How Does COVID-19 Impact Gulf Economies?

The traditionally oil-backed economies of the Gulf have experienced a growth stunt after the COVID-19 pandemic, but in what way does the rentier state theory affect this?

The brutal reality of COVID-19 has wrecked world economies in the few months of its existence. The case of Gulf countries is especially noteworthy, given the uniquely disadvantaged structure of the “rentier state”- a political science term used to categorize countries primarily relying on external income. Expanding sources of income and economic activity, otherwise known as “economic diversification”, is a subsequent challenge in the region. A preceding decrease in oil prices only makes matters worse amidst the crisis. According to International Monetary Fund chief Kristalina Georgieva, the COVID-19 aftermath could inflict damage even worse than the 2009 Financial Crisis; damage worth trillions of dollars (“IMF Warns Coronavirus,” 2020).

Aviation, one of the region’s younger endeavors and exponentially growing industries, was among the first to experience shock. In countries such as the UAE, the General Civilian Authority had announced the complete suspension of passenger flights (Shirka, 2020). This decision was expected to cause significant losses not only for Dubai International Airport, the third busiest in the world, but also the world-renowned Emirates Airlines. Losses for airlines in the Middle East exploded within a week- from $100 million to $7 billion (Batrawy, 2020). Keeping in mind companies of all ten highest-grossing airline routes in the Middle East are Gulf-based: Emirates, Etihad, and Saudi Arabian Airlines (Mack, 2019). Aviation endured losses even before flight suspension, meaning industries like tourism could regain regular activity only when confidence in travel is restored.

Tourism as an industry that perfectly complements aviation- thus, earning its significant socio-economic influence. Combined, both economic activities are worth $47.4 billion of the UAE GDP and were expected to quadruple in the next 20 years (“Aviation and Tourism,” 2020). However, disruptions in travel are expected to reduce visitors, impacting all branches of hospitality drastically. Worldwide events such as Bahrain’s Formula One Grand Prix, Dubai World Cup Horse Race, and Saudi Arabia’s 2020 census have also been delayed until further notice. In the forefront lies the unfortunate delay of EXPO 2020, a much-anticipated opportunity for Dubai, which has now been postponed to October 2021. Saudi Arabia has also temporarily banned religious tourism (for purposes of Umrah) despite its importance as a major non-oil source of income.

But there are other industries that were hit more than tourism and aviation. The issues of oil demand, export, and barrel prices were consistently moving on a slippery slope even prior to the COVID-19 economic crash. The oil industry has suffered, and its heavy significance meant dragging Gulf economies along with it. Based on estimates of the International Energy Agency, 2020 will see a decrease of 90,000 barrels per day from the previous year (Saidi, 2020). This is a worrying trend considering the ever-growing innovation in sustainable energy or even in oil-extracting methods such as fracking. Countries like Oman are in a particularly worrisome position, as 53% of exports are to countries struggling or have struggled with the virus- most notably China (Ng, 2020). The average fiscal break-even price of Brent oil ($64) as produced by GCC countries is almost less than half of its market value ($30) (Saidi, 2020). Hence, the effects of the COVID-19 are expected to wreck both oil and non-oil sources of revenue in the region.

The primary export product of the region – oil – has retained its importance since the early twentieth century. Naturally, as countries rely more on oil exports, revenue is sourced externally, thereby making it a defining feature of the rentier state. Essentially, Rentier states, which all Gulf countries are, follow a system of wealth allocation and re-distribution to the population. This takes away the need for heavy taxation or internal production and manufacturing. This is especially problematic now, as states become susceptible to severe economic trauma following increasing trends of globalization. Rentier states rely on the “abundant availability of resources”, except fossil fuels (oil and gas in this scenario) are non-renewable (Schwarz, 2008). Oil-income is generously redistributed to the public in the form of services: education, healthcare, and land property, etc.

For example, Kuwait, home of the world’s seventh-largest oil reserves, is still at risk despite the abundance of natural gas (Stebbins, 2019). According to the rentier theory, if 40% of state income is oil-based, but global demand for oil is at its lowest, then the economy will surely suffer. This can be observed in the country’s 60% drop in revenue during the past three years (Mathews, 2019).

In this case, how can Gulf economies be better positioned to avoid similar perils in the future? The first major economic strategy, which is already well-established in importance, is economic diversification.  Gulf countries are rich in hydrocarbon supply, so utilizing revenue for other economic activities will help. In fact, investing in fields that could still operate regardless of the decline in oil prices and demand is the ideal scenario for the GCC. Becoming the world’s largest premium aluminum producer like Dubai’s Emirates Global Aluminum is an example of that (Ega.ae, 2020). Generating income internally could also alleviate dependency on governmental support, whether through introducing taxation or revaluating state budgets.

The COVID-19 outbreak was a true visualization of how globally-integrated our economies have become. In the GCC region, the crisis highlighted the dire need to restructure economic systems. If countries fail to diversify revenue and efficiently reform state-budgeting, then all economic activities of that country will fall with the ever-decreasing oil prices.

References:

Aviation and tourism to contribute $128bn to UAE’s economy in the next 20 years – IATA. (2019, October 8). Gulf Business. Retrieved from https://gulfbusiness.com/aviation-tourism-contribute-128bn-uaes-economy-next-20-years-iata/

Batrawy, A. (2020, March 22). Emirates, One of the World’s Biggest Airlines, Halts Passenger Flights to 13 Destinations Over COVID-19. Time. Retrieved from https://time.com/5807936/emirates-halts-flights-covid-19-coronavirus/

EGA. (2020). About Us. Retrieved March 26, 2020, from https://www.ega.ae/en

IMF Warns Coronavirus Recession Could be Worse Than 2009 Financial Crisis. (2020, March 23). News18. Retrieved from https://www.news18.com/news/business/imf-warns-coronavirus-recession-could-be-worse-than-2009-financial-crisisimf-warns-coronavirus-recession-could-be-worse-than-2009-financial-crisis-2548339.html

Mack, B. (2019, August 25). Revealed: The Middle East’s highest-earning airline routes. Gulf Business. Retrieved from https://gulfbusiness.com/revealed-middle-easts-highest-earning-airline-routes/

Mathews, J. (2019, February 12). Kuwait Must Brace For A World Less Dependent On Oil. Arab Times. Retrieved from https://www.arabtimesonline.com/news/kuwait-must-brace-for-a-world-less-dependent-on-oil/

Ng, A. (2020, March 12). Three ways the coronavirus could have an impact on Middle East economies. CNBC. Retrieved from https://www.cnbc.com/2020/03/12/three-ways-the-coronavirus-could-impact-middle-east-economies.html

Saidi, N. (2020, March 24). The Arab World’s Perfect COVID-19 Storm. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/gulf-cooperation-council-perfect-covid19-storm-by-nasser-saidi-2020-03

Schwarz, R. (2008, January). From Rentier State to Failed State: War and the De-Formation of the State in Iraq. Cairn. Retrieved from https://www.cairn.info/revue-a-contrario-2008-1-page-102.htm

Shirka, H. (2020, March 24). UAE to ground all passenger flights in and out of the country. The National. Retrieved from https://www.thenational.ae/lifestyle/travel/uae-to-ground-all-passenger-flights-in-and-out-of-the-country-1.995963

Stebbins, S. (2019, May 22). These 15 countries, as home to largest reserves, control the world’s oil. USA Today. Retrieved from https://www.usatoday.com/story/money/2019/05/22/largest-oil-reserves-in-world-15-countries-that-control-the-worlds-oil/39497945/