Trade and investments are key to the diversification and growth in the GCC. Diversification of the GCC economies, supported by greater openness to trade and higher foreign investment, can have a large impact on growth.
Such measures can support higher, sustained, and more inclusive growth by improving the allocation of resources across sectors triggering technology spillovers, promoting knowledge, creating a more competitive business environment, and enhancing productivity, the International Monetary Fund (IMF) said in a document on GCC’s ‘Trade and Investment’ released yesterday.
The Fund said the GCC countries are open to trade, but much less so to foreign direct investment (FDI).
GCC foreign trade has been expanding robustly, but FDI inflows have stalled in recent years despite policy efforts taken to reduce administrative barriers and provide incentives to attract FDI. Tariffs are relatively low; however, a number of non-tariff barriers to trade persist and there are substantial restrictions on foreign ownership of businesses and real estate. The growth impact of closing export and FDI gaps could be significant.
In most countries, the biggest boost to growth would come from closing the FDI gap—up to one percentage point increase in real non-oil per capita GDP growth. Closing export gaps could provide an additional growth dividend in the range of 0.2-0.5 percentage point.
Boosting non-oil exports and attracting more FDI requires a supportive policy environment in the region.
Policy priorities are required to upgrade human capital, increase productivity and competitiveness, improve the business climate, and reduce remaining barriers to foreign trade and investment.
Most countries in the GCC have made limited progress in diversifying their economies away from hydrocarbons. On average for the region during 2000-2017, oil revenues were close to 80 percent of government revenues, oil exports amounted to 65 percent of total exports, and oil GDP represented 42 percent of total GDP.
This picture was broadly unchanged during 2011–17. There is a need to diversify the economies of the GCC to reduce exposure to volatility and uncertainty in the global oil market, help create private sector jobs, and increase productivity and sustainable growth.
The IMF document noted that a higher foreign trade and investment can play a large role in boosting diversification and growth in the region. It pointed out FDI can boost growth by triggering technology spillovers, promoting knowledge, creating a more competitive business environment, and enhancing productivity in the region.
Further reducing barriers to foreign trade and investment to broaden and upgrade their export bases can help GCC countries better integrate into global value chains and make their economies more productive.
While trade between the GCC and the rest of the world has expanded robustly over the years, FDI inflows into the region have stalled in recent years.
Since 2000, the GCC’s trade in goods and services grew at an average real rate of 7.5 percent almost twice that of real GDP growth, compared with the global averages of 4.8 percent and 3.8 percent, respectively.
The oil price boom during 2003-2008 led to a sharp increase in oil export receipts which in turn led to a significant expansion in imports of goods and services during that period. This growth in trade was interrupted during the global financial crisis, but has rebounded strongly since then, largely driven by solid domestic demand and improvements in global conditions.
On the other hand, after surging in the early 2000s, FDI inflows into GCC countries have stalled, remaining on average below 2 percent of regional GDP.
