Private sector to boost sluggish Gulf economies, says GIC

19 May 1995

Growth in the economies of the GCC states slowed in 1994 despite a slight improvement in oil prices during the year, and prospects for 1995 look equally sluggish, according to a report issued by the Kuwait- based Gulf Investment Corporation (GIC). But the private sector is taking an increasingly important role throughout the region, as governments are encouraged to look at new sources of investment, the report said.

Overall gross domestic product (GDP) for the six Gulf states rose by only 2.6 per cent to an estimated $210,000 million in 1994, down from a 2.8 per cent increase a year earlier. However, rising inflation in the region suggests little real economic expansion last year (see tables below). The main reason for the slowdown, with the exception of Kuwait, was a decline in oil revenues.

Lower revenues led to a reduction in government spending. Total budgeted expenditure by GCC governments was reduced to $71,100 million in 1994, compared with $81,300 million a year earlier. The projected budget deficit for the region was about $18,000 million in 1994, equivalent to 8.6 per cent of the total GDP, although this figure could be lower as some governments are expected to report reduced actual spending.

'The slowdown in economic activity generated directly by governments of the region, however, was partially offset by an apparent pick up in private sector activity in some countries,' the report said. In Saudi Arabia, overall GDP is estimated to have risen by 0.6 per cent, but the private sector expanded by about 4 per cent.

Governments' expenditure was cut back further in 1995, and growth rates will remain slow as a result. This is mainly because oil revenues are not expected to improve this year. However, governments are also being encouraged to squeeze spending because of the fall in foreign assets in recent years, especially those of Saudi Arabia and Kuwait, and a recognition of the need for fiscal discipline.

But governments are also realising the need to provide incentives to encourage the private sector. This includes implementation of mechanisms to boost the inflow of external portfolio investment, mainly in the form of foreign direct investment. 'Ample business opportunities exist in the region for foreign corporations, particularly those willing to take a longer term perspective of the area and capable of providing technology transfer to the Gulf region,' the report said.

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