Austerity, subsidy cuts, and diversification are buzz words in the Gulf states right now. While budget deficits are projected across the Gulf Cooperation Council for 2016, the intensity of economic reform has so far been mild and measured. Governments are testing public appetite and consent for reform, what some analysts have termed a renegotiation of the rentier bargain, and perhaps more euphemistically, the Gulf social contract.

With this edition, Market Watch introduces our Economic Reform Barometer, which will monitor initiatives taken by Gulf states as they seek fiscal, monetary, and labor policy changes to meet the challenge of reduced state revenue from natural resources. We will update the barometer on a regular basis. The key trend is a reversal in fiscal expenditure, in a major shift in the way states in the GCC have been steadily increasing spending on public sector wages, infrastructure, and social services over the last decade.

For example, government spending on public sector wages accounted for as much as 45 percent of total outlays in Saudi Arabia, according to the International Monetary Fund. For Gulf states, maintaining public sector wage expenditure, without increases for the thousands of young job seekers entering the workforce every year with a preference for government employment (some 300,000 per year in Saudi Arabia), will present a challenge.

Fiscal Policy Measures

The greatest number of changes across the GCC states have been on fiscal policy. The reduction of subsidies, particularly in gasoline, has occurred quickly, with momentum from the fall of oil revenue a publicly understood driver necessitating reforms. There is renewed discussion, and nominal agreement, across the GCC to institute a value-added tax by 2018, though previous initiatives have not been implemented.

Monetary Policy Measures

Stay tuned as the policy environment evolves.