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VAT Could Be A Reality If Oil Woes Continue

April 2015

If the oil slump continues beyond the near term, most oil exporters in the GCC are expected to move more seriously towards a fiscal consolidation stance to avoid a significant rundown of foreign assets, Washington-based The Institute of International Finance (IIF) has said.

Low-priority projects could be postponed or phased over time without impeding longer-term growth prospects or diversification efforts.

“The tax base could be broadened, including through the introduction of a Value Added Tax (VAT) that would provide additional sources of nonoil revenue and thus reduce the burden of adjustment needed on the expenditure side,” it said in a report ‘MENA: Lower Oil Prices Present Challenges and Opportunities’.

More importantly, the rapid pace of growth in domestic consumption of petroleum products could be reduced. This could be achieved by intensifying ongoing efforts to improve efficiency and by gradually raising the prices of domestic petroleum products, the report said.

Banking systems in the GCC, with relatively limited reliance on external funding and comfortable liquidity, should be reasonably resilient to low oil prices in the next couple of years. The expected modest increase in interest rates in the U.S. during the second half of this year and further increases in 2016 may tighten financial conditions in the GCC countries because of their exchange rate peg, and eventually lead to some deceleration in the growth of credit to the private sector.

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