GCC strives to shrink shadow economy by developing SME sector; Report

By Arya M Nair, Official Reporter
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GCC Shadow Economy

Gulf Cooperation Council (GCC) countries enjoy a remarkably small shadow economy, reported Arthur D. Little, an international management consulting firm.

The report says that GCC’s informal businesses account for 18 percent of GDP, below the world average (~28 percent), and close to Organisation for Economic Co-operation and Development (OECD) countries (~15 percent).

However, bringing shadow businesses into the formal economy is a priority. This Viewpoint shares recent initiatives and explores options for shrinking the shadow economy and expanding small and medium-sized enterprises (SMEs) by increasing economic and financial inclusion.

Economic & Financial Inclusion: The Key to GCC Growth

Creating an economically and financially inclusive climate is key to future growth for countries in the GCC region. There are multiple reasons to prioritize inclusion;

  •       Boost economic growth – By enlarging the scope of activities included in the formal economy to include more businesses performing transparently, GCC countries will benefit from additional sources of income. The region can also stimulate economic progress and increase domestic demand by expanding financial services for underbanked and unbanked populations.
  •       Improve financial stability – Inclusion may reduce dependence on informal financial systems (e.g., those provided by non-licensed intermediaries), which can lead to greater stability in the financial sector. Economic actors who gain better access to formal financial services will enjoy stronger and more sustainable growth in their activity.
  •       Promote social inclusion – Providing low-income populations with access to financial services can help alleviate poverty by enabling people to save and invest and obtain credit to start or grow businesses (for example, “STC Pay”). Economic inclusion can bring about social inclusion by introducing marginalized groups to the financial services they need to participate fully in the economy.
  •       Support sustainable development – By increasing the availability of financial services, the GCC can further sustainable development goals, such as reducing overall inequality and furthering gender equality.

Financial and economic inclusion is an important undertaking for countries in the GCC region, as more inclusiveness can bolster long-term economic prospects and create a more equitable and stable society for all.

World Bank informal economy growth
Rep.Image (Courtesy; Arthur D. Little)

Potential in the Informal Economy

The GCC is spearheading the Middle East and North Africa (MENA) region’s fight against the shadow, or informal, economy by introducing policies and ideas to motivate shadow businesses to participate in the formal economy.

Some of the measures the GCC is taking include;

  •       Improving tax enforcement — taking steps to increase tax enforcement and compliance, which includes implementing more robust tax laws and strengthening the capabilities of tax authorities. Helped by a historically low tax environment, GCC countries are evaluating international examples in order to refine the taxpayer experience (the largest cause of citizens and companies bailing out of the tax process, after the tax burden itself) and to create balanced value propositions where taxpayer-funded benefits are worthy of the required contribution.
  •       Encouraging small businesses to formalize— working to simplify and accelerate the process of creating and maintaining small businesses; a straightforward approach can encourage businesses to register, reduce the size of the shadow economy, and increase government revenue.
  •       Enhancing digitalization — promoting digitalization in the financial sector and emphasizing electronic payment systems, which may increase transparency and result in a reduction of the shadow economy, while making all interactions with government services easier.
  •       Promoting transparency— introducing measures to make financial transactions transparent, such as implementing anti-money-laundering laws and regulations and increasing financial sector oversight.

By taking these measures, the GCC is striving to create a more inclusive and transparent economy and reduce the size of the shadow economy. This can support sustainable and inclusive economic growth and improve the climate for the SME sector.

Impact of Shadow economy on GCC
Rep.Image (Courtesy: Arthur D. Little)

Painting the SME Sector of the Future

Defining a target for the SME sector versus the overall economy is a daunting task. The target size of the SME sector in the GCC region is not explicitly stated. However, governments and development organizations in the GCC region recognize the important role that SMEs play in promoting economic improvement, job creation, and entrepreneurship and are working to support the development and growth of the SME sector in the region.

Governments and development organizations in the GCC region are working to realize their dream of a diverse and dynamic SME sector, comprising a range of businesses and industries. Some key areas of focus for the development of SMEs in the GCC region include;

  •       Technology and innovation — promoting the advancement of technology-driven SMEs and backing the expansion of businesses in sectors such as e-commerce, fintech, and digital health.
  •       Women-led businesses— encouraging women-led SMEs and promoting gender diversity in entrepreneurship.
  •       Renewable energy— supporting the growth of SMEs in the renewable energy sector, including businesses focused on solar, wind, and hydropower.
  •       Micro and small enterprises — providing assistance and resources for micro and small enterprises, particularly in rural and remote areas.
  •       Tourism and hospitality — furthering the progress of SMEs in the tourism and hospitality sector, including businesses focused on eco-tourism and sustainable tourism.

The report concludes by saying that GCC countries are on a path to achieve what has proven impossible for virtually any government in the last century; combining a state-driven economic transformation with a citizen-centered approach. Leaving aside ideological aspects of previous attempts, one economic pain point remains, the lack of a large, sustainable SME sector to ensure growth, dynamism, and resilience for the entire economy.

Related: KFED partners with The Accounter to offer accounting & financial services for SMEs