Capital Economics expects Gulf states to reduce VAT on higher oil revenues

This comes at the backdrop of this month’s OPEC+ meeting which resulted in higher prices of oil on Wednesday. The London-based firm, however, predicts that this trend is not sustainable and states that a fall in oil prices is on the horizon.

While the surge in oil exports will enhance the Gulf countries’ fiscal positions, Capital Economics says that the situation remains diverse for different countries.

Due to the Saudi Arabia’s tight policy and expected spending cuts, the country is in a favorable position to ease up on VAT rates and the revenue side. The situation is similar in the UAE and Qatar as well, the firm added.

However, a tightening of policy should be a priority for Oman and Bahrain, the economic research company noted, as they need “further fiscal consolidation.”

The firm also laid out its forecasts for the soon-released inflation rates for Saudi Arabia and Egypt.

A slight increase in annual inflation rate is projected for the Kingdom in September, rising from 0.3 percent in August to 0.4 percent in September. This is mainly the result of price increases in food.

While global supply chain issues are gaining momentum and could have adverse effects on inflation, the company reassured that the Saudi “inflation will remain weak at 1-1.5 percent y/y over the course of 2022-23.”

Concerning Egypt, Capital Economics expects that Egypt’s yearly inflation rate will increase to 6.2 percent in September, up from 5.4 percent in August. As was the case for Saudi Arabia, food inflation is inducing this price hike.

The company added that this will likely prevent the Egyptian Central Bank from cutting rates this month.