Recovering from the dual shock of COVID-19 and the oil price drop

The GCC way

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The dual shock to GCC countries

GCC countries are experiencing a dual shock: the COVID-19 pandemic and lower oil prices. The pandemic is having tragic human consequences. The necessary containment measures are having detrimental effects on the global economy and world trade, with serious consequences for the import-dependent GCC countries. The result is supply-side issues and disruptions to global value chains that are creating production problems in GCC economies. Patterns of demand are changing, with demand overall shrinking. Production and productivity are dropping.

Along with the impact of the pandemic, GCC countries are contending with a fall in oil prices to their lowest levels in 17 years. GCC state revenues are oil-dependent. If the oil price remains at around $20 per barrel for the rest of the year, GCC governments could lose $554 million a day.

The dual shock has slashed oil revenues

This dual shock has hit all parts of the economy and all elements of the economic cycle. The economic system as a whole is at risk the longer these shocks endure.

The dual shock is severely affecting all parts of the economy and the whole economy cycle

The outlook is discouraging. The spread of COVID-19 is likely to keep oil prices low, and reduce global demand for oil. Within the GCC, the necessary containment measures and prudent restrictions are having a serious effect on other economic sectors. In recent years, GCC countries have made considerable efforts to develop travel and tourism. However, Saudi Arabia has now been forced to suspend travel for the Umrah (a pilgrimage that can be done at any time of the year), which attracted some 7.5 million visitors in 20192. Continued travel restrictions could affect the ability to perform the Hajj (the major pilgrimage that must be performed at the end of the Islamic calendar), which brought in around 2.5 million visitors in 20193. Meanwhile, Dubai’s tourism season is experiencing a decline reminiscent of the 2008 crisis.

Travel and tourism are being hit hard

Three action areas for GCC leaders

GCC leaders must act quickly. Their aim should be to contain and minimize the disruption from the dual shock and mitigate the risks, while building capabilities for the eventual recovery and adapting their tactics for economic transformation and sustainable growth.

GCC governments need to take three sets of actions:

1. Mobilize against the pandemic
2. Stabilize by throwing economic lifelines to the population, businesses, and financial institutions
3. Strategize for a sustainable recovery

1. Mobilize against the pandemic

GCC governments are already taking a range of measures to confront the immediate healthcare aspects of the pandemic and to treat those affected by COVID-19. GCC governments must continue to monitor the global and regional spread of the pandemic and constantly review leading practices. They will need to increase the focus on testing and healthcare capacity expansion, which means securing critical supply chain components including ventilators. In addition to causing individual physical suffering, the virus sows chaos in communities by causing a surge in cases that overwhelms the healthcare system, particularly intensive care unit (ICU) capacity, with drastic knock-on effects for others seeking treatment.

Contain

GCC governments are applying steadily more stringent containment measures to limit the spread of the virus. They have enforced such social distancing measures as limiting internal mobility, suspending local and international flights, and setting mandatory curfews in some places. They can supplement these actions by using behavioral science interventions, known as “nudging.” These are simple steps that seek to correct cognitive biases that are not in individuals’ self-interest, such as loss aversion bias, status quo bias, and negativity bias. Nudging has been used successfully in other contexts to improve public health, environmental practices, and even tax compliance. During a pandemic of indeterminate length, nudging can reinforce the message of social distancing, and encourage people to adopt hygienic behaviors and seek timely medical help. Governments can amplify the message by connecting responsible hygiene to cultural and religious norms.

Test

GCC governments must now begin mass testing for residents. Fast-tracked and extensive testing is a critical component of containment, especially for asymptomatic virus carriers. The virus has a long incubation period, which results in infected, often asymptomatic people becoming mobile spreaders. The impact of their spreading becomes apparent only when it is too late, after infection rates and fatalities rise rapidly. Thus far GCC governments, particularly Bahrain and the United Arab Emirates (UAE), have performed significant numbers of tests that have mainly focused on inbound travelers.

Treat

A swift expansion in treatment capacity and the acquisition and production of vital necessary equipment are necessary to enable widespread testing and to treat the large numbers who could fall ill. Health officials need rapidly to audit and monitor the national ICU capacity and the inventory of ventilators and protective personal equipment (PPE). They need to plan for how they will mitigate any shortfall in ICU beds, such as by investing in more ICUs, creating temporary capacity, or by using beds in military hospitals. Governments also need to secure critical supply chain components such as ventilators and PPE (initially for healthcare workers but likely also masks and gloves for the general population). That means supporting companies to use their existing manufacturing capacity and collaborate with the healthcare system to switch to producing ventilators and PPE.

2. Stabilize by throwing economic lifelines to the population, businesses, and financial institutions 

All GCC governments have already allocated substantial sums in stimulus packages ranging from around 2 percent to 30 percent of GDP. As elsewhere, there is a rising tempo of measures as governments seek to protect citizens and support private businesses, indicating that more support is on the way. For example, the UAE first announced an AED1.5 billion ($409 million) package on March 12, 2020, followed with AED100 billion ($27 billion) on March 14, 2020, and AED16 billion ($4.3 billion) on March 22, 2020. Such steps are a recognition by governments that the economy may need multiple rounds of stimulus packages in the coming months, possibly even into next year.

There are three main targets for support: the population, businesses, and financial institutions.

The population: Social safety nets

In terms of the population, GCC governments need to strengthen social safety nets, enhance consumer protection, and pay special attention to vulnerable groups. GCC governments have already taken such measures as temporary exemptions and delays of fees and loan repayment. They have secured the salaries of private-sector workers for the next few months and granted extensions for residency renewals. Governments have taken important consumer protection initiatives such as through public campaigns about consumer rights and banning profiteering for products that are in high demand.

To supplement these actions, GCC governments should focus on vulnerable groups. For example, GCC governments could adopt the approach of some European countries and offer exceptional paid sick leave and extended medical insurance for those sick and quarantined. They can offer direct cash support to low-income residents facing unemployment.

The population: Social safety nets

Businesses: Immediate assistance and conditionality

In terms of businesses, GCC governments need to extend immediate assistance to the seven worst-affected sectors. These are air transport, hospitality and entertainment, banking and finance, construction and real estate, manufacturing of non-food items, retail, and petrochemicals. COVID-19 and the drop in the price of oil has led to significant demand-side and supply-side shocks, which will mean that such sectors as petrochemicals will have to endure large and prolonged economic disruption.

Businesses: Immediate assistance and conditionality
While stimulus packages are being declared, support must be targeted, conditional, rapid, and provide flexibility

All support measures must be consistent with long-term economic priorities. GCC governments can achieve this by attaching conditions that secure employment and social protection, lead to higher output, prepare for economic recovery, and promote long-established goals of innovation and resilience. Assistance packages should avoid unproductive subsidies that have limited impact on GDP or employment; that help uncompetitive sectors and traditional business models, such as those likely to be replaced in the near future; or that will be difficult to reverse.

Support to businesses should be tailored and channeled in a flexible and agile manner. For example, governments can streamline procurement to accelerate the mobilization of demand and resources that will help businesses. They can help businesses through the uncertain climate by providing them with business advisory services. Governments can also ensure that existing development funds and authorities change their processes to respond with assistance based on “business recovery plans” submitted by medium-sized and large businesses.

The demand for “business recovery plans” is critical if GCC governments are to maximize value for money and maintain momentum toward broader national development goals. There should be a checklist that asks about the type and degree of government support required; how the support will be used; the action plan the business will pursue for its main line of activity or service; planned recovery measures; and details of any other form of non-financial support that may be required.

Support to financial institutions

In terms of financial institutions, swift and decisive action is vital to prevent a deepening of economic problems. Measures should allow the financial sector to fulfil its role as a financial intermediary for the real economy in a timely manner. GCC governments have already introduced measures to cut costs on banks, increase the liquidity of financial institutions, support capital markets, and relax restrictions on lending. It is essential to accompany these measures with significant awareness campaigns so that the population and businesses understand that they can have confidence in the financial system, which will have a positive economic influence.

Support to financial institutions

3. Strategize for a sustainable recovery

GCC governments need to prepare for a sustainable recovery. The health emergency will eventually subside. GCC governments therefore need to ensure that their crisis response lays the groundwork for a sustainable recovery that promotes economic diversification and transformation. Governments should be rescuing today’s economy with the goal of building the economy of the future, not restoring the economy of the past. Their strategic efforts should focus on the well-being of the population, through an institutionalized recovery process, capabilities building, and improved communications.

Six action areas for a sustainable recovery

GCC governments will need to move ahead in six areas.

Six action areas for a sustainable recovery

1. Develop macro, fiscal, and labor policies for growth and resilience

  • Strengthen medium-term fiscal frameworks and activate performance-based budgeting, and link it to sustainable development goals
  • Identify alternative forms of revenues to compensate for the drop in corporate earnings and enact tax reforms that promote growth
  • Implement labor market programs that provide employment opportunities including skills improvement and reskilling for the unemployed

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2. Shift vision realization tactics

  • Impose a short-term pause of “pain for gain” policies such as subsidy reforms
  • Shift to impact- and outcome-driven reforms that enhance productivity, sustainability, and resilience in preparation for future reforms
  • Refocus local content efforts and use targeted recovery measures to assist industrial revival, with a focus on building localized and resilient supply chains for critical inputs and goods

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3. Foster innovation

  • Reduce legal and regulatory obstacles to entrepreneurship and industrial renewal
  • Establish post-crisis innovation funds
  • Provide “innovation vouchers” that cover the cost of connecting small and medium-sized enterprises to research bodies and subsequent collaboration
  • Launch research and development funds for innovation sectors and to promote new technology in traditional sectors such as manufacturing, agriculture, and retail

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4. Improve government effectiveness

  • Improve ease of doing business through accelerated business environment reform
  • Provide businesses and the population with one point of access to government services that is enabled by digital technology
  • Use open and big data to improve evidence-based decision making and transparency
  • Reduce the amount of red tape in all government processes

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5. Intensify push for private-sector participation (PSP)

  • Remove governance, legislative, and regulatory bottlenecks to accelerate the rate of PSP in the economy and corporatization of state-owned enterprises, especially in vulnerable sectors
  • Adopt a PSP model that gets the most value for money in terms of current economic conditions and the readiness of sectors to accommodate greater private-sector involvement
  • Consider other forms of funding for private-sector participation, such as funding conditional on outcomes, for example, social impact bonds

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6. Promote trade, open markets, investment, and competition

  • Streamline the regulatory framework
  • Remove impediments to inflow of capital
  • Reduce barriers to open markets
  • Reduce barriers to business operations
  • Facilitate access to capital, especially for small and medium-sized companies
  • Enhance national competitiveness by promoting such innovation sectors as renewable energy, life sciences, digital, and intelligent automation in industry

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Six action areas to build the economy of the future

The COVID-19 pandemic is at its essence a human crisis. Although governments around the world are crafting detailed economic, health, and technical initiatives, they must remember to center their responses on their populations. For GCC governments, this means that they should take action in six areas related to national priorities, expenditures and investments, capabilities, and constituent engagement.

1. Institutionalize the recovery process

  • Establish a dedicated post-crisis recovery unit at the center of government that is empowered to coordinate the response and that reports to decision makers
  • Form a recovery task force consisting of members of the public and the private sectors to ensure that decision makers know about emerging challenges and can hear solutions from those most affected
  • Develop an overarching policy mechanism to ensure consistency among national objectives, roles, responsibilities, resources, and funding
  • Ensure sustained and predictable funding for the post-crisis recovery era
  • Require that government entities develop contingency plans to deal with potential issues during the recovery
  • Reconsider national development priorities, expenditures, and investments in the context of the ongoing crisis and recovery plans

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2. Accelerate processes to assist the recovery

  • Set up units within the government that enable the rapid mobilization of resources and promote quick decision making
  • Institutionalize the streamlining of government procurement implemented during the crisis to enable efficient and timely responses
  • Relax specific regulatory measures that may hinder speedy responses and the rapid mobilization of resources

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3. Focus on the population

  • Encourage urban innovation and experimental labs so that innovation is not confined to the enterprise sector and that there is city-wide innovation that promotes urban renewal
  • Set up platforms that engage with stakeholders so that the government effectively and clearly informs businesses and the population about post-crisis reforms while seeking their feedback on the impact of these policies
  • Create a means to gauge population and business sentiment to spot emerging issues early

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4. Build capabilities

  • Build government foresight capabilities to anticipate economic, healthcare, and social vulnerabilities and that guide response efforts
  • Build data collection and analytics capabilities to consolidate various data sources and take advantage of big and open data to improve decision making
  • Build resilient national policy frameworks and embed supporting capabilities such as risk analytics at the level of the government entity responsible for the framework
  • Build impact assessment capabilities to analyze the impact of the crisis on the economy, the environment, and society to improve the identification of recovery needs

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5. Expand the talent base

  • Form a national public health emergency response team for disaster prevention and protection
  • Launch city- and country-wide events that invite public- and private-sector participants to propose recovery initiatives, with online platforms that play a similar role
  • Provide innovation-based bonuses for successful recovery proposals from government employees

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6. Build improved communication

  • Be proactive in communicating with the population through targeted approaches such as social media messages and random government sentiment checks
  • Create a single government digital outlet for crisis-related communication
  • Obtain support for communications from the top levels of government
  • Enlist cultural, government, and social influencers to champion communications

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Conclusion

The dual shock of the COVID-19 pandemic and lower oil prices will eventually end. By taking decisive steps now, GCC governments can prepare for the recovery and keep their long-term economic development on track. They can lay the groundwork for a sustainable economic recovery powered by diversification and innovation.

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