Are the West Asian Economies prepared for a revival in a post-Covid Scenario?

 By Vishakh Krishnan Valiathan
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Amidst the growing concerns on the spike of coronavirus cases worldwide, major economies have taken some harsh steps to recover their economy from a downfall. With the uncertainty prevailing around the development of vaccines [1] and the return to the normalcy, countries are worried about the economic consequences it went through along with what it has to conquer soon. While countries in Europe have slowly started returning to the pre-Covid scenario with a new normal measure[2], the United States(US), Russia and India have been experiencing the hike in the cases while also easing restrictions in a phased manner. Meanwhile, the Gulf economies and other countries in West Asia whose budget majorly revolves around oil and gas sectors had to depend on other sectors to generate revenue as these countries were drastically affected by the twin challenges- Covid-19 and Oil prices- demand.

The unexpected turn of events post-February 2020 sponsored by the Covid pandemic eventually created a huge trouble for the high-income economies as well as even for the Gulf economies. According to the International Monetary Fund(IMF), the Gulf economies will shrink by 7.6 percent this year.[3] This, however, reflects the need for a transitionary business model to revive the regional economy in the upcoming year.  Traditionally dependent on the oil and gas sector for their revenue, these middle-income countries in the Levant, Arab, and the Persian Gulf have either turned to new avenues for generating income or requesting financial aid for reconstruction from richer nations. This can be because of the current state of affairs or situations surrounding these. There are smaller economies like Lebanon, where debt crisis and recession had led to nationwide protests during pre-Covid times; now it has only made the conditions more vulnerable which has led to a state of nearly economic depression as attention is inclined to the pandemic, but with the recent currency dive protestors are back in the streets.[4] While Iraq also experienced a similar situation since October 2019, in the meantime there has been a shift in the leadership with a new government taking charge since May 2020[5] amidst the multiple crises. Faced with many national and regional challenges, Iraq being an oil economy, suffered very badly while its revenues dropped as barely any oil exports were initiated since march 2020- given that the consumer world was into a state of partial lockdown caused by the pandemic. Iraq is set to record a huge leap downwards in its Gross Domestic Product(GDP) per capita since 2006 and it has also had the biggest fiscal deficit in the region since early this year.[6] Moreover, Iraq’s economy survives on imports from its neighbours and other countries in the region except that the trade was scant during this period. This however helped the domestic market to thrive and small businesses have emerged to be a lifesaver for the economy.[7] This is a temporary shift but would be a beginning to a domestic inclined economy for the future. Qatar, on the other hand, with limited domestic restrictions in the last few months has somehow maintained to sustain its economy despite being affected by sanctions and other regional issues even though it experienced a diminishing growth rate in the last few years. Interestingly, except for the gas-rich nation, the rest of all nations in the Gulf has a negative fiscal deficit.[8]

At the same time, Iran is the first nation in the Persian Gulf to get affected with Covid-19 and from where the progressive spread moved across the region. It has over the last few weeks seen a decline in the cases causing quite some damage to their domestic economy. Some experts exert that the Iranian domestic economy had a subtle effect as the transmission started just before the Nowruz (New year) holidays and the shutdown disturbed the economy but the government distributed United States Dollar(USD) 1 billion as loans and credits to the 23 billion households for maintaining the business cycle; Rouhani’s government had also applied for a loan of USD 5 billion from IMF for purchasing medical supplies and equipment as well.[9] To add, there are hardly any international companies in Tehran and trade has also been limited in the last few months; In fact, the Persian state affected with US sanctions further weakened their economy, also got involved with external spats with the US and now with the Covid-19, the pressure on the domestic economy to revive is at the peak and do not seem to be stable unless the private sector performs, which seems unpredictable as well.[10] Interestingly, Iran’s oil market suffered huge losses with the lesser purchase by China and the Persian nation has also turned its hand to the mining and manufacturing sector which has been creating revenue.[11] In recent times, their currency value[12] has also depreciated very badly which indeed will affect their trade and forex. Moreover, with the elections approaching both in the US and later in Iran[13], it would be interesting to see how policies would be deferring post-elections.

Now, Saudi Arabia, who was also involved in a price tussle with Russia earlier this year, was very affected with the fall in oil price during the lockdown period and further went on to increase Value Added Tax(VAT) from 5 percent to 15 percent, cutting down spending on major projects worth 100 billion riyals (USD 26.6 million) in April 2020 as well. Even if the oil prices rise, it is estimated that the Kingdom will be a net debtor for a foreseeable future.[14] Coming to Bahrain and Oman, comparatively smaller economies but both have suffered negative growth in the last few quarters while they also face a large balance of payment and fiscal debts while also carrying high-sovereign risk premiums.[15] Oil and gas sectors have been affected the most with lower demand and falling prices. Even though affected with a lack of oil revenue and an increase in Covid cases, Kuwait’s Social Wealth Fund(SWF) has been witnessing continuous growth since the 2008 financial crisis majorly accumulated from oil revenue surpluses marking around USD 655 billion of sovereign savings.[16] Whereas, being the second-largest economy in the Gulf and one of the top exporters of oil from the region, the United Arab Emirates(UAE) had to deal with a large number of immigrants leaving the country especially South Asians due to job losses amidst the Covid crisis which accounts to about 10 percent of the population. With high earning expatriates leaving the country, there would be a big slash on spending and consumer index as well. [17]

Recession in the region is prevalent as countries might be relying on more government spending through fiscal instruments. According to a credit rating agency, the Islamic finance social instruments would be a useful tool in reviving the economies of the Gulf Cooperation Countries(GCC). In a report by S&P, Mohammed Damak, its Global head of Islamic Finance and director of Research, mentioned that “Islamic finance abides by the goals and objectives of Sharia (Maqasid). While interpretations of the Maqasid differ, they broadly center around the protection of faith, life, mind, wealth, and dignity”.[18] However, with the increasing unemployment rate and decrease in incomes for households and revenues of companies in the Gulf nations,  implementation of proper financial and social instruments for a revival shortly cannot be avoided.

Concerning India, the huge return migration from the region is a cause of worry. However, it is estimated that the majority of them who are returning have already lost their jobs before the pandemic hit the region and the rest might return post the end of Covid crisis which is uncertain to an extent. Most importantly India would be affected by the inflow of remittances which is estimated to fall from USD 83 billion in 2019 to USD 64 billion in 2020.[19] Being one of the largest importers of oil and gas from West Asia and with falling oil prices in the last few months, it was favourable in India’s point of view to purchase and store more oil for its consumption but the lockdown due to the pandemic in March 2020 created a huge disappointment in the inventory front as all refineries and reserves in the country were already filled. The oil economies in the region were desperate to sell their produce as it was getting accumulated with no demand in the market, leaving them without revenue. This forced them to turn to other avenues and bringing economic reforms as mentioned earlier. While revival is important not only for the region but most importantly it affects economies in South Asia as well. The regional economic connection goes beyond trade, commerce, and human resources as these regions are interconnected with culture and civilization as well. Indeed, there are inter-dependant. Therefore, the need for the economic revival seems to be obligatory for the Gulf economies to re-establish the demand for their markets and re-creating more employment opportunities for emigrants in the post-Covid era.

End-Notes 

[1] H Devlin, “The hunt for a coronavirus vaccine- a perilious and uncertain path”, The Guardian, 24 April, 2020, https://www.theguardian.com/world/2020/apr/24/the-hunt-for-a-coronavirus-vaccine-a-perilous-and-uncertain-path, accessed on 2 July , 2020.

[2] “Covid-19: Europe continues to ease down lockdown as countries adapt to new normal”, France24, 8 June, 2020, https://www.france24.com/en/20200608-covid-19-europe-continues-to-ease-lockdown-as-countries-adapt-to-new-normal, accessed on 2 July, 2020.

[3] D Barbuscia and M Rashad, “Gulf economies to shrink by 7.6% this year, IMF says”, Reuters, 30 June, 2020, https://www.reuters.com/article/us-gulf-economy-imf/gulf-economies-to-shrink-by-7-6-this-year-imf-says-idUSKBN2411RS, accessed on 2 July, 2020.

[4] L Sinjab,”Lebanon protests escalate as currency dives”, BBC News, 12 June, 2020, https://www.bbc.com/news/world-middle-east-53020014?intlink_from_url=https://www.bbc.com/news/topics/c8nq32jwjydt/lebanon&link_location=live-reporting-story, accessed on 4 July, 2020.

[5] “New Iraq Prime Minister after five months of Deadlock”, BBC News, 7 May, 2020, https://www.bbc.com/news/world-middle-east-52571220, accessed on 4 July, 2020.

[6] P Wallace and k Al-Ansary, “Oil’s Fragile Peace is threatened by Iraq’s desperate reality”, Bloomberg Quint,5 June, 2020, https://www.bloombergquint.com/markets/oil-s-fragile-peace-is-threatened-by-iraq-s-desperate-reality, accessed on 4 July, 2020.

[7] “As Iraq’s coronavirus lockdown chokes imports, local businesses thrive”, Deccan Herald, 28 May, 2020, https://www.deccanherald.com/international/as-iraqs-coronavirus-lockdown-chokes-off-imports-local-businesses-thrive-842679.html, accessed on 4 July, 2020.

[8] P Wallace and K Al-Ansary, “Oil’s Fragile Peace is threatened by Iraq’s desperate reality”, Bloomberg Quint,5 June, 2020.

[9] S Vakil, “Covid-19 and Iranian Shadow of Wars”,Chatham House, 8 April, 2020, https://www.chathamhouse.org/expert/comment/covid-19-and-iranian-shadows-war, accessed on 4 July, 2020.

[10] S N Mafi and A Hatami, “Webinar:How the private views Iran’s Economy”, Chatham House, 24 June, 2020, https://www.chathamhouse.org/event/webinar-how-private-sector-views-iran-s-economy, accessed on 24 June, 2020.

[11] E Batmanghelidj, “It’s manufacturing that’s giving Iran a lifeline, not oil”, The Print, 15 June, 2020, https://theprint.in/world/its-manufacturing-thats-giving-iran-a-lifeline-not-oil/441730/, accessed on 4 July, 2020.

[12] “Rial erases gains”, Financial Tribune, 28 June, 2020, https://financialtribune.com/articles/business-and-markets/104056/rial-erases-gains, accessed on 4 July, 2020.

[13]E Batmanghelidj ,“Webinar:How the private views Iran’s Economy”, Chatham House, 24 June, 2020, https://www.chathamhouse.org/event/webinar-how-private-sector-views-iran-s-economy, accessed on 24 June, 2020.

[14] “Gulf economies face a fight for survival as impact of coronavirus bites”, TRT World, 13 May, 2020, https://www.trtworld.com/magazine/gulf-economies-face-a-fight-for-survival-as-impact-of-coronavirus-bites-36277, accessed on 4 July, 2020.

[15] Ibid

[16] “Kuwait’s SWF witnesses steady growth despite crisis globally ”, Arab Times, 14 June, 2020, https://www.arabtimesonline.com/news/kuwaits-swf-witnesses-steady-growth-despite-crisis-globally/, accessed on 4 July, 2020.

[17] S Siddiqui, “GCC faces possible setback with exodus of skilled professionals”, Al-Monitor, 23 June, 2020, https://www.al-monitor.com/pulse/originals/2020/06/gulf-state-gcc-exodus-saudi-arabia-wokers-uae-kuwait.html, accessed on 4 July, 2020.

[18] M Damak, “Islamic Finance 2020-2021: Covid-19 offers an Opportunity for Transformative Developments”, S&P Global Ratings, 15 June, 2020, https://www.spglobal.com/ratings/en/research/articles/200615-islamic-finance-2020-2021-covid-19-offers-an-opportunity-for-transformative-developments-11533355, accessed on 4 July 2020.

[19] Press Trust of India, “Remittances to India likely to decline by 23% in 2020 due to Covid-19: World Bank” The Times of India, April 23, 2020, https://timesofindia.indiatimes.com/business/india-business/remittances-to-india-likely-to-decline-by-23-in-2020-due-to-covid-19-world-bank/articleshow/75311447.cms, accessed on 4 July, 2020.