Pressure is mounting on GCC countries to brace for an unprecedented fundraising drive in 2016 to cover estimated aggregate fiscal deficits close to $265 billion through the issuance of bonds asset sales introduction of taxes and subsidy cuts.

With oil revenues plummeting to more than 60 per cent over the past one year countries in the GCC are expected to need more than $250 billion over the next two years.

According to financial strategists much of that required funds will be raised through asset sales sukuk or bonds and new taxes including a proposed introduction of value-added tax across the GCC.

In 2015 alone GCC countries will record a deficit of $145 billion in the public budgets and more than $750 billion between 2015 and 2020 amid the continued decline in oil prices the International Monetary Fund forecasts. The oil price has plummeted to below $40 a barrel down from last year's peak of $115 a barrel leading to widening fiscal deficits for the GCC. According to forecast the GCC fiscal deficit will reach 13 per cent of GDP this year versus the IMF's projection of an eight per cent in May.

The IMF says the development of local debt instruments which have liquidity in the Gulf markets can lead to enhancing the ability of these economies to cope with the adverse shocks indicating that sovereign borrowing represents an option to finance a fiscal deficit.

The fund in its recent round of discussions with the GCC's finance ministers and central bank governors in Doha stressed the need to revive their strategies for reform of domestic taxation system.

The IMF believes that removal subsidies and reforms in taxation would help the GCC countries increase revenue collections from the non-oil economy to partly offset the plunge in oil revenues. It also argues that fiscal reforms would also enable the economies to streamline or eliminate the inefficient fees and duties currently in place.

According to the IMF's policy document the proposed reforms would also begin to put in place the tax system that will be needed to ensure government service provision when hydrocarbon resources are depleted. "Raising more from domestic taxes and relying less on oil revenues will enhance the GCC governments' accountability to the population given the more direct link that will be established between revenues and service provision" it said.

The IMF had suggested that GCC countries could choose a combination of modern tax options to meet their revenue needs. These include a low rate broad-based VAT together with selected excises; a tax on profits of incorporated and unincorporated enterprises; and a recurrent property tax. A combination of these taxes can ensure efficient and progressive tax systems in the region. Taxes should start at low rates with limited exemptions. Such a system will be easier to administer and will have little or no efficiency costs to the economy.

With regard to VAT the fund noted it is important that the GCC countries announce the broad principles of the VAT framework they have agreed. Individual countries should then move forward with designing their own VAT law. International experience suggests it will take 18-24 months to introduce a VAT once agreement has been reached. Rather individual countries should move ahead with their own reforms and implementation strategies when ready and this may provide a demonstration effect to other countries.The IMF experts suggest that the choice of the VAT threshold is crucial for the successful introduction of VAT. The simple rule of thumb is that the largest 10 per cent of tax payers account for about 90 per cent of total tax payments.

The IMF also advised the regional governments to limit exemptions to the extent possible to basic social services and hard to tax outputs such as financial services. Experience shows that support for granting exemptions begins to wane only after a few years of VAT implementation. Apart from such fiscal reforms financial experts expect the GCC sovereigns would seek to raise at least $15 billion in the international market next year. That would be more than all GCC sovereign dollar debt issuance from 2013 to the end of 2015. Saudi Arabia is likely to steal the show with the sovereign heavily rumoured to make its long-awaited debut in the international market.

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Issac John Associate Business Editor of Khaleej Times is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years including 23 years with Khaleej Times. A post-graduate in English and graduate in economics he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends he is respected for his astute understanding of the local business scene.