The Middle East, boasting some of the world’s largest oil reserves, is a region divided. The International Monetary Fund has forecast overall real GDP growth of 4.1% for both 2021 and 2022 for the whole Middle East and North Africa region. However, economic growth in Middle Eastern countries – Bahrain, Iran, Iraq, Israel, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, the United Arab Emirates (UAE) and Yemen – will vary. Differing growth strategies, policies and targets across countries will impact development.

Saudi Arabia accounts for lion’s share of GDP in Middle East

Saudi Arabia has the highest GDP in the Middle East. In 2019, it accounted for 30.3% of the region's total, reaching $793bn, its highest value ever. In 2020, the country increased its market share of the Middle East’s GDP to 31.4%, despite a decline in value to $700bn. In 2020, Saudi Arabia moved out of a period of deflation, with inflation recorded at 3.4% due to a combination of higher global oil prices, higher food prices and an increase in VAT. The country's budget document has predicted economic growth of 7.2% in 2022.

Saudi Arabia is the top exporter of crude oil in the world. It shipped an estimated $113.7bn-worth of oil in 2020, $40bn more than Russia. The country however is keen to move away from its reliance on fossil fuels as highlighted in its Vision 2030 framework laid out in 2016. Reforms include increasing the private sector’s contribution to GDP and boosting digital transformation activities, especially in the areas of governmental and financial services.

Finance minister Mohammed Al Jadaan aims to transform the city of Riyadh into a top ten international financial centre with an expanding private sector, focusing on tourism and other services that will account for 65% of national GDP by 2030, against about 40% in 2021.

Qatar, one of the worlds largest exporters of liquefied natural gas, has the highest GDP per capita in the Middle East. In 2019, GDP per capita was $62,276, compared with Saudi Arabia’s $23,139. Home to an abundance of oil and gas reserves with a relatively low population compared with its counterparts, it is one of the richest countries in the world. Low oil prices lead to a decline in GDP per capita below $80,000 in 2015 ($63,039) for the first time since 2011, and figures have remained below this threshold since.

Economic development is one of the four pillars of Qatar's Nation Vision 2030. As part of reforms to assist the country's development, in 2021, Qatar introduced a new minimum wage law. A draft law was also put in place allowing 100% foreign ownership in Qatari listed companies.

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In a further boost to the economy, in 2021, Saudi Arabia reinstated diplomatic ties with Qatar. Almost four years prior, in 2017, Saudi Arabia, the UAE, Bahrain and Egypt sealed off borders with Qatar citing links to terrorism in the country, allegations Qatar denied. The easing of the conflict should improve trade, tourism and logistics in the country.

The country will host the FIFA World Cup 2022, with Fitch Solutions predicting an increase in the country’s GDP of 4.1% in 2022 largely as a result of this event. Hassan Al Thawadi, head of the Qatari World Cup organising committee, has hailed the event as a “transformative tournament”. However, with claims of bribery and corruption still being made, along with concerns over human rights, the event has not necessarily enhanced Qatar's international reputation.

Ranked second, behind Saudi Arabia, the UAE contributes significantly to the Middle East’s GDP (consistently more than 15% since 2015, peaking in 2020 at 16.1%).

Having recently celebrated its golden jubilee, the country launched Projects of the 50, a series of developmental and economic projects that aim to transform the UAE into a comprehensive hub in all sectors and establish its status as an ideal destination for both investors and talented workers. Projects of the 50 covers several key sectors such as the economy, entrepreneurship, advanced skills, digital economy, space and advanced technologies.

The UAE is in a strong economic position, having built solid foundations, with a highly regarded business environment, exceptional infrastructure, defined policies and political stability all contributing. The roll-out of economic support schemes during the Covid-19 pandemic also enabled the country to make a strong recovery from the impact of the virus. To further enhance growth, in 2021, the country announced it would offer citizenship to foreigners, which is expected to bring huge economic benefits.

The country was also hailed for its quick and successful reaction to the virus breakout, highlighting the strong leadership within the country. It was one of the first countries to adopt the mandatory use of face masks in March 2020, in advance of the World Health Organisation recommending this policy.

Following the end of the conflict in the country in 2011, GDP in Iraq started to surpass $200bn, reaching $218bn in 2012. Since then GDP has fluctuated. The US became reinvolved in the country in 2014 at the head of a new coalition, only to see GDP fall below the $200bn mark between 2015 and 2017. Gains have since been made, with its GDP hitting $235bn in 2019.

Economic conditions in Iraq have been gradually improving, but Covid-19 and the drop in oil prices have hit the country hard. Risks remain and this continues to deter investors, with macroeconomic volatility, a further drop in oil prices, worries over security and political stability all adding to these concerns. At the end of 2021, US forces ended their combat mission in Iraq but service members will remain in the country to advise and assist, highlighting an element of confidence in security in the country.

Lebanon’s GDP had been slowly increasing since 2000; however, in 2019, GDP declined to $51.95bn, and to $31.74bn in 2020. Conditions in the country are deteriorating rapidly. In March 2020, Lebanon defaulted on paying back its debt for the first time.

Since 2019, the Lebanese pound has lost 90% of its value. Prices of basic goods, most of which are imported, have risen sharply, leaving many people in a state of poverty. Lebanon took more than a year to form a new government after an ammonium nitrate explosion in the Port of Beirut in August 2020, which forced the resignation of the government.

The country is currently faced with shortages of fuel and medical goods, alongside its political instability. As a result the World Bank has stated Lebanon is facing one of the most severe global crises. Following these deteriorating conditions, research consultancy Information International found that 77,000 Lebanese people left the country in 2021, with 70% being between the ages of 25 and 40.

FDI is booming in the UAE

Since 2003, the UAE has consistently accounted for more than 40% of foreign direct investment (FDI) projects into the Middle East. In recent years, FDI into the country has been increasing, peaking at 445 projects in 2019. In 2020, it recorded its largest share of Middle Eastern FDI, taking 62% of FDI projects in the region, despite lower project numbers than in 2019.

The UAE is keen to build on this momentum. In September 2021, as part of the Projects of the 50 campaign, minister of state for foreign trade Thani Bin Ahmed Al Zeyoudi said: “Today we mark the beginning of true collaboration as we announce the UAE investment promotion partnerships, which encourage local investment promotion authorities, free zones and UAE private companies to attract FDI towards important projects that will benefit the country.” The UAE aims to attract $150bn in FDI annually by 2030.

One of the biggest reforms announced to increase investment into the UAE is to allow investors and entrepreneurs to establish and fully own onshore companies in almost all sectors. There have also been changes around digital signatures, data protection, online security and copyright, making investment in the country easier.

Saudi Arabia ranks second for FDI in the Middle East by number of FDI projects. Growth in FDI is key to achieving the country’s Vision 2030 plans and its goal to end its dependence on fossil fuels. The government is targeting $100bn in annual FDI by 2030 in the city of Riyadh alone.

In 2021, as part of plans to increase FDI into the country, Saudi Arabia announced it would no longer sign contracts with foreign companies that do not have a regional headquarters within its borders from January 2024. The government hopes this will attract investors to set up permanent bases in Saudi Arabia, rather than looking to neighbouring countries, and will create thousands of jobs.

Israel has pitted itself as a key FDI location in the Middle East thanks to its blossoming tech scene. The number of FDI projects in the country peaked in 2019 with 78 greenfield investments recorded. In 2020, it was home to the highest number of start-ups per capita in the Middle East and is considered an innovation leader across many sectors, including ICT. The country’s laws encourage capital raising, tech innovation and industrial R&D investment.

Covid-19 provided a boost for tech companies in Israel with a surge in demand for new technologies as the world looked to adapt to new ways of living and working. With rising demand, and to combat a shortage of skilled workers, in 2021, the Israel Innovation Authority announced a new initiative to offer funding of up to 70% for “innovative and groundbreaking models” that will lead to more professional training, retraining where required, and the placement of candidates in tech jobs.

Many Big Tech players have already set up bases in Israel with plans to expand in the future. In the final quarter of 2021, Microsoft announced plans to open five additional sites in Israel and more than double its R&D workforce in the country by 2025. Google also plans to establish a chip development team in the country, having opened its first office there in 2006. As tech investments increase in Israel, many are pitching the country as the new Silicon Valley.

Heavily dependent on oil, Kuwait is looking to use FDI to diversify its economy. The country aims to attract more than $200bn in FDI between 2020 and 2035. Plans to become a centre for transportation and warehousing include the creation of logistics cities.

Sheikh Yousef Al-Abdullah Al-Sabah, the director-general of Kuwait Ports Authority, has said that the logistics cities will be built on an area of two million square metres. Plans include a smart port, which would use a single communication system for all logistics, customs and port operations. To reduce traffic on the borders, the Kuwait Ports Authority also intends to establish Kuwait’s first inland port.

The country is also aiming to diversify its economy further through the reconstruction and development of Failaka Island and Boubyan Island, which will be promoted as commercial centres.

The lifting of sanctions in Iran in 2016 had a profound effect on its greenfield FDI. The country attracted a record 63 greenfield FDI projects that year. However, FDI declined almost as quickly as it rose. In 2017, then-US President Donald Trump reinstated sanctions, the effects of which can be seen by a decline in FDI to zero projects by 2020. Current US president Joe Biden has stated that the US is open to fresh talks with Iran, but there has been little movement by either side to date.

Where in the Middle East is best for doing business?

Almost 100% (99.2%) of individuals in the UAE were using the internet in 2019. It was the first country in the Arab region and the fourth globally to launch its 5G network, and UAE telecoms operator Etisalat has announced plans to explore 6G, which is estimated to be 100 times faster than 5G, as well as offering lower latency and higher reliability. The UAE also offers attractive corporate tax structures, ranging from 0% for certain industries, to 20% for branches of foreign banks, and rising to 55% for some oil and gas activities. Further tax incentives can be found across its abundance of free zones, which often offer tax exemptions or tax holidays.

Investors wanting to set up a business in Oman only had to wait an average of 4.3 days in 2019, compared with the regional average of 21 days. The country also offers low corporation tax at 15%. To encourage investment, the Ministry of Economy has taken additional steps to create an investment-friendly regulatory framework by introducing the New Foreign Capital Investment Law. It also plans to simplify the company formation procedures to make it easier to obtain licences for commercial activities. Furthermore, Oman's improvement of its Corruption Perception Index score from 47 in 2012 to 54 in 2020 signifies positive development in the country.

Iraq has seen its Corruption Perception Index score increase from 16 in 2015 to 21 in 2020, its highest rank to date (higher being better). Syria, however, with a score of 14, ranks lowest in the Middle East in the index, below only South Sudan and Somalia on a global basis.

The liveability divide

The divide in Middle Eastern economies is further highlighted when comparing tertiary education enrolment. In Yemen, tertiary education enrolment was only 10% in 2011. It seems unlikely that this figure will have changed in the proceeding decade, with about two million children forced to drop out of school in Yemen due to conflict and poverty in 2021.

In contrast, Saudi Arabia, which had tertiary education enrolment of 70% in 2019, has announced new education initiatives. The Flexible Learning Pathways Initiative aims to improve professional skills for K-12 education, higher education and professional development, leading to a better labour market.

Palestine has the highest unemployment rate in the region, at 25.3% in 2019 and 37.4% in 2020. With poor economic prospects and political unrest, the outlook is bleak for its working age population. Loss of land and water have lead to a decline in agriculture employment in Palestine, too. Tertiary education enrolment remains low at only 43.2% in 2019, while school attendance rates tend to fluctuate with many children, girls in particular, forced to stay home during unrest.

Growth in solar power as Middle East looks away from oil

As the global focus shifts from fossil fuels, many countries in the Middle East are looking to increase their share of renewable energy provision. The region boasts an attractive landscape for solar power, given the availability of cheap, vacant land with high levels of sunlight, low labour costs, cheap project financing and tax incentives.

The UAE aims to generate 50% of its electricity from carbon-free sources, driven mainly by solar PV, by 2050. The two-gigawatt Al Dhafra plant is expected to be operational by the end of 2022. Developed by a consortium of France’s EDF and China’s Jinko, it will generate enough electricity for approximately 160,000 homes across the UAE, using 3.5 million solar panels. The UAE remains committed to climate action and will host the COP28 international climate conference in 2023.

Bahrain has already achieved 95% of its national renewable energy target of 250 megawatts (MW) by 2025. Sustainable Energy Authority president Dr Abdulhussain Mirza stated that currently more than 237MW of green energy is being produced, and the country aims to become a centre of clean energy excellence. Coinciding with these plans, at the end of 2021, local company Batelco opened its solar park in the Ras Abu Jarjoor region. The park will help to reduce about 900 tonnes of carbon emissions yearly.

The Middle East region has offered investors an attractive landscape for many decades now, and with many growing economies, skilled workforces and investor-friendly initiatives, that situation is unlikely to change.