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GCC countries keep shadow economy in check: Report

7 Jun 2023 By GULAM ALI KHAN

It is estimated that shadow economic activity accounts for 15% of GDP in Saudi Arabia, 17% in Bahrain, 22% in Kuwait, and 24% in the UAE and Oman

Muscat – The GCC countries boast a remarkably small shadow economy, with informal businesses accounting for just 18% of total GDP of the region, which is significantly below the global average, according to a new report.

It is estimated that the shadow activity accounts for 15% of GDP in Saudi Arabia, 17% in Bahrain, 22% in Kuwait, and 24% in the UAE and Oman. This is significantly below the global average of approximately 28% and closely aligns with OECD countries, which stand at around 15%, according to the global management consulting firm Arthur D. Little.

‘Building on this strong position, integrating shadow businesses into the formal economy remains a top priority across the GCC,’ the report noted.

Arthur D. Little Wednesday released an exclusive viewpoint report titled ‘Delivering Inclusive Growth’. The report outlines recent initiatives and presents innovative strategies designed to further diminish the shadow economy and bolster SMEs by enhancing economic and financial inclusion.

According to the report, the GCC is spearheading the battle against the shadow economy in the Middle East and North Africa region by implementing effective policies and ideas that incentivise shadow businesses to participate in the formal economy. Measures include improving tax enforcement, promoting the formalisation of small businesses, advancing digitalisation, fostering transparency, and boosting financial inclusion through the provision of financial services and greater access to credit.

In the UAE alone, SMEs employed more than 86% of the private sector labour force as of mid-2020 and accounted for over 60% of GDP. Meanwhile, Saudi Arabia aims for SMEs to contribute 35% by 2030, and Bahrain set a target of 50% to be achieved by the same year.

Stephane Ulcakar, principal at Arthur D. Little Middle East, said, “By integrating key enablers such as streamlined regulations, enhanced tax oversight, accessible financial services, and a level playing field, the GCC region can establish a robust foundation for the growth and development of the formal economy. These concerted efforts not only reduce incentives for individuals and businesses to operate in the shadow economy but also foster a more inclusive and sustainable economic landscape.”

“As the GCC countries continue to demonstrate remarkable progress, these strategic measures will further empower SMEs as vital drivers of economic growth, innovation, and resilience, ultimately contributing to the long-term prosperity of the entire region,” he added.

GCC accelerating inclusive growth

To ensure a robust enabling SME ecosystem, Arthur D. Little advised that the governments must lead with an orchestrated and coordinated approach and offer solutions that harmonise design, technology, and data. Moreover, such an ecosystem requires that various ministries and government entities establish shared objectives to circumvent siloed approaches.

‘Key enablers of this ecosystem include a strong legal framework, straightforward and transparent taxation, artificial intelligence and digital solutions, access to finance, investment, market access, lucid and effective labor laws, comprehensive infrastructure, and education and awareness,’ the report noted.

It said that the GCC countries are forging a path toward achieving what has eluded virtually every government in the last century: state-driven economic transformation with a citizen-centric approach.

‘But there is more to do; the region’s leaders recognise the need for a thriving and sustainable SME sector to guarantee growth and resilience for the entire economy, and they have positioned this need at the heart of their policies,’ the report added.

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