IMF chief urges Gulf states to bring in taxes

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The International Monetary Fund chief has urged oil-exporting Gulf countries to introduce taxes, warning that low crude prices are likely to stay for an “extended period.”
Gulf economies “need to strengthen their fiscal frameworks and reengineer their tax systems by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues,” Christine Lagarde told a forum in Abu Dhabi.
Lagarde, who was named to a new five-year term Friday at the global emergency lender, called for the introduction of value-added tax, “ideally a harmonized regional VAT.”
“Even at a low single-digit rate, such a tax could raise up to 2 percent of GDP (gross domestic product),” she said.
Lagarde also called for a “greater emphasis” on corporate income taxes, as well as property and excise taxes.
The IMF chief pointed out that oil exporters in the Middle East and North Africa lost last year more than $340 billion in oil revenue from their budgets, amounting to 20 percent of their combined GDP.
“Not only have oil prices fallen by around two-thirds from their most recent peak, but supply and demand-side factors suggest that they are likely to stay low for an extended period,” she warned.
The price of oil has dropped from over $100 a barrel in July 2014 to around $30 today.
The International Energy Agency said Monday that oil prices are unlikely to rise from current levels before 2017.
The IMF is confident that Gulf Cooperation Council economies can make the large fiscal adjustments they need to cope with a period of low oil prices, Lagarde said.
She said oil exporters would have to reduce state spending and increase government revenues, but that they had shown the ability to adjust in the past and could do so again.
“Oil prices have fallen by two-thirds from their most recent peak but supply and demand-side factors suggest they are likely to stay low for an extended period,” Lagarde told a conference.
She estimated that in the Middle East and North Africa as a whole, oil exporters lost more than $340 billion of revenues last year because of low crude prices, equivalent to 20 percent of their combined gross domestic product.
“The size and likely persistence of this external shock means that all oil exporters will have to adjust by reducing spending and increasing revenue,” Lagarde said.
She added: “Most GCC countries are now in a position where they can pace their adjustment over several years and thus limit the impact on growth.”
She did not specify which of the six GCC economies were not in that position.
As oil prices have plunged, the IMF has played an increasing role advising GCC governments on reforms to shore up their finances, and its recommendations have provided some governments with political cover to make difficult decisions that could lower living standards of their citizens.
Lagarde noted that the IMF had helped Kuwait to study the design of broad-based taxes such as VAT and a business profit tax.
The Kuwait government has said it is preparing for such reforms but has not made a firm commitment to a specific plan.
She added that introducing a value-added tax, even at a low single-digit rate, could raise revenues equivalent to as much as 2 percent of gross domestic product.
“Add to this greater emphasis on corporate income taxes as well as property and excise taxes. And continue to invest in building tax administration capacity that could eventually allow for introduction of personal income taxes.”

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