Looking like a futurist, the IMF Chief, Christine Lagarde, told a forum in Abu Dhabi that oil exporting Gulf countries need to introduce taxes, warning them that low crude prices are likely to stay at the present level for an extended period.
Gulf economies “need to strengthen their fiscal frameworks and reengineer their tax systems by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues,” she said. In this connection, she called for the introduction of value-added tax like harmonised regional VAT and argued that even at a single digit rate, such a tax could raise up to 2 percent of GDP. Greater emphasis was also required on corporate income taxes as well as property and excise taxes. It was pointed out that oil exporters in the Middle East and North Africa last year had lost more than dollar 340 billion in oil revenues from their budgets which amounted to 20 percent of their combined GDP.
The observations of Lagarde, who will head the IMF for another five years, 2016, reflects the cold ground reality and her warning needs to be taken seriously by the policymakers in the oil exporting countries. The period of ever-rising prices of crude oil and its products seems to be over, at least in the foreseeable future, due to the availability of shale oil and the depressing economic environment in the developed and emerging economies that were the main users of oil. The oil glut is likely to accentuate due to the entrance of Iran in the international market and lack of agreement among the exporting countries to limit oil supplies in the world market to a certain level.
Against this background, oil prices have not only fallen by around two-thirds from their most recent peak but supply and demand factors suggest that prices are likely to stay low for the next few years. Crude price has already dropped from over dollar 100 a barrel in July, 2014 to around a dollar 30 these days. According to the International Oil Agency, oil prices are unlikely to rise from current levels before 2017 and the rise, if any, may only be modest.
Lagarde’s advice does not, however, mean that oil exporting countries are not themselves concerned about the evolving situation or not doing anything about the challenges lying ahead. As it is, all the six GCC states have already reduced generous fuel, electricity and other subsidies to cut spending in the face of falling revenues. The residents of these countries are not very happy about these measures but obviously much more still needs to be done by the governments of oil exporting countries to cut their coats according to their cloth which has shrunk by a huge margin. We know that the transition from luxurious or care-free living to subsistence levels would be arduous and painful but there is no plausible alternative.
One option that can be exercised to delay the inevitable is to draw down the foreign exchange reserves heavily. However, would only be temporary and non-sustainable. Continued for long, such a step would only destabilise the economy and make the necessary adjustment more painful when dictated by the harsh realities later on. Lagarde has suggested several measures to rectify the situation but the list of measures need not be the same and could be adjusted according to the circumstances in individual countries. It also needs to be added that Pakistan and several other countries that have become highly dependent on home remittances in recent times have also to rethink their strategies.
Rich oil exporting countries hosting millions of foreign workers attracted by tax-free incomes would have to reduce their development programmes and shed foreign workers. This is likely to diminish the level of remittances and raise unemployment in the labour exporting countries. Therefore, we feel that though the advice of the IMF chief was largely meant for oil exporting countries, several other countries, including Pakistan, also need to take a serious note of the adverse consequences that could ensue if the oil prices in the international market remain depressed.
Source: Business Recorder