GCC countries making headway against shadow economy

28 June 2023 Consultancy-me.com 3 min. read

Bringing informal businesses into the formal economy will continue to be a huge driver of growth in Gulf Cooperation Council (GCC) countries.

A new study from international management consulting firm Arthur D. Little shows how formalizing businesses in the shadow economy will boost economic growth, improve financial stability, and promote social inclusion. Initiatives like this also have the potential to support sustainable development, an important undertaking for countries in the GCC region, which have historically struggled with high levels of inequality.

GCC countries are fortunate to have comparably small shadow economies. Informal businesses in the region account for 18% of GDP, well below the world average of around 28%, and nearly on par with European countries.

GCC countries making headway against shadow economy

The shadow economy refers to underground or informal sectors where unreported income, tax evasion, and illicit transactions elude government oversight.

“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,” said Stephane Ulcakar, principal at Arthur D. Little.

The size of the GCC shadow economy has been steadily decreasing in recent years. This economic inclusion has been adding significant percentage points to the formal economy GPD, contributing to the healthy growth seen in the region. A separate report from 2020 showed how Saudi Arabia, for example, could add around 2.5% to their GDP by pushing for inclusive growth.

GCC countries making headway against shadow economy

“As GCC countries continue to demonstrate remarkable progress, 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,” said Ulcakar.

SMEs often play a significant role in the shadow economy, as they may engage in cash transactions, underreport their income, and evade taxes to remain competitive or reduce financial burdens. The informal nature of SMEs' operations allows them to operate outside the mainstream economy, posing a challenge for governments in terms of revenue collection and regulatory enforcement.

The importance of SMEs in the economy of the GCC region is related to the imperative for governments to accelerate the shift away from the dominance of the oil industry. Saudi Arabia, for example, has recently understood the importance of SMEs in their Vision 2030 plan – an ambitious plan to diversify their economy and completely transform their society to be more economically sustainable.