s anti-corruption efforts.
Policies for Financial Risk Mitigation and Robust Financial Sectors
27. As financial sectors expand again in the context of high oil prices and liquidity,
maintaining bank soundness is essential to contain systemic risk.22 Overall, financial sectors in
the GCC appear sound and able to accompany the ongoing recovery in the non-oil sector and
longer-term structural transformation, but legacy risks, current stresses and emerging vulnerabilities
need to be managed and anticipated:
 As policy support measures have been withdrawn in most of the GCC countries, underlying
financial vulnerabilities could surface in pockets of vulnerabilities (e.g., in SME financing, real
estate and mortgage lending). Close monitoring of credit standards among SMEs and
corporations needs to be paired with intense supervision of banks and other financial
institutions. This requires detailed on and off-site inspections, including to ensure adequacy of
credit risk assessments and provisioning, and stress-testing. Regular reporting on loans under
the few remaining deferral schemes and the stock of those restructured after support measures
are lifted will remain important in monitoring asset quality performance.
 Specific vulnerabilities potentially emerging, such as in the rapid development of mortgage and
real estate financing and given banks’ growing exposure to construction and real estate loans,
would for instance warrant the development of real estate price indicators to help assess
financial stability risks (e.g., in Bahrain). Given uncertainties and the tightening of global financial
conditions, reduced profits of corporates, credit risk remains a concern, requiring enhanced
supervisor scrutiny, including through regular thematic inspections in banks and continued in-
depth assessments of loan portfolios and provisioning practices. Prudent management of
corporate leverage in the recovery period, in particular in some sectors that may benefit from a
22
Assessing Banking Sector Vulnerabilities in the Gulf Cooperation Council in the Wake of COVID-19 (imf.org)

rapid inflow of funds (e.g., real estate, construction) could allow for more sustainable
developments over the medium term.
 Pre-existing vulnerabilities also need to be addressed, including reducing loan-to-deposit

ratios—where they remain above the regulatory norms—and significant FX mismatches or
reliance on wholesale and nonresident funding (e.g., Qatar).
28. Expediting the strengthening of insolvency and resolution frameworks should be a

priority. Progress has been achieved in some GCC countries (e.g., UAE, Bahrain and Saudi Arabia).
However, continued efforts to strengthen insolvency and resolution frameworks would help banks
deal swiftly with the limited part of the loan books most affected by the Covid crisis, while limiting
any long-lasting effects on growth prospects stemming from weak corporations. Policies to ensure
recognition of impairment and resolution of bankrupt borrowers (while targeting distressed but
viable borrowers) and ensuring adequate bank buffers remain in place could help reduce the length
and severity of any negative credit cycle in the future.
29. Continued support of fintech and digitalization could provide an important source of
growth to the financial sector that needs to be balanced against possible risks. The fintech
sector is growing rapidly in GCC countries with the support of the authorities. In line with its aim to
be a regional fintech hub, the UAE introduced regulatory sandboxes (in 2016 in Abu Dhabi and 2017
in Dubai), while the federal government is developing a comprehensive legislative framework to
regulate Fintech and related financial services, with 7 digital banks recently licensed and 10 Fintech
accelerators put in place. In Saudi Arabia, the Central Bank has launched together with the Capital
Markets Authority the Fintech Saudi initiative in 2018, has granted licenses to three digital banks as
of February 2022 and has established a cybersecurity framework to identify and address cyber risks.
In Bahrain, the Central Bank established a dedicated Fintech & Innovation Unit and introduced a
Regulatory Sandbox encouraging fintech firms whereas in Qatar a National Fintech Strategy was
announced and the Qatar FinTech Hub (QFTH) launched in 2019. Kuwait and Oman have also
introduced fintech regulatory sandboxes in 2018 and 2020 respectively. The innovation drive should
continue to remain balanced against the risks, including to financial stability, arising from new
technologies and innovative fintech business models. Finally, the authorities should continue to
apply a mix of activity- and entity-based regulation proportionate to the size, complexity, and risk of
fintech firms.
30. Continued reforms are needed to further develop financial markets and the non-bank
sector and increase financial inclusion.23 Priority reforms include developing a yield curve,
increasing market liquidity through secondary markets trading and developing domestic corporate
bond markets. There is also a need to focus stock market reforms on enhancing corporate
governance and investor protection, removing restrictions on foreign ownership, and encouraging
financial market competition. Green and sukuk market segments have also the unique potential to
23
Gulf Cooperation Council: How Developed and Inclusive are Financial Systems in the GCC? (imf.org)

contribute to the development of local markets in the GCC, and such issuance (e.g., green bonds
and green sukuk) has been recently developing.
Revive Economic Diversification and Lift Medium-Term Growth and Competitiveness to Ensure
a Smooth Adjustment to a More Sustainable Future
31. Pegged exchange rate regimes remain appropriate for GCC economies despite global
economic volatility and shocks. It is a policy that has been serving GCC countries well by providing
a credible monetary anchor. However, the pegs Figure 25. GCC: Effective Exchange
should continue to be reviewed regularly to ensure Rates, 2019-2022
they remain appropriate and do not hinder (Index, 2010=100)
competitiveness. So far, indications are of a limited
impact of the USD appreciation on competitiveness
as REERs have held relatively steady, largely thanks
to relatively lower inflation in GCC countries
(Figure 25). Overall, the external position of GCC
countries remains broadly in line with or slightly
weaker than medium-term fundamentals and
desirable policies, and GCC countries have overall
adequate buffers to maintain their pegs. Reforms to
deepen money and capital markets and further Sources: EcData; and IMF staff calculations.
strengthen the monetary policy framework should continue to ensure institutions are in place to
support more independent monetary policies in the future if this becomes appropriate. Fiscal
consolidation and competitiveness-
Figure 26. GCC: Diversification Index
enhancing structural reforms will
help strengthen the external
120.00
2020 2000
position further and support the 100.00
exchange rate pegs.

80.00
32. Preserving and 60.00
continuously enhancing
competitiveness remains critical 40.00
for diversification and 20.00
investment, especially in the

context of a global transition to
-
Kuwait Oman Qatar Saudi Arabia United Arab Bahrain

Emirates
lower carbon-intensive
economies. GCC countries have Sources: Prasad A., Refass S., Saidi N., Salem F., Shepherd B., Global Economic
managed to accelerate their Diversification Index 2022. Dubai: Mohammed bin Rashid School of
Government.
diversification efforts across output,
Note: The series are based on a multidimensional index which quantifies
export and revenue dimensions diversification across three angles: trade, output, and revenue as well as an
(Figure 26), though in some cases overall weighted index. An increase in the index is interpreted as an increase in
diversification for the relevant indicator.

FDI inflows remain relatively low.24 The progress can be attributed to the multifocal reforms
undertaken across the region. As the GCC charts its diversification path, a move toward
environmentally sustainable growth will also be essential - with lower expected global demand for
hydrocarbons including from worldwide policies to confront climate change making the
transformation towards more complex products and services even more urgent. With a potentially
important contribution to economic and financial diversification, sovereign wealth funds’
interventions in the domestic economy — including in Giga projects—should continue to be
subjected to rigorous cost-benefit analysis to ensure that risk-adjusted returns remain high and
generate greater private sector involvement.
33. Reforms to address long-standing structural issues, promote competitiveness and

boost non-oil growth continued during the pandemic. The region has weathered the Covid 19
crisis relatively well, with limited scarring overall but structural weaknesses, including over-sized
public sectors in some countries, low female labor force participation, insufficient training and
upskilling of the labor force (in particular, in innovative sectors), low productivity and limited private
sector activity crowded out by dominant SOEs remain as bottlenecks for further progress. Steps
taken to attract private and foreign investment (e.g., Qatar, Saudi Arabia), improve the regulatory
and business environment, align business procedures with international standards and reduce costs
associated with setting up a business are welcome. Opportunities for economic transformation have
also emerged during the pandemic, including through digitalization and climate-related investment,
which have the potential to accelerate diversification and a greener recovery.
34. Good progress has been made in labor market reforms, but more is needed to foster
higher productivity growth and promote diversification. Recent progress includes: (i) changes
to the Kafala sponsorship system in Oman, Qatar and Saudi Arabia that will enhance expatriate
labor’s job mobility, (ii) reforms to raise female labor market participation (e.g., doubling Saudi
Arabia’s woman labor force participation rate in the past three years); (iii) legislations that prohibit
gender-based discrimination in employment (Saudi Arabia, Bahrain and the UAE) and push for a
gender balance agenda through a Gender Balance Council (UAE); (iv) attraction of highly skilled
expatriate professionals through a number of reform efforts, including visa reforms and changes to
employment contracts (Bahrain and UAE) ; (v) digital residency services for expatriate workers and
new employment and training portal (Bahrain); and (vi) introduction of a minimum wage and
abolishment of the sponsorship system for foreign workers (Qatar). Further reforms needed to
boost labor productivity include:
 Encouraging private sector labor force participation of nationals, in particular among

females. Several countries in the region (e.g., UAE, Saudi Arabia) are seeking to develop private
sector employment among nationals. This is critical for enhancing labor productivity and
competitiveness and requires leveling the playing field by removing explicit and implicit barriers
24

for women to enter certain sectors or jobs and by providing more maternity and childcare
support. This also implies lifting barriers to entrepreneurship and small business creation.
 Adopting and implementing more flexible policies for expatriates –– including highly
educated—who are an important part of the labor force and source of talent in the GCC to avoid
abrupt declines in labor supply. More flexibility will also reduce the wage gap between nationals
and expats, which will also encourage firms to hire more nationals.
 Improving the quality of education and training to transform the labor force for the
future. The education sector in the GCC should be reformed to reduce structural mismatches in
labor markets and develop the current workforce by removing skills gaps and better aligning
educational programs with employer needs. Additionally, improving the quantity and quality of
education at all levels, including vocational training for middle-aged workers, will create a more
productive workforce. Furthermore, reducing the public-private wage gap will boost
employment in the private sector, while addressing the productivity-wage gap will ensure
competitive wages.
35. Lifting inclusive potential growth would also require:
 Reducing distortions from public sector intervention that would hinder resource
reallocation and the development of markets. Making sure large-scale public-sector
interventions made domestically primarily through sovereign wealth funds (SWFs) are based on
appropriate project selection to avoid spending that would have low multiplier effects on
growth or even crowd out private investment would be key. Facilitating resource reallocation
within and across sectors, including from non-viable firms to viable ones by further improving
and utilizing bankruptcy frameworks will be key, as well as appropriate training and education
policies.
 Enhancing SME development. Countries like Saudi Arabia have also worked towards
enhancing SME and local content development while strengthening their governance
framework25. Bahrain also announced initiatives under its Economic Recovery Plan including
comprehensive credit and movable collateral registries, new infrastructure (e.g., the American
Free Trade Zone and the aluminum downstream park) and launched a revamped National
Employment Plan to further boost employment of Bahrainis in the private sector.
 Minimizing inefficiencies that accompany industrial policies. To maximize the benefits to

economic growth, incentives should be carefully designed with a focus on transparency and
accountability to address governance vulnerabilities, with special emphasis on export orientation
and diversification rather than import substitution. This should be done with a focus on
technology and innovation, and by holding firms accountable for the support received, such as
on the basis of strict performance criteria. For example, economic and industrial clusters can
make important contributions by helping to attract investment, induce agglomeration effects,
25
Saudi Arabia has also announced the establishment of an SME Bank.

create jobs and boost exports – both directly and indirectly when they succeed in building
linkages with the broader economy and when accompanied by an integrated strategy (including
a conducive business environment, technology upgrading and skills training). But care should be
taken to minimize fiscal risks from tax exemptions by instituting strict exit criteria, sunset clauses
and ensuring incentives are time-bound. Furthermore, other industrial policy instruments such
as local procurement strategies need to be developed jointly with other policies while ensuring
there is no hindrance to foreign competition.
 Enhancing regulations, governance and anti-corruption frameworks to further mobilize

private sector and foreign direct investment in the non-oil sector and raise productivity. This
includes reducing restrictions on foreign ownership, aligning tax treatments of local and foreign
firms, reducing preferential treatments for government related entities, improving transparency
and accountability in the public sector, and further strengthening AML/CLT frameworks.
Progress is being made on anti-corruption (e.g., in Saudi Arabia26 ) and improved governance
frameworks but significant advances are still needed. Though greater transparency of economic,
fiscal and financial data is being gradually achieved, greater data and information availability will
also help in addressing the need for a better business environment and ultimately long-term
diversification.
 Promoting digitalization to prepare for the future of work, enhance productivity and protect
macro-financial stability. GCC countries have acted swiftly to accelerate digitalization during the
pandemic and the digital transformation accelerated by the pandemic will benefit countries,
sectors and firms that invested in digital technology before and during the COVID-19 crisis. GCC
countries have rightly put significant emphasis on digitalization, and this has led to substantial
progress in a number of areas with potential economic impact over the medium term, in a
number of areas including the public and financial sectors (Box 5).
26

Box 5. Digital Transformation in the GCC
Digital technologies are transforming the economic and financial landscape and have the potential to
generate efficiencies and greater productivity, spur innovation and improve services. The COVID-19
pandemic has accelerated the digitalization agenda and has created new opportunities for the digital economy as
an increased number of activities have shifted to online platforms (e.g., e-education, tele-health, digital banks,
virtual courts, and e-businesses). This growing role of digitalization, e-government and e-commerce have the
potential to boost productivity given the young and tech-savvy population in GCC. However, it is crucial to ensure
that proper regulatory frameworks are in place to tackle challenges pertaining to data protection and cyber
security. Digital transformation also bears social dividends. For example, digital adoption can help improve
education and health outcomes, and strengthen households’ resilience to future shocks (as digitalization allows
governments to quickly scale up social assistance programs or enhance the education system’s preparedness to
future pandemics).
ICT adoption and E-government development has accelerated in the GCC and is close to that of advanced
economies. A continued increase in E-government is evident in the region with the UAE ranking 21 in the 2020
UN E-government survey, while most GCC countries are among the top 50, with Saudi Arabia, Kuwait and Oman
moving to very high EGDI group for the first time in 2020. Moreover, the number of individuals with internet
access has moved to more than 95 percent for all GCC countries, which is a level above the average for high-
income countries (89.6 percent).
Digitalization of the financial system is also proceeding at a fast pace with the number of active fintech
companies increasing rapidly. Developing the proper regulatory framework to keep pace with the Fintech
ecosystem should continue to be a priority, including by ensuring adequate consumer protection without stifling
innovation. GCC countries are also currently exploring CBDCs. Reportedly, as of May 2022, Saudi Arabia and UAE
are in the pilot stage of CBDCs with the plan for a possible full launch, while others are either in development
(Bahrain) or research stage (Kuwait, Oman and Qatar). These CBDC projects will require careful monitoring of risks
associated with monetary policy implications (non-interest bearing CBDC), technical constraints (cyber risks and
data protection) and socio-economic challenges (low adoption and financial illiteracy).
GCC countries have embedded digital transformation initiatives in their national visions to diversify their
economies. Saudi Arabia implemented its National Digital Transformation Strategy and accelerated the
digitalization agenda during the COVID pandemic, which led to the adoption of e-Health (Sehati), virtual court
(Najiz), distance learning (Madrasati), and ease of doing business for enterprises (Etimad and Fasah). The UAE has
also launched several digital projects as part of its Vision 2030, including the Dubai Internet City which acts as a
hub for technological innovation to attract ICT companies. Qatar has a similar initiative, TASMU Smart Qatar, that
emphasizes cooperation across sectors as part of its national vision. Bahrain, Kuwait and Oman have also taken
initiatives to further foster their digital transformation agenda including Bahrain’s Digital Government Strategy
2022, Kuwait’s digital roadmap as part of its Vision 2035 and its increased focus on Internet of Things (IoT)
systems and Oman’s e.Oman strategy that focuses on e-Government and ICT infrastructure.

Box 5. Digital Transformation in the GCC (concluded)
Sources: World Development Indicators; World Bank; UN E-Government Survey; CISCO; and IMF staff calculations.

36. Continued GCC integration will support economic and financial development. The
January 2021 Al-Ula Declaration has been welcome and should allow further development of intra-
regional trade, tourism, and financial flows. Cooperation in the context of tensions on food security
and supply chains has further cemented
integration. GCC countries’ trade integration Figure 27. GCC: Value of GCC Exports
with the rest of the world was on an improving Within GCC
trend pre-Covid. Intra GCC exports still (Percentage of GDP)
amounted to a limited share of total exports
though still relatively more diversified than the
trading baskets with respect to the rest of the
world (Figure 27 and 28).27 The implementation
of different tax and customs policies as well as
non-trade barriers call for enhanced
cooperation. Digitalization and the transition
toward a greener economy also provide new
opportunities for regional corporation by setting
common standards and creating a larger
regional market. If integration progresses Sources: EcData; and IMF staff estimates.
further, the longer-term growth gains could be
substantial with significant room to Figure 28. GCC: Average Trade Centrality
enhance intra-GCC trade. Closer Indicator Relative to EM Average
integration paired with further (Excluding crude oil and related products, ratio)
improvements in the business
environment could also attract additional
FDI inflows to the region.
37. Pressing ahead with the

common challenges of climate
adaptation, mitigation, and transition
management is essential to foster
greener growth and address climate
risks. To this end, GCC governments have
Note: This measure is the PageRank centrality and takes into
committed under their Nationally
account the size of exports for any given country, the number
Determined Contributions (NDCs) to of its trader partners, and the relative weight of these partners
reduce greenhouse gas emissions. For in global trade (see Brin and Page 1998 for a description of its
instance, Bahrain and Saudi Arabia computation)
27
The centrality index measures a country’s interconnectedness within the web of global trade, considering the size
of its exports, the number of its trade partners, and the relative weight of these trade partners in global trade (De
Benedictis and others 2014). A higher centrality index implies greater trade integration. The GCC’s role in global trade
has been generally increasing, with the GCC average centrality index greater than the EM average and improving
over time (with the 2019 ratio higher than 2000 for GCC in general).

declared commitments to reach net zero emissions in 2060 and Oman as well as the UAE by 2050. 28
Qatar has committed to a 25 percent reduction of its trend greenhouse gas (GHG) emission by 2030
while Kuwait has committed to cut its emissions of CO2 equivalent by 7 ½ percent by 2035
compared to that of 2015. Governments have also set ambitious targets to derive electricity from
renewables. Achieving national green initiatives will require detailing how these will be reached,
including the magnitude of the investment necessary and feasibility through technology. To deliver
on their commitments and targets, GCC countries will also need to ensure full integration of climate-
related priorities into their macroeconomic policy frameworks while continuing to develop,
mainstream, and scale up green financing. Implementing those policies—including by scaling up
ongoing investment in clean energy sources as well as sustainable infrastructure—would be
essential to finding a balance ensuring energy security through fossil fuel production, predominantly
in the short term, and necessary policies for transition and mitigation. Accelerating the phasing out
of untargeted energy subsidies would be critical in meeting mitigation pledges.
D. Concluding Remarks
38. With higher hydrocarbon prices but increased risks at the global level, policy priorities
depend on the available policy space and should avoid pitfalls of the past. In the near term,
with a subsiding pandemic and a stronger economy in the back of higher but still volatile
hydrocarbon prices, policies will need to remain flexible to respond to economic shocks in a
targeted manner, be they induced by geopolitical, climate related or health developments while
keep an overarching objective of fiscal consolidation and saving hydrocarbon windfalls. With higher
oil prices, the reform momentum should be kept, procyclical spending should be avoided, and the
windfall used to rebuild policy space. Fiscal prudence should be maintained by keeping expenditures
on items such as the wage bill and capital expenditures at their planned level irrespective of higher
hydrocarbon prices. Targeted support should be prioritized, drawing on the progress made in
modernizing social benefits during the pandemic, while identifying fiscal savings from cutting or
reallocating non-priority spending should continue in countries where fiscal space is more limited.
39. Medium-term policy priorities should focus on securing sustainable fiscal positions,
macro-financial stability, and strong inclusive and green growth. Fiscal policy should be geared
toward achieving growth friendly consolidation with the aim to ensure long-term fiscal and external
sustainability. Priority should be given to strengthening fiscal frameworks, further mobilizing non-oil
revenues, and increasing spending efficiency – including when undertaken outside of the budget,
for example through Sovereign Wealth Funds. Overall, financial sectors appear sound and able to
support the recovery and structural transformation, but legacy risks, current stress, and emerging
vulnerabilities need to be managed. GCC economies are particularly vulnerable to risks related to
28
The Middle East Green Initiative, launched in 2021, reflects the regional effort in coordinating an appropriate
climate response. Egypt and the UAE will also lead the coordination of global climate action during the COP
conferences in 2022 and 2023.

climate change be it related to energy transition, climate adaptation or mitigation. Ongoing reforms
to drive up productivity and diversification should be accelerated to meet these challenges.
Table 2. GCC: Selected Economic Indicators1

(October 2022 WEO)
Sources: National authorities; and IMF staff calculations.

1/ GCC aggregates in the form of growth rates or shares of GDP are weighted.
2 Central Government
3/ Central government and estimated net income of sovereign wealth funds.
4/ Federal government and emirates.

Appendix I. GCC’s Fiscal Policy Responses to Hydrocarbon

Windfalls: Past and Present1
Fiscal policies in the GCC region have long been shaped by distinct periods of hydrocarbon windfalls.
During those periods, countries deepened their dependency on oil and gas, increased wages and
hirings in the public sector, expanded social safety nets, and ramped up capital expenditure. However,
since 2014, the region has accelerated its fiscal and structural reforms. To maintain the current reform
momentum, continuing strengthening further fiscal frameworks would be essential.
Looking Back at GCC Fiscal Policies
1. The region witnessed several periods of sharp increases in oil prices (Figures 1a-b). Oil
prices surged in the 1970s, followed by a sharp reversal in the early 1980s and a long period of low
oil prices in the 1990s. Another surge occurred from early 2000s to 2014 (interrupted temporarily
during the 2008/9 financial crisis), before a period of relatively stable oil prices between the 2014 oil
price shock and the COVID-19 crisis in 2020. Since 2021, oil prices have spiked due to demand and
supply factors, as well as recent geopolitical developments. Broadly, the same trends apply to gas
(albeit smoother). To shed some light on how oil prices affected public finances in the GCC region,2
the analysis below is focused on past policy responses during the latest episodes of surging oil
prices (mainly limited to 2002-2008 and 2010-2014 periods because of data availability).
Figure 1a. Real Oil Price Figure 1b. Real Expenditure

(2010 $/bbl)
Sources: National authorities; and IMF staff estimates. Sources: National authorities; and IMF staff estimates.
1
Prepared by Abdullah AlHassan.
2
WEO data span from 1990 to 2021.

2. Higher oil revenues led to large fiscal surpluses, lower debt and substantial financial
buffers (especially during 2002-2008) despite the acceleration of expenditure (Figure 2 and 3,
Table 1).3 The prominent role of hydrocarbon production in the GCC region had in the past led to a
pro-cyclical link between oil prices and government spending (Figure 1b), such that the non-oil
primary balance deteriorated sharply by around 85 and 40 percent in real terms during 2002-08 and
2010-14, respectively. That is because in both periods of oil windfalls (2002-08 and 2010-14),
governments in the region increased wages, public sector hiring, fuel subsidies, social spending
(subsidies and transfers), affordable housing to citizens, and infrastructure spending. Fiscal reforms
were more limited/delayed during those periods.
Figure 2. Percent Change in Real Terms, 2002-08 Figure 3. Percent Change in Real Terms, 2010-14
(GCC Median) (GCC Median)
Sources: National authorities; and IMF staff estimates.

Table 1. GCC: Evolution of Fiscal Indicators 2002-08 and 2010-14

(GCC Median)
3
The analysis is reported both in real terms and as a percentage of non-oil GDP. Procyclical fiscal policies had been
partially masked when measured in percent of non-oil GDP given the significant increase in nominal non-oil GDP
(increasing by around 300 percent and 140 percent on average during 2002-08 and 2010-14, respectively). Also,
there is a base effect (e.g., for non-oil revenue). Furthermore, the analysis is based on central banks’ reserves but due
to data unavailability, it does not consider assets in SWFs which in some GCC countries remain very large.

Is This Time Different?

Figure 4. Difference of Primary Balance
3. Fiscal balances will improve Between 2021 April and 2022 April WEO
considerably in the near term and moderate projections for 2022-26
over the medium term. Due to the significant (Percent of GDP, cumulative)
increase in oil prices between April 2021 and
April 2022 and ongoing fiscal consolidation, the
cumulative primary balances are expected to be
25 percent of GDP higher during 2022-2026 than
projected in the April 2021 WEO. Procyclical
fiscal policies have been avoided for the most
part, with the focus being kept on targeted
expenditures to address the impact of higher
energy and food prices (Table 2).
Table 2. GCC: Announced Measures in Response to High Energy and Food Prices, and Oil
Windfalls (2021-2022)
____________________________
Sources: Announced measures by country authorities.

4. Since 2015, GCC countries have accelerated fiscal and structural reforms to allow a
better management of hydrocarbon related volatility, but more can be done to improve fiscal
institutions and frameworks. The sharp decline in oil prices in 2014 has triggered a sizeable fiscal
consolidation effort in most of the GCC countries, where policymakers have adopted a mix of
spending cuts and non-oil revenue-raising measures (such as the introduction of VAT and/or raising
the VAT rate) to reduce fiscal deficits. All countries have formulated strategic visions, focusing on
reducing the proportion of GDP derived from the energy sector, labor market reforms, women
empowerment, social services reforms, and further oversight of SOEs. Oman and Saudi Arabia have
put in place medium-term fiscal frameworks.
5. Despite these reforms, and given the growing role of SWFs and SOEs, developing
robust sovereign asset-liability management frameworks and enhancing fiscal governance are
paramount in identifying and mitigating sovereign risk exposures. While central governments
have contained capital spending, this has been replaced by increased capital and development
projects spending by the rest of the public sector (i.e., SWFs and SOEs), calling for further reforms to
monitor contingent fiscal risks and making further progress in fiscal transparency beyond the central
government. A robust Sovereign Asset Liability Management Framework should (as a first step) rely
on a comprehensive understanding of the public sector balance sheet (PSBS) that covers entities
beyond the central government, including the Sovereign Wealth Funds and the central bank.

Appendix II. Inflation Dynamics in the GCC1

Inflation in the GCC has remained relatively stable over the past decade and below 3 percent on
average. However, inflation has picked up in several GCC countries since the end of last year, mainly
due to an increase in food and transport prices. An empirical analysis to study the drivers of inflation
suggests that inflation abroad is one of the main determinants of inflation dynamics in the GCC.
Moreover, our estimates also suggest that the recent appreciation of the nominal effective exchange
rate in line with that of the USD appears to shield GCC countries from inflationary pressures.
1. Inflation has remained relatively stable over Figure 1. Inflation and Oil Price
the past decade despite challenges posed by (Average, Percent)
fluctuations in international commodity prices.
Since 2012, average inflation in GCC has been less than
3 percent a year. In the past, positive oil price shocks
have often been associated with increased government
spending resulting from higher oil revenues while
exerting upward pressure on consumer prices. Given
that GCC countries are mostly relying on fiscal policies
and changes in exchange rates do not affect the
volume of overall exports,2 the GCC monetary policy
frameworks targeting a stable exchange rate seem to
estimates.
have contributed to stabilizing inflation.
Figure 2. Retail Sales Prices of

2. Contained domestic energy prices, due to
Gasoline and Diesel
subsidies and price caps, have contributed to
(USD equivalent, including taxes as of
relatively low levels of inflation in recent years.
August 2022)
Retail sale prices of gasoline and diesel remain lower
in GCC countries compared to G20 countries as of
August 2022 (Figure 2). In Saudi Arabia, a cap on local
gasoline prices was put in place in 2021 and electricity
prices have also remained capped, though a step
increase in diesel prices and other fuel products took
place in 2022. In the UAE, diesel prices were frozen by
the Fuel Price Committee after the onset of the
coronavirus pandemic in 2020. The controls were Sources: globalpetrolprices.com; and IMF staff
removed in March 2021 to reflect market movements, estimates.
1
Prepared by Charlotte Sandoz and Fozan Fareed, with the assistance of Abolfazl Rezghi.
2
SAMA, 2016 “Inflation mechanisms, expectations and monetary policy in Saudi Arabia.”

but the levels remain lower than the ones observed in G20 countries. Kuwait’s fuel prices have been
fixed and Oman authorities have also imposed administered prices and subsidies on selected fuel
items.
Figure 3. Food and Beverages Weight in
3. The composition of the CPI baskets can the CPI
also explain the relatively low level of inflation (Latest year available)
in GCC countries to some extent. Countries
where food represents a larger share of
consumption have been feeling the impact of
inflation most strongly. GCC countries have lower
shares of food in their CPI baskets, based on their
consumption patterns, compared to other
countries in the MENA region (Figure 3). Moreover,
contained rental prices and their high share in the
Sources: Haver Analytics, country authorities; and
CPI basket also contributed to low inflation levels IMF staff calculations.
in GCC in recent times. For example, the housing
Figure 4. Food CPI Weight, Food
rental component is about 21 percent of the overall Imports and Dependency on Russia-
CPI basket in Saudi Arabia, which has either stayed Ukraine Imports
constant or even declined slightly in the recent past
amidst higher supply, increased home ownership and
changes in the characteristics of housing demand
(e.g., less for villas which are overrepresented in the
CPI, and more for smaller units and apartments).
4. However, inflation in the GCC has started

to increase since last year, following a similar
trend as the one observed in trading partners,
Sources: UN Comtrade; and IMF staff
while remaining below regional peers. Inflation has calculations.
been on the upward trend, increasing from 0.7
percent (y/y) in July 2021 to 3.2 percent (y/y) in July Figure 5. Monthly Inflation in GCC
2022. There was a pickup in inflation in mid- 2020 (YoY, percent change)
which was mainly driven by inflation in Saudi Arabia
which jumped to over 6 percent (y/y) as a result of
the tripling of the VAT rate to 15 percent in July
2020. As of July 2022, inflation in the GCC ranged
from 2.6 percent (y/y) in Oman to 5 percent (y/y) in
Qatar (Figures 5, 6 and 7).
5. The recent increase in GCC inflation seems

to be mainly driven by food and transport. Food
inflation has increased from 2.2 percent (y/y) in April
Sources: Haver Analytics, national authorities; and
2021 to 6 percent (y/y) in June 2022. While food
IMF staff calculations.

inflation has been on an upward trend, it has Figure 6. GCC: Inflation by Category
remained below MENA peers, which can be (YoY, percent)
explained by the prevalence of administered
prices, subsidies on certain food products,
stockpiling of basic food items (e.g., wheat) and
low share of food imports. The transport basket
also picked up as prices of cars saw a sharp
increase internationally during the past year and
transport services, mainly international transport
by air and travel by sea, also picked up.
6. Given the high import dependency of

Sources: Haver Analytics, national authorities; and
the GCC countries, we use a Global VAR (GVAR) IMF staff calculations.
model to investigate the spillover of global
inflation to the region. The GVAR model incorporates regional and global inflationary pressures as
well as domestic factors such as money supply and effective exchange rate. The model consists of
38 countries covering about 90 percent of the world GDP. The GVAR includes five domestic variables
for each country (real GDP, inflation, growth of money supply, nominal effective exchange rate
(NEER), interest rates), which are endogenous to each economy. Except for the US, a weighted
average of trade partner's domestic variables is entered in the model as foreign variables, which are
treated as weakly exogenous following Dees et al. (2007). For the US model, we only include foreign
CPI and foreign growth of money supply as foreign variable consistent with our weak exogeneity
tests. Oil price and the price of agricultural materials are included in the GVAR as global variables
endogenous to US foreign variables but weakly exogenous to all other countries.
Figure 7. GCC Inflation
Sources: Haver Analytics, national authorities; and IMF staff estimates.
7. GVAR estimations indicate that domestic inflation in the GCC is mainly driven by
imported inflation from its main trading partners, which has been recently pushed upwards
by rising oil and food prices, supply chain disruptions and tensions on the labor market.

Results show that an initial

1 percentage point increase in Figure 8. Cumulative Impulse Response Functions of GCC
inflation abroad leads to a Domestic Inflation to Each Individual Shock after a Year
0.22 percentage point increase (ppt)
in inflation in the GCC based
on historical data (Figure 8).
Given recent global
developments—where foreign
inflation has been driven up by
an unusual supply of shocks
associated with the pandemic
and later on with the war in
Ukraine, inflation in the GCC is Note: Bars are median generalized impulse responses to a 1 ppt increase in
expected to increase in the annual inflation abroad, growth of money supply, or a 10 percent increase
in oil prices, NEER, and agriculture material prices, together with the 15th
coming months. Empirical
and 85th percentile error bands.
evidence also shows that
Sources: Haver Analytics, IFS, and Bloomberg databases; and IMF staff
higher food and energy prices estimates.
would mostly impact GCC
domestic inflation through the foreign inflation channel (higher costs of trading partners) for some
of the reasons mentioned earlier (e.g, caps on fuel prices). For instance, the estimated pass-through
for Saudi Arabia shows that a rise in oil and food prices does not translate, on average, into an
increase in domestic inflation.3
8. The recent appreciation of the nominal effective exchange rate in line with that of the
USD appears to shield GCC countries against inflationary pressures. The recent appreciation of
the US dollar is expected to help contain inflation by reducing import costs. However, over the
medium term, domestic currency overvaluation can hinder economic diversification efforts and
weaken the credibility of the pegs.
3

Appendix III. Impact of U.S. Monetary Policy Decisions on the

GCC Economy and the Banking Sector 1
Central bank policy rates in the GCC mostly follow U.S. policy rates given the pegged exchange rate
regimes, with implications for the overall economy and the banking sector. Our analysis finds that U.S
monetary policy tightening would have a limited impact on the non-oil economy and the banking
sector in an environment of high oil prices and liquidity.
1. The primary objective of monetary policy in GCC countries is to ensure exchange rate
stability. Monetary policy is anchored by the fixed exchange rate of the national currency to the U.S.
Dollar - or in the case of Kuwait, to an undisclosed basket of currencies tilted towards the U.S. dollar
- and open capital accounts. GCC central banks remain committed to the nominal anchor as its
monetary policy objective is to maintain monetary and financial stability to support economic
growth. The exchange rate pegs are maintained by managing the magnitude of short-term interest
rate differentials with U.S interest rates.
2. Monetary policy rates in GCC countries Figure 1. U.S Federal Funds Rates and
tend to move in line with the U.S. federal funds GCC-Wide Bank Rates
rate (Figure 1). Since the start of the pandemic, (Percent)
most GCC centrals banks have moved their policy
rates broadly in line with the U.S. Federal Reserve,
which is consistent with previous U.S. tightening
and easing cycles. The banks’ liability and asset
rates also tend to move strongly with policy rates.2
The spread between these rates (asset and liability
rates) underlines the dynamics behind the margins
of banks. This raises the important question of how
changing U.S. policy interest rates impact the GCC Sources: S&P Analytics; and IMF staff estimates.
economy and the banking sector.
3. Historically, non-oil GDP growth in GCC appears to be more sensitive to U.S. monetary
tightening episodes when oil prices are low. The level of oil prices – through its effect on
domestic liquidity – could potentially dampen or amplify the impact of nominal policy rate changes
on non-oil GDP growth (Figure 2). Specifically, depending on liquidity conditions – associated with
oil prices – market interest rates may deviate from policy rates (Adedeji, 2019). Too abundant
liquidity due to high oil prices could lead banks to supply more loans to other financial institutions.
This in turn could put downward pressure on banks’ funding costs and prompt them to pass it on to
borrowers in the form of lower undesired divergence with policy transmission. In this regard,
1
Prepared by Fozan Fareed and Nordine Abidi.
2
The liability rate is defined by banks’ interest expense scaled by interest-bearing liabilities whereas the asset rate is
measured as total interest income scaled by interest earning assets.

monetary policy tightening that Figure 2. Monetary Policy Tightening, Oil Prices, and
coincides with increased liquidity Non-Oil GDP Growth
associated with higher oil prices could
tend to have a more limited growth
impact. While the opposite would be
the case if monetary tightening is
accompanied by lower oil prices and
less liquidity.
4. The main objective of this

annex is to provide empirical
evidence on the impact of U.S.
monetary policy decisions on the
GCC economy and its banking sector.
First, we analyze the impact of U.S.
Sources: Haver Analytics, national authorities; and IMF staff
monetary policy tightening on GCC’s calculations.
economic and financial variables using
a panel vector autoregression (panel-VAR). In the baseline specification, following IMF’s 2014
Spillover Report (IMF, 2014), the dependent variables include non-oil GDP growth, stock market
indices and long-term sovereign bond yields. Control variables in this specification include the U.S.
effective Fed Fund rates, the Chicago Board Options Exchange volatility index (VIX- as a measure of
global uncertainty), domestic inflation and oil prices. The dynamic relationship between the
dependent variables (Y) and control variables (X) is modeled as follows:
𝑌, = 𝐴 𝑌 , + 𝐵 𝑋 + 𝑢 ,
Table 1. Overview of Past Fed Tightening Actions

First Initial FFTR Final Final FFTR Total U.S. GCC Non- GCC
Tightening Target (%) Tightening Target (%) Tightening Business Oil GDP Median
Action Action (percentag Expansion response * Non-Oil
e points) Peak GDP
response *
31-Mar- 8.5 Aug. 9, 1984 11.5 3 N/A 0.04 -0.06
1983
29-Mar- 6.5 16-May- 9.81 3.31 Jul-90 2.98 3.08
1988 1989
Feb. 4, 1994 3 Feb. 1, 1995 6 3 N/A 4.58 3.5
30-Jun-1999 4.75 16-May- 6.5 1.75 Mar-01 5.14 4.43

2000
30-Jun-2004 1 29-Jun-2006 5.25 4.25 Dec-07 11.88 12.90
Dec. 16, 0.00-0.25 Dec. 19, 2.25-2.50 2.25 Feb-20 -1.00 1.17
2015 2018
Sources: Federal Reserve Board of Governors, Federal Reserve Bank of St. Louis and NBER.
Note: “N/A” indicates that a recession didn’t follow the tightening episode.
*Average three years growth (from the final year of tightening plus two years)

5. We estimate this model using quarterly data covering the period 2018Q1-2021Q4.
With a small sample size and limited time dimension, we report 6-month average responses, instead
of average responses over a longer horizon. The time span is determined by the availability of
sovereign yield data. Long term sovereign bond yields in GCC are proxied by bonds ranging from 5-
to 13-year maturity. The average time to maturity of sovereign bonds in the sample is less than 10
years.3
6. The VAR estimates suggest that Fed

Figure 3. Impact of a 100 bps Fed
tightening has limited effect on non-oil economic
Tightening on Non-Oil GDP and Equity
activity, particularly in a high oil price
Markets in the GCC
environment. When oil prices are less than a certain
(Percent)
threshold, monetary spillovers to GCC get amplified.4
Our estimates suggest that a 100 basis points hike in
the Fed rate when real oil prices are below $45
reduces non-oil GDP growth by about 0.3 percent in
GCC (Figure 3). In contrast, the effect of Fed
tightening is negligible when oil prices are high.
Moreover, equity prices drop by about 0.8 percent
when oil prices are low and increase by about
1 percent when oil prices are above the $45
threshold. These results are statistically significant at a
5 percent level except when oil prices are high for
Note: the bars represent the average six-month
non-oil GDP. Therefore, in the current environment, response. The interval denotes 95% confidence
high oil prices will likely mitigate spillovers from U.S. interval
monetary policy normalization to GCC economies. These findings confirm the limited adverse effects
of US monetary policy tightening cycles on GCC non-oil GDP, especially when oil prices are high.
7. The transmission channels from U.S. monetary policy to GCC economies are likely to
depend on oil prices. Indeed, liquidity swings – due to oil price volatility – could complicate the
implementation of monetary policy, with liquidity imbalances reducing the pass-through of policy
rates to market rates. For instance, market interest rates may increase to a larger extent than
normally entailed by policy rates if oil prices and liquidity decline, with banks in turn charging higher
rates for loans, slowing down the demand for credit and consequently economic growth (Figure 4).
3
This method was also used in the recent REO, April 2022. This is similar to Adedeji et al. (2019) and Giovanni and
Shambaugh (2008) who use foreign interest rates as exogenous variables. IMF (2014) decomposes the drivers of the
US 10-year Treasury yield into money and real shocks.
4
For the choice of the threshold, see IMF (2019).

Figure 4. Oil Prices and Monetary Policy Transmission Channel
Implications for the Banking Sector:
8. The banking sectors in GCC Figure 5. Deposit Fraction of Total Liabilities

countries vary in terms of their deposit (Percent)
mix and prevalence of non-interest-
bearing deposits. While deposits dominate
Saudi banks’ liability structures, non-deposit
liabilities such as wholesale funding are
relatively important for banks in Kuwait, and
Bahrain (Figure 5). Moreover, there is a
significant heterogeneity across countries
with respect to the share of non-interest-
bearing deposits (Figure 6). In the case of
Saudi Arabia, more than 60 percent of
deposits are non-interest bearing, whereas
this percentage is quite low for other
countries such as Kuwait, Qatar and Oman. Sources: Fitch Connect, and IMF staff calculations.
Banks with a high proportion of non-
interest-bearing deposits are likely to be well positioned to benefit from the interest rate hikes.
Similarly, banks with a low proportion of loans repricing are more likely to be adversely affected by
the U.S. monetary policy tightening.5
5
Banks with a high proportion of mortgage lending at fixed rates are more likely to be impacted by Fed tightening
(Fitch, 2022).

9. Following IMF (2019), we analyze the

impact of U.S. monetary policy tightening on the Figure 6. Proportion of Interest-
banking sector using a panel fixed effects model. Bearing Deposits (2020)
We exploit bank-level panel data from 2003-2021 to
isolate the impact of U.S. monetary policy tightening
on banks funding costs, asset rates, credit growth,
profitability, and asset quality.
10. Our estimates suggest a significant pass

through from U.S. interest rates to GCC banks’
liability and asset rates. Results in Table 2 suggest
that when U.S. rates rise by 100 basis points, GCC
banks’ liability rates rise by about 40 basis points and
their asset rates by close to 35 basis points.6 However,
Sources: S&P Analytics; and IMF staff
as with any empirical analysis, it is difficult to isolate calculations.
the effect of changes in policy rates from other
changes to the macroeconomic environment. In the context of the GCC, the regressions do allow us
to account for other important factors such as shocks to oil prices or global financial market
developments. These findings could be explained by the fact that banks in GCCs have a relatively
high share of variable-rate loans, which allow increases in banks’ funding costs to be swiftly passed
on to customers.
Table 2. Pass-through from US Rates to GCC Bank Rates

(1) (2) (3) (4) (5) (6)
VARIABLES Δ Liability Δ Liability Rate Δ Liability Rate Δ Asset Rate Δ Asset Δ Asset
Rate Rate Rate
Δ Federal Funds Rate 0.369*** 0.433*** 0.402*** 0.320*** 0.380*** 0.352***
(0.035) (0.042) (0.044) (0.037) (0.040) (0.043)

Δ Oil Price ($) 0.077 0.113 0.090 0.122
(0.122) (0.121) (0.126) (0.131)
Log (Uncertainty Index) 0.495*** 0.499*** 0.479*** 0.482***
(0.106) (0.105) (0.101) (0.101)
Crisis Dummies Yes Yes
Bank F.E. Yes Yes Yes Yes Yes Yes
Constant 0.001 0.006 0.088 -0.023*** -0.019*** 0.204***
(0.002) (0.004) (0.080) (0.002) (0.004) (0.026)
Observations 919 919 919 973 973 973
R-squared 0.153 0.169 0.176 0.131 0.147 0.154
11. Despite substantial differences in funding structures, banks’ profitability seems to be

insulated from shifts in U.S. policy rates. Our results suggest that the impact of tighter U.S
monetary policy on banks’ profitability is statistically insignificant (Table 3). Regressions controlling
6
We also find similar results using changes in country-specific policy rates as the independent variable instead.

for bank and country time-invariant characteristics, oil prices and the Chicago Board Options
Exchange Volatility Index (VIX), which reflects global uncertainty, confirm that an upward shift in
interest rates is not significantly associated with net interest margins of banks. Overall,
notwithstanding the differences in funding structures, bank profitability is likely to remain insulated
from shifts in nominal policy rates.
Table 3. Pass-through from US Rates to Banks’ Profitability

(1) (2) (3) (4)
VARIABLES Δ NIM Δ NIM Δ NIM Δ NIM
Δ Federal Funds Rate -0.001 -0.002 -0.011 -0.025

(0.021) (0.022) (0.024) (0.027)
Δ Oil Price ($) 0.058 0.075
(0.061) (0.062)
Log (Uncertainty Index) -0.026 -0.024
(0.054) (0.054)
Bank F.E. No Yes Yes Yes
Crisis Dummies No No No Yes
Constant -0.053*** -0.009*** -0.013*** -0.126***

(0.011) (0.001) (0.004) (0.036)
Observations 919 919 919 919

R-squared 0.000 0.029 0.031 0.039
12. Historically, there has been a Figure 7. Private Sector Credit Growth in GCC and
limited impact of monetary policy Monetary Policy Tightening
tightening episodes on credit growth
in periods when oil prices were high.
Despite tightening episodes during
2004-2007, credit growth remained
strong as oil prices were at relatively
high levels (Figure 7). Regression results
at the bank level also suggest that Fed
tightening does not impact credit
growth and asset quality, which may be
another channel explaining the lack of
adverse impact on non-oil GDP growth
(Table 4). We find that credit growth is Sources: Haver Analytics, national authorities; and IMF staff
not affected even for banks with a calculations.
higher pass-through.7 Similarly,
7
We construct a measure of the overall sensitivity of bank liabilities/assets to changes in U.S. monetary policy at the
bank level: liability/asset pass-through (LPT). We estimate LPT using bank level regressions in which the dependent
variable is the change in the bank’s liability/asset rate, and the independent variable is the change in the U.S. Federal
(continued)

regarding asset quality as measured by the change in non-performing-loans, we also do not find
any significant impact of U.S. monetary policy tightening. This result holds even for banks with a
higher liability pass-through and when oil prices are low.8
Table 4. Pass-through from US Rates to Banks’ Credit Growth and Asset Quality
(1) (2) (3)
VARIABLES Δln(Credit) Δln(Credit) Δ(NPLs)
Δ MP 0.145 0.330 0.026
(0.290) (0.427) (0.058)
(Δ MP)*(LPT Dummy) 0.046 -3.395
(0.316) (2.537)
(Δ MP)*(LPT Dummy)*(Oil Dummy) -0.057 3.328
(0.492) (2.522)
Constant 0.703 -1.219 0.498
(0.510) (1.282) (0.339)
Bank F.E. Yes Yes Yes
Crisis Dummies No Yes Yes
Other Controls Yes Yes Yes
Observations 778 778 934
R-squared 0.110 0.113 0.111
Funds Rate. LPT is likely to link closely with the interest-bearing fraction of deposits in countries where deposits
dominate but may differ from the interest-bearing fraction of deposits in other GCC countries.
8
See Saudi Arabia: Selected Issues (imf.org) for a detailed discussion on the calculation of passthroughs.

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Gulf Cooperation Council

Economic Prospects and Policy Challenges for the GCC Countries -

Prepared by Staff of the International Monetary Fund

EXECUTIVE SUMMARY, __________________________________________________________________________ 4

2 INTERNATIONAL MONETARY FUND

24. Energy Subsidies _____________________________________________________________________________ 26

INTERNATIONAL MONETARY FUND 3

A comprehensive package of policies should be implemented to respond to near-term shocks

4 INTERNATIONAL MONETARY FUND

A. Global Developments and Outlook

Figure 1. GCC: Global PMIs and GDP Growth

Sources: Haver Analytics, and IMF Staff Calculations.

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Sources: Federal Reserve Bank of New York, Global

Sources: Bloomberg L.P., and IMF staff estimates.

6 INTERNATIONAL MONETARY FUND

Box 1. Oil and Gas Market Developments

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Box 1. Oil and Gas Market Developments (concluded)

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B. The Economic and Financial Outlook in the GCC Countries

7. The recovery continues with cyclical

INTERNATIONAL MONETARY FUND 9

Sources: National authorities; and IMF staff

Figure 8. GCC: High-Frequency Indicators

Source: Haver Analytics; and national authorities.

10 INTERNATIONAL MONETARY FUND

8. Inflation is rising but remains

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Box 2. Impact of the Russian Invasion of Ukraine on the GCC

term can adversely affect demand for

12 INTERNATIONAL MONETARY FUND

Box 2. Impact of the Russian Invasion of Ukraine on the GCC (concluded)

 Local financial markets were not affected

INTERNATIONAL MONETARY FUND 13

Box 3. Food Security and the GCC

14 INTERNATIONAL MONETARY FUND

Figure 11. GCC: Labor Statistics

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Fiscal Developments and Outlook

Figure 12. GCC: Fiscal Developments

Sources: National Authorities; and IMF Staff Estimates.

16 INTERNATIONAL MONETARY FUND

12. GCC commitment to growth-friendly

INTERNATIONAL MONETARY FUND 17

18 INTERNATIONAL MONETARY FUND

Figure 16. GCC: Financial Soundness Indicators

Return On Equity Return On Assets

Leverage Ratio Provisions

Sources: Country authorities; Haver Analytics, and IMF staff calculations.

INTERNATIONAL MONETARY FUND 19

Box 4. Corporate Sector Vulnerabilities in the GCC

20 INTERNATIONAL MONETARY FUND

Figure 17. GCC: Selected Corporate Sector Indicators

GCC: Revenue growth GCC: Return on Equity

GCC: Leverage Ratio GCC: Interest Coverage Ratio

GCC: Liqudity Ratio GCC: Capital Expenditure

Sources: S&P Global Market Intelligence; and IMF staff calculations.