Surge in GCC state handouts emphasises need for long-term solution (page 1 of 2)

A recent report by Merrill Lynch Bank of America estimated that social welfare spending by the six GCC nations since the unrest began has amounted to almost $150bn. As Ben Ali was followed by Mubarak and then Gaddafi, so Gulf governments turned to their cash reserves in order to reduce any possibility of their own people taking to the streets in revolt.

"The initial response of GCC policymakers [to the Arab revolt] has been to sharply increase current spending to accommodate social pressures and to pledge intra-regional fiscal transfers to less endowed members," says Jean-Michel Saliba, Middle East and North Africa economist for Merrill Lynch, in the report. "We estimate that these extra GCC spending pledges total $150bn (12.8% of GDP) while 2011 appropriations could reach 4.9% of GDP."

State-backed financial initiatives

Days after the collapse of the 30-year regime of former Egyptian president Hosni Mubarak in February, Saudi Arabia unveiled a state handout packages worth around $37bn, including money for an extra two months' wages for all government employees, the monthly minimum wage rising to $800, and unemployment benefit rising to $533 a month. By the end of March the handout packages amounted to almost $100bn: more than $67bn will be spent on housing alone, and the new legislation even made provisions to forgive the debts of nationals who die.

In the UAE, plans were announced in the capital Abu Dhabi to spend close to $2bn to providing housing loans for nationals. The government has been trumpeting its democratic credentials too: at last month's Federal National Council elections, during which 20 Emiratis were nominated to sit alongside the 20 appointed members of the country's most powerful legislative body, the electoral college was a record 130,000-strong. In Kuwait the government handed out $3,500 in cash to each citizen along with free food rations, and Oman enacted a 43% rise in the minimum wage, as well as an increase in unemployment benefit and the promise of an extra 50,000 jobs for locals.

In Qatar, meanwhile, significant salary, pension and benefits increases for state and military employees will cost the state more than $8bn. The decree, announced last month, will boost basic salaries and social benefits for state civilian employees by 60%, while military staff of officer rank will receive a 120% increase in basic salaries and benefits, with other ranks getting a 50% rise. The total salary increases will amount to $2.7bn per year, and there will be a 60% pension increase for civilian retirees. In addition, the state made a one-time payment of $2.75bn toward its pension fund, and another $2.75bn towards retirees' subscriptions.

Of course, those Gulf countries without ready access to oil revenues were unable to afford such largesse. In Bahrain, where simmering sectarian tensions erupted into full-scale violence on the streets of Manama, the government has wielded the stick rather than the carrot: scores of civilians have died, and 20 doctors and other medical staff found guilty of treating protestors have been jailed, a decision which caused an international outcry.

There have been some pledges: $7000 handouts, a 25% cut in housing loans, and public wage hikes. However a flight of foreign capital in the wake of the violence, coupled with the fact that the country's vital banking sector was already reeling as a result of the global economic crisis, means that Bahrain is threatened with economic stagnation.