On the back of higher global oil prices and a stronger international economic environment, the Middle East returned to growth in 2021, with a number of governments taking the opportunity to implement or resume long-term initiatives aimed at bolstering diversification and modernisation.
Following a year in which economies throughout the region contracted due to the fallout from the Covid-19 pandemic, the Middle East experienced an economic rebound in 2021, with the IMF estimating in April 2022 that GDP for the region – which includes Central Asia – expanded by 5.7%.
Looking more closely at the GCC, the World Bank estimated in December 2021 that the six-member bloc would record an aggregate growth rate of 2.6% for the year. Bahrain was forecast to expand by 3.5%, followed by Qatar and Oman (3%), the UAE (2.7%), Saudi Arabia (2.4%) and Kuwait (2%).
A driving factor in this growth was the rise in oil prices. After starting 2021 at just over $50 a barrel, the price of oil increased to yearly highs of more than $85 in October. This provided an economic boon to Gulf countries throughout much of the year. Prices fell again towards the end of the year as the Omicron variant of the virus dampened fuel demand, before closing out 2021 at around $77 a barrel. However, Russia’s February 2022 invasion of Ukraine caused international energy prices to rise significantly, reaching over $100 a barrel in March and April of that year. This expansionary trend is expected to continue should the crisis be protracted.
As higher oil prices helped increase revenue across the region, a number of governments sought either to implement or extend long-term fiscal rationalisation strategies. In April 2021 Oman introduced a 5% value-added tax (VAT), becoming the fourth Gulf country – behind Saudi Arabia, the UAE and Bahrain – to do so, following the GCC’s 2018 pledge to implement the surcharge. The tax is expected to help ease fiscal pressure by generating OR400m ($1bn) annually, equivalent to around 1.5% of the country’s GDP.
In the final month of the year Bahrain’s Parliament approved a measure to double its VAT from 5% to 10%, effective January 1, 2022. According to a November 2021 report from Standard & Poor’s, this measures could result in receipts worth 3% of GDP in the coming years, up from 1.7% in 2021. This followed a similar move in Saudi Arabia, which increased its VAT to 15% in 2020.
The decision forms part of Bahrain’s strategy to bring the budget back to surplus by 2024. “While the Covid-19 pandemic resulted in delaying fiscal balance targets to beyond 2022, the government’s discipline in curtailing expenditure raises expectations that it will narrow the fiscal deficit and achieve a fiscal balance in the coming years,” Yaser Al Sharifi, group chief strategy officer at the National Bank of Bahrain, told OBG. “Furthermore, given the economic recovery seen in 2021 and a higher oil price environment, one could expect a robust economic performance in 2022, which will further support the government’s fiscal situation.”
A number of Gulf countries also launched reforms designed to incentivise foreign investment and bolster competitiveness. Qatar, for example, opened up more opportunities for foreign participation in different sectors. In April 2021 the Cabinet approved a measure that allowed for 100% foreign ownership of listed companies, a move that was expected to attract $1.5bn in investment inflows. In August of that year the body formally approved opening the country’s listed banks to 100% foreign ownership.
Saudi Arabia continued its diversification efforts through a series of initiatives aimed at attracting foreign direct investment (FDI). FDI was already up 33% year-on-year in the first six months of 2021, according to government officials, building on the pandemic-affected figure of $5.5bn in 2020. In October 2021 the country launched the National Investment Strategy, which aims to attract $100bn in FDI annually by 2030. The strategy includes plans to develop special economic zones, a programme to transfer key supply chains to the country and the diversification of financing options for private sector operations. These initiatives are being accompanied by efforts to improve the general business environment, such as a law allowing specialised foreign professionals to gain Saudi citizenship and a new platform to streamline the process of setting up a business for foreign investors.
Elsewhere, the UAE implemented a number of reforms to improve its competitiveness. In an effort to encourage foreign investment, in June 2021 the country amended laws to allow for 100% foreign ownership of Emirati companies in all but a few restricted sectors, up from the previous limit of 49%. This was followed in November of that year by the most significant legal reforms in the country’s history, when 40 laws covering trade, online security, personal data rights, copyrights, residency, narcotics and other social issues were implemented.
The social reforms cover areas such as the easing of restrictions on cohabitation before marriage, the implementation of more protections for women and longer-term visas designed to attract skilled migrants to the UAE. Indeed, social reforms have been a key focus for the country. In 2020 a broad-based reform package was implemented that included the MENA region’s first provision of paid parental leave to workers in the private sector – available to both female and male employees – and labour regulations were amended to ensure equal pay for work of equal value.
These measures were followed by the December 2021 announcement that government entities in the UAE would shift to a four-and-a-half-day work week starting in January 2022, with many private companies quickly following suit. The change extended the weekend to run from Friday afternoon to Sunday instead of the previous Friday-to-Saturday schedule. This puts the country in line with most of the world’s developed economies, and is designed to enhance its competitiveness on a global scale and keep pace with international business developments.
These moves to incentivise investment aligned with Dubai’s hosting of Expo 2020, which ran from October 2021 through to March 2022. More than 190 countries were represented at the Expo, with the event attracting nearly 16m visitors between its launch and February 2022.
While attracting foreign investment remains a key aim for all countries in the Gulf, some – among them Qatar – have also focused on increasing self-sufficiency. “The blockade made us realise that we were too dependent on others in a number of fields,” Ziyad Eissa, CEO of S’Hail Holding Group, a supplier and exporter of recycled metals and other industrial products, told OBG. “Good relationships with neighbours are important, but Qatar needed a plan to operate independently in any scenario. The country quickly built up the necessary capabilities to maintain operations in all sectors, including primary and industrial.”
In addition to efforts to improve food security by investing in high-tech agricultural solutions (see Trade & Investment chapter), Qatar established significant industrial recycling facilities. Recycling is seen as key to lowering the carbon footprint of heavy industry, which accounts for an estimated 27% of global emissions. “By the end of 2022, it is expected that Qatar will become the first country in the world to recycle 100% of its domestic solid metal waste locally, including lead, copper, aluminium, steel, brass and zinc,” Eissa told OBG.
Despite the region being home to some of the world’s largest hydrocarbons-exporting countries, a number of markets in the Middle East have sought to capitalise on the shift towards renewable energy throughout 2021. Indeed, the UAE has set a net-zero emissions target for 2050, while Saudi Arabia and Bahrain both hope to achieve this goal by 2060. To reach its target, the UAE aims to increase renewables’ contribution to its energy mix from the current level of 13% to 31% by 2025. During 2021 the country continued to make progress on the Al Dhafra solar plant. Once it is completed in the second half of 2022, the facility will be the largest single-site solar plant in the world, capable of providing enough electricity for 160,000 homes and mitigating 2.4m tonnes of carbon emissions annually.
Meanwhile, in Saudi Arabia April 2021 saw the launch of the 300-MW Sakaka solar power plant, the country’s first utility-scale renewables project. This was followed in August of that year by the announcement that Saudi energy company ACWA Power finalised financing for the 1.5-GW Sudair solar plant, slated to be one of the world’s largest upon completion. This forms part of the country’s plans to invest some SR380bn ($101bn) in renewable energy projects by 2030.
The measures reflect a broader trend in the Middle East towards low-carbon energy solutions. As another way to meet its targets, the UAE has invested in carbon capture and storage (CCS) technology, which works by capturing and then storing carbon emissions before they are released into the atmosphere. Although the technology is still in a nascent stage and does not yet exist at scale, the UAE is taking a leading role in its development, alongside Qatar and Saudi Arabia. In addition to the country’s first CCS project – a facility that processes the emissions from a steel factory in Mussafah – the Abu Dhabi National Oil Company signed a memorandum of understanding with French energy major TotalEnergies in December 2021 to explore the development of CCS technology.
This has been complemented by the development of green hydrogen (see Industry chapter). Created by splitting water through a process called electrolysis, it is considered the most environmentally friendly fuel for the future. A global leader in this field, the UAE is developing seven hydrogen projects, and aims to capture 25% of international demand by 2030.
While Qatar has not yet announced a net-zero emissions target date, in October 2021 government-owned Qatar Petroleum announced its name change to Qatar Energy as part of an attempt to better reflect the firm’s renewables-focused strategy. Although it will likely continue to export gas for decades to come, the company’s new strategy will focus on energy-efficient technologies such as CCS.
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