IMF recommendations should first gauge economic and social realities in each country
Over the years, we have had the chance to meet annually with International Monetary Fund (IMF) delegations visiting the Gulf to assess the economic conditions. The multilateral institution is known for its professionalism, and its experts have the best credentials in their field.
And yet, some of them are not fully aware of the economic conditions in the Gulf countries. Although what they hear in the meetings has some place in the reports they prepare on their return, the experts still insist on a set of ready recommendations they think are valid for all countries.
Therefore, we have to pay attention to these IMF recommendations though they may not be suitable to all countries for any number of reasons. What works for this country may not work out for the other. Recently, the IMF proposed to some Gulf countries to double VAT from 5 per cent to 10, a proposal that needs to be carefully examined to study its possible implications from all sides.
Too much too soon
We have been – and are still – supporters of VAT as an economic necessity and an important financial and developmental tool. We have highlighted its significance in detail in earlier columns, but rushing to double VAT in a period of time not exceeding two years of its introduction may create repercussions that will undesirably affect multiple sectors and the overall economic situation.
It is true that the VAT in European countries ranges between 15-20 per cent, as in the UK, but it took decades to come up to these levels. This is why it is necessary to give countries new to these tax systems some time so that their economies can absorb and deal with the effects in a way that minimizes any repercussions.
It is plausible to say that VAT has significant economic advantages, but it also produces adverse phenomena. There is no unilateral phenomenon. The resultant negative economic and social phenomena need to be addressed and mitigated.
Weigh all options
So, before adopting any new IMF recommendation, it is necessary to evaluate the pros and cons of the past two years since VAT was implemented and develop solutions that can make this scheme more effective to the economy and society alike.
It should also be noted that the two-year period is too short to come up with correct results, as it takes a minimum of five years from implementation to comprehensively assess the consequences. This is in part because the economic and geopolitical conditions in the region have been through some serious developments, which requires the strengthening of the economic, social and security structures to boost stability.
The VAT results that can be achieved three years from now will reflect a clearer reality thanks to better and rigorous assessment, based on which a decision to maintain or increase the current percentage can be made in accordance with the conditions prevailing at the time.
Assuming that, according to assessments, it is okay to increase the VAT, this could not be doubled to 10 per cent at once, or can gradually be increased, such as to 7.5 per cent and then to 10 even if the evaluation process may indicate otherwise.
This is quite likely, as it has happened in many countries, including in Europe, which have raised taxes at some point but reduced at other times according to the prevailing economic conditions and in a nod to investment and growth priorities.
Taking advantage of proposals put up by international institutions is important. But they need to be be mixed with the views of the country concerned, which knows its realities better than others.
Interestingly, the GCC countries share similar experiences in the present time. The bottom-line here is: “God helps those who help themselves…”.