Negative impact of VAT on UAE, Saudi only short-term – PwC

The introduction of value added tax (VAT) in the UAE and Saudi Arabia this year has had a negative impact on their economies in the short term with inflation rising, a new report by consultancy PwC has found.

Inflation rose to 3 per cent year-on-year in Saudi in January, after a year in which consumer prices were largely suffering deflation, with a smaller step up in the UAE to 4.8 per cent.

This compares to very low rates of inflation in the rest of the GCC where VAT is yet to be introduced (below 1 per cent in Kuwait, Qatar and Oman).

The purchasing manager indices (PMIs) for Saudi and the UAE also showed a slump. Saudi had been close to a two-year high in December but dropped in January to a record low of 53 (albeit still above the 50-mark that signals economic expansion).

UAE, which had been at a record level in December, slipped more gradually, down to 54.8 in March, its second lowest reading in a year.

However, the implementation of the tax will prove beneficial for regional economies in the longer term, the report added.

“Although adjustments such as subsidies cuts and the introduction of VAT this year have had short-term negative impacts, they should make the economy more efficient,” the report said, referring to the UAE.

According to the latest IMF forecasts, the country’s real GDP growth is expected to reach 2 per cent in 2018 ( up from an estimated 0.5 per cent in 2017) and average 3.1 per cent in 2019-23. The deficit is narrowing and is expected to return to a surplus by 2022.

Longer term, the UAE’s economy will also benefit from a wave of investment in Abu Dhabi’s oil sector and efforts by Dubai to take a lead in many new technologies, the PwC report said.

“The UAE leads the region in both quantified medium-term planning, such as the Vision 2021, as well as much longer-term thinking such as the Strategy for the Future. Abu Dhabi has just completed the once in a generation process of signing up new foreign partners for its main offshore and onshore concessions, bringing in new firms such as China National Petroleum Corp and negotiating better terms. This lays the foundation to boost oil and gas output, with $109bn in investment planned until 2022.

“Meanwhile, Dubai is preparing for Expo 2020 and making progress with a host of initiatives to become a global hub for the development and deployment of new technologies such as fintech, 3D printing and AI. Although these will only make relatively small contributions to the economy in the near term, they add to its prestige and support the core real estate, transport and tourism sectors,” the report added.

Looking at the wider GCC as well, PwC noted that recovery in foreign direct investment (FDI) – thanks to reforms in foreign ownership rules – and broader improvements in the business environment will help boost regional economies.

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Richard Boxshall, senior economist at PwC Middle East, said: “Gulf countries are rethinking the role of foreign investors as they look to ease fiscal burdens and restructure their economies for the twilight of the oil era, with a strong focus on technology-intensive sectors. This is leading to a series of new investment and companies laws and changes to capital market rules.”

He added: “Notwithstanding the impact of VAT and inflation, if oil prices remains buoyant, as seems likely, and regional investment flows are boosted by IPOs and a rise in foreign inflows, non-oil GDP growth in 2018 should be slightly stronger than in 2017 which, combined with flat (rather than reduced) oil production, should result in stronger overall growth for the year.”