VAT implementation: IMF gives thumbs up to GCCs value-added tax roll-out

Tuesday, May 02, 2017

Dubai: The GCC-wide implementation of value added tax (VAT) in 2018 is achievable and a key component of fiscal adjustment and revenue diversification efforts of governments, said Jihad Azour, director of the International Monetary Fund’s Middle East and Central Asia Department.

“Successful implementation of fiscal reform plans will be helped by strengthening fiscal institutions. Although a work in progress across the region, there have been notable advances in setting up medium-term fiscal frameworks and debt management offices,” Azour said.

Cumulative overall budget deficits of the region for the five-year period between 2016 and 2021 are estimated at $375 billion (Dh1.37 trillion), down from $565 billion estimated in the October 2016 Regional Economic Outlook of the IMF. The overall fiscal deficit is projected fall from 12 per cent of GDP in 2016 to 6.5 per cent this year and further down to 4 per cent in 2018. This is a substantial improvement predicated on the sustained implementation of these ambitious fiscal plans and helped by projected oil price trends.

Recognising the need to strike a balance between drawing down assets and issuing debt, GCC countries have increasingly used debt to finance deficits, and this is expected to continue in 2017, according to the IMF.

The region witnessed external sovereign issuance of $50 billion in 2016, more than five times the 2015 amount, which played a key role in financing external deficits. GCC countries are expected to rely on external borrowing in the year ahead, subject to global market conditions.

Yields on the GCC’s US dollar-denominated sovereign bonds have increased only by about 10 basis points between November 1, 2016 and March 24, 2017, much less than the 60-basis point increase in the benchmark 10-year US Treasury bond, thus keeping the external borrowing window open for regional sovereign borrowers.

However, the IMF has warned that that reliance on external financing is vulnerable to sudden changes in global risk aversion, so the associated risks need to be actively managed.

Domestic debt issuance would reduce risks related to external financing, and would help develop local financial markets. However, any domestic issuances need to be considered carefully to avoid crowding out private sector credit, especially where liquidity conditions are already tight.

The IMF sees the external balances of GCC countries improving substantially after a couple of years of sizeable deficits. Higher oil prices and fiscal consolidation are expected to return the current accounts of GCC countries to broad balance this year.

Despite the improvements in current accounts, external challenges remain for GCC countries. Given the existing currency pegs in GCC countries, real exchange rates have appreciated due to the recent strengthening of the US dollar, reducing competitiveness and raising demand for imports. However, the IMF said the GCC is better off with the dollar peg as it serves an anchor of stability to these economies.

By Babu Das Augustine Banking Editor