The fiscal situations and broad economic outlooks of oil- and gas-producing states have improved drastically since 2021, owing primarily to high energy prices. The International Monetary Fund expects oil-exporting countries in the Middle East and Central Asia to generate $818 billion in revenue over the year, which reflects an upward revision of $320 billion from earlier estimates in October 2021. Cumulative crude oil exports from the Gulf Cooperation Council states are likely to exceed $500 billion this year, according to Bloomberg.

The economies of Gulf Arab states are poised to grow at their fastest rate in over a decade. In the first quarter of the year, Saudi Arabia’s economy expanded by 9.6%, marking the fastest pace of quarterly growth since 2011, and the kingdom posted a $15.3 billion budget surplus. Even regional states with weaker economic fundamentals, such as Oman, are in a comparatively strong position to shore up their finances. Omani Sultan Haitham bin Tariq al-Said plans to pay down government debt with expected budget surpluses.

Managing the Windfall

Rapidly improving economic conditions have renewed concerns over how regional governments will utilize newfound financial windfalls. The IMF’s director of the Middle East and Central Asia department, Jihad Azour, urged these countries to “remain vigilant in the way they conduct their policies.” This critical moment in the recent economic histories of regional states raises a familiar question: Are financial windfalls emerging from periods of energy price volatility ultimately a positive development for longer-run economic diversification efforts? The short answer is a highly qualified yes.

An influx of oil and gas revenue – and, most important, the associated profits – afford regional officials the financial wherewithal to proceed with their preferred paths toward economic diversification. Substantial and sustained support from government and government-related entities underlies the ambitious economic transformations and projects underway in the region’s largest economies. A financial windfall from oil and gas proceeds may boost regional officials’ expensive economic diversification plans – especially in Saudi Arabia, the United Arab Emirates, and Qatar – but does not make them foolproof. Financial resource availability alone does not guarantee long-term success in the non-oil domain.

Over the short term, newly replenished state coffers do offer insight into economic policy priorities in the region. Only three of the Gulf Arab states are in a strong position to aggressively advance wide-ranging, future-oriented economic diversification initiatives: Saudi Arabia, the UAE, and Qatar. These countries, while demonstrating plenty of institutional variation, combine top-down political will for economic transformation with available financial resources. Oman and Bahrain must act to shore up their finances and reduce economic vulnerabilities moving forward, with longer-term economic diversification relegated to a second tier of priorities. Higher energy prices enable Kuwait – a regional outlier – to further delay economic reforms and diversification initiatives, which were largely stalled because of various political constraints on decision making.

Few Modest Proposals

The preferred path to diversified, sustainable economic futures in the Gulf has not been paved with modest proposals. For example, Saudi Arabia wants to reimagine cities, luxury tourism, and aviation. The developments around the inaugural Future Aviation Forum in Riyadh from May 9-11 are a clear example of the kingdom’s ambitious goals for the aviation sector. Saudi officials hope to position Saudi Arabia as the Middle East’s leading aviation hub by 2030 – a lofty goal to be supported by an anticipated $100 billion in public and private funding, a new national carrier, and enhanced infrastructure. A policy white paper on the forum’s website strives to create a universally recognized and harmonized health requirement framework for the global air passenger journey and experience. Saudi Arabia is also relaunching its airport privatization plans, and 29 airports have been reorganized under a new commercial entity, Matarat.

Certain areas of the non-oil economy seem more promising than others. Saudi Arabia’s large domestic population – around 35 million in mid-2020 according to the General Authority for Statistics – and the country’s established religious tourism sector lend some credibility to aviation and tourism strategies. The Saudi entertainment sector also has plenty of growth potential. However, the results of Saudi efforts to build industrial and economic cities have been mixed. What many ongoing and nascent development projects have in common is that the Saudi government and its related entities will largely be the financiers of first and last resort.

The smaller states and emirates in the region are not afraid to punch above their weight in the economic arena. Emirati officials launched the “Projects of the 50” roadmap to “accelerate the UAE’s development and transform it into a comprehensive hub in all sectors and establish its status as an ideal destination for talents and investors,” especially those engaged in entrepreneurship, the digital economy, space, and advanced technologies. In 2017, Dubai’s ruler launched the Dubai 10X initiative to create “disruptive, exponential change in government entities, placing Dubai 10 years ahead of leading global cities.”

Small Gulf countries have secured the rights for major global events, providing exceptional marketing opportunities while posing post-event challenges. Dubai hosted World Expo 2020, and the tiny country of Qatar is gearing up to hold the FIFA World Cup beginning in November. The associated infrastructure needs to be repurposed efficiently – especially in Qatar. For the gas-rich Qatari government, financing these infrastructure transformations will not pose a challenge. Officials in Doha aim to transform World Cup-specific infrastructure, such as stadiums, into new communities, schools, and hospitals as well as springboards for tourism inflows.

Balancing International and Domestic Expectations

Expanding non-oil industries and supporting new non-oil segments of Gulf economies require continued flows of foreign expertise, expatriate residents, and international visitors. It is not surprising, then, that many of Neom’s senior management team members are non-Saudis. One of these Neom project officials suggested that two million “Neomians” will reside in the city by 2030, suggesting an eventual population exceeding that of nearby Bahrain. The Saudi Press Agency later refuted the moniker offered by Neom’s tourism head but confirmed that Neom was one of the Public Investment Fund’s “major strategic projects.”

Expatriates are even more central to non-oil growth in the UAE and Qatar, where citizens constitute a small fraction of the population. The UAE Cabinet announced a major overhaul of its visa residency system, which will come into effect in September, making it even easier to visit and reside in the country. This announcement follows years of new visa schemes and other initiatives intended to attract global talent. Some of the government expenditure allocated for economic diversification efforts will ultimately be captured by foreign visitors, residents, and investors. Yet the goal is for much of this state spending and foreign capital to be recycled within the broader economy, trickling down to local firms and citizens.

Citizens and established residents have been asked to shoulder more taxes and fees over recent years to help increase non-oil revenue streams, building on measures that were originally conceived during the oil price plunge of 2014-16. For example, Saudi Arabia hiked the value-added tax to 15%, up from 5%, and suspended the cost-of-living allowance in 2020. Expected government surpluses, however, provide the means to fluff the socioeconomic cushion. In May, the UAE federal government announced plans to provide unemployment insurance to all workers in the country. The UAE Cabinet also approved a $3.13 billion housing policy for Emiratis and a new system to enforce the government’s plan to reach a 10% target of Emirati nationals working in the private sector by 2026. Regional governments do not want their citizenries’ economic well-being unduly hampered by economic transformations – especially during the good economic times of booming energy markets.

Affordable Patience

Developing the region’s non-oil industries requires patience, which regional governments can more easily afford during periods of high energy prices. Breaking down Saudi Arabia’s 9.6% growth in the first quarter of the year reveals oil-related activities growing at 20.4% and non-oil activities at just 3.7%. Growth rates in much of the non-oil economy cannot match those of a robust energy market. However, non-oil industries often experience less volatility and ultimately offer a more sustainable future. The challenge for governments in the region is to find ways to increase sustainable growth rates in these non-oil sectors in times of surging growth in oil-related parts of the economy.

To the extent that being flush with financial resources from energy exports is a problem, it’s a good one for Gulf governments to have. A key risk is that regional officials focus too much on the supply of the economic diversification equation (such as the availability and quantity of goods, services, and infrastructure), while ignoring the demand-related considerations of a rapidly changing world. Those Gulf countries forced to design economic diversification projects and initiatives without generous, long-term state financing support may enjoy greater resiliency and sustainability, albeit with a limited and modest set of projects and initiatives.