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44933975_oil_512Headline Photo: BBC

Written by: Kei Zamaninoor, Middle East Correspondent

Since mid-2014, oil prices have plummeted by more than 60 per cent. Many oil producing countries, as a result, are expected to face significant budget deficits in the coming months. These developments have once again sparked discussions on the need for economic diversification for these countries. Notably, the Middle East’s Arab countries have been the focus of these discussions. Due to the instability in the Middle East and the continuous decrease in oil prices, the region’s oil exporters, particularly Iran and Saudi Arabia, should consider economic diversification and restoring regional stability as their top priorities.

The recent failure of OPEC countries to reach an agreement on a total oil production cap suggests that the status quo will persist, at least for the foreseeable future. This makes a move towards economic diversification critical. Oil revenues, for instance, make up 29.6 per cent and 56.8 percent of the respective GDPs of Iran and Saudi Arabia.

Moreover, current oil prices are well below necessary levels to help these countries balance their budgets. To balance the budget, Iran needs each barrel of oil to be sold at US$87.20 while Saudi Arabia needs it to be at US$105.60. Prices are predicted to move even further down when Iran, at the end of its nuclear sanctions, increases its oil production.

The Middle East’s oil exporters, therefore, do not have a choice but to find other sources of revenue to balance their budgets. Introducing various taxes would be a viable solution for the immediate term, and both Iran and Saudi Arabia have already begun implementing such policies. In 2008, Iran introduced a VAT (Value Added Tax) on goods and services. In November 2015, Saudi Arabia announced taxes on empty and undeveloped lands. Nonetheless, such policies can be expanded to include income, among other things. To be effective, oil-exporting governments need to ensure that they use mechanisms and procedures to successfully control financial activities. This will allow them to decrease the possibility of tax evasion and accounting manipulations.

Additionally, it is important for these countries to foster economic growth through promoting the development of non-oil industries. The oil revenue portions of these countries’ GDPs have already taken a big hit. Not only are other industries needed for these oil exporters to compensate for their losses, they are also essential for lifting them out of ongoing or upcoming economic recessions. With the growth of non-oil industries, these countries will be able to mitigate their vulnerabilities to oil price shocks. This, consequently, will make these resource-dependant countries more attractive to foreign investment, as the risks associated with doing business in them are reduced.

Both Iran and Saudi Arabia have great potential due to the strength of their populations. Based on the latest available data, literacy rates among adults are 83.6 per cent in Iran and 94.4 per cent in Saudi Arabia. Furthermore, 18.8 per cent of Iran’s and 20.7 per cent of Saudi Arabia’s workforce have university degrees. This, combined with the availability of natural resources, promises high growth potential for these two countries.

Regional stability will be another key factor that should be maintained by these countries. Currently, the Middle East is facing various conflicts and civil wars. Given the direct and indirect involvement of some of these countries in the wars, many investors may avoid investing substantially in them. Investors need to be assured that their investments are protected. As a result, the oil-exporting governments of the region should cooperate through dialogue and negotiation in order to find comprehensive solutions for ending these conflicts.

Of course, it will not be easy for countries to pursue radical and fundamental economic change. Such changes will be even harder for the Middle East’s oil-exporting countries as their governments, over time, have become heavily reliant on oil revenues. Over the course of decades, many of these countries have come to overlook the potential for new ways of fostering growth and prosperity. Nevertheless, current regional and global trends have left no choice but to accept the need for adopting a new economic vision. These countries will need to devise plans to support the growth of non-oil industries, such as manufacturing and technology, and attract foreign investment. Without a doubt, the transition will be lengthy and uncomfortable; however, it will ultimately be beneficial to move away from the heavy dependence on an unsustainable resource.

Kei Zamaninoor is currently a Master of Global Affairs (MGA) Can14b272fdidate at Munk School of Global Affairs, University of Toronto. He previously studied Business Administration at Schulich School of Business, York University. His research interests include international business, international economy, Middle Eastern geopolitics, and Iranian affairs.

Author The Global Conversations Team

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