World Bank country director for the GCC Safaa El Tayeb El-Kogali speaks to Economy Middle East about the findings of the latest edition of the Gulf Economic Update. Referencing the report, she explains why strategic fiscal policies, targeted investments, and a strong focus on innovation, entrepreneurship, and job creation for youth are essential to sustaining growth and stability.
The report titled “Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC”, discusses the effectiveness of fiscal policy in ensuring macroeconomic stabilization and encouraging growth.
The topic is particularly relevant as oil price fluctuations strain budget balances in several countries across the region. Some GCC countries are projected to experience increasing fiscal deficits in 2025, emphasizing the need for understanding the effectiveness of fiscal policy.
What recommendations does the World Bank offer to GCC countries, particularly during this period of uncertainty? Should governments consider cutting spending?
The resilience of GCC countries in navigating global uncertainties while advancing economic diversification underscores their strong commitment to long-term prosperity.
This report recommends that GCC countries prioritize balanced fiscal policies, looking at both the spending and the revenue sides of the coin. The report calls for smart spending. That is, for policymakers to pay attention not just to spending levels, but also to the type of public spending and maximize growth-enhancing one.
Fiscal policy should also be countercyclical — expanding during downturns and consolidating during booms. That said, fiscal policy should be contemplated as a set of policies complementing each other from both the expenditure and revenue side to improve spending efficiency, broadening revenue bases, and maintaining discipline in managing windfalls.
The report forecasts medium-term growth of 3.2 percent in 2025 and 4.5 percent in 2026 across the GCC. What factors are driving these projections?
Growth is expected to rebound due to:
- The phasing out of oil production cuts, which will lift overall output.
- Continued momentum in non-oil sectors, supporting broad-based expansion.
- Positive contributions from net exports, investment, and consumption, reflecting both domestic resilience and gradual external recovery.
What are the short-term and long-term economic risks facing GCC countries?
Short-term risks include:
- Global trade uncertainty, which may reduce demand for exports.
- Oil price volatility, affecting fiscal and external balances.
- Spillover risks from regional conflicts, which could disrupt trade, investor confidence and incoming tourism to the region.
Long-term risks include:
- Limited productivity growth and slow economic transformation, particularly if diversification efforts stall.
- Overdependence on hydrocarbons, leaving economies vulnerable to global energy transitions.
What measures can GCC countries take to mitigate risks associated with global trade uncertainty and a potential economic slowdown?
GCC countries can respond by:
- Accelerating diversification and structural reforms to reduce exposure to hydrocarbon cycles.
- Pursuing revenue diversification, including the introduction of new taxes and broadening non-oil income.
- Strengthening regional trade ties to create more resilient economic linkages within the Gulf and with adjacent regions.
According to the report, government spending can boost non-hydrocarbon output by 0.1-0.45 units per unit of spending, yet government investment shows only a marginal impact at 0.07 percent. This seems counterintuitive. How should GCC governments restructure their spending priorities to maximize economic returns, and what specific sectors or types of investments would constitute ‘smart spending’ in the current economic climate?
It is important to first recognize that government consumption has played a stabilizing role across the region, particularly during periods of economic downturn. It has helped cushion the impact of external shocks and supported domestic demand.
Moreover, public investment spending has contributed to economic growth, especially where it has targeted infrastructure, services, and strategic sectors aligned with diversification goals.
However, to enhance the growth impact of such investments further, a more detailed analysis is needed to understand which types of investments yield the highest returns. This, in turn, depends on the specific economic structure and development stage of each country, including factors such as absorptive capacity, institutional efficiency, and sectoral priorities.
The projections show significant variations in growth trajectories — from Kuwait’s dramatic turnaround from -2.9 percent to 2.2 percent, to Qatar’s expected jump to 6.5 percent in 2026-2027. Beyond oil production cuts, what fundamental economic differences explain these divergent paths, and which country’s diversification model offers the most replicable lessons for the region?
The divergent growth trajectories across the GCC primarily reflect differences in underlying economic structures. While oil production cuts play a role, more fundamental factors — such as varying levels of economic diversification, distinct non-oil growth drivers, and country-specific structural constraints — largely explain the disparities.
Some countries have made greater strides in developing sectors like tourism, logistics, manufacturing, and financial services, while others continue to rely heavily on hydrocarbons.
Institutional capacity, fiscal space, and the pace of structural reforms also differ significantly, shaping each country’s ability to respond to shocks and sustain growth. These variations naturally lead to differing medium-term outlooks. The report highlights Oman’s fiscal consolidation as a noteworthy example despite it having one of the lowest projected growth rates in the region.
Given that other GCC countries face increasing fiscal deficits, what specific elements of Oman’s Medium-Term Fiscal Plan could be adopted region-wide, and why wealthier GCC nations have not implemented similar reforms despite having greater financial cushions?
Oman’s Medium-Term Fiscal Plan is portrayed in the report as a successful case of fiscal discipline, particularly in its ability to reduce public debt and diversify revenue sources following past periods of economic vulnerability. One key outcome of the reform was the reduction of public debt from 68 percent of GDP in 2020 to 35 percent of GDP in 2024.
Key components of Oman’s approach — such as channeling oil windfalls into debt reduction, enhancing spending efficiency, and advancing tax reforms — stand out as replicable strategies across the region. These measures have helped create fiscal space and boost resilience without compromising long-term stability.
Proactive fiscal planning, even in the presence of financial surpluses, is essential to weather future volatility and support sustainable growth.
