The introduction of value added tax (VAT) in the UAE and Saudi Arabia this year has had a negative impact on their economies in the short term with inflation rising, a new report by consultancy PwC has found.

Inflation rose to 3 percent year-on-year in Saudi in January, after a year in which consumer prices were largely suffering deflation, with a smaller step up in the UAE to 4.8 percent.

This compares to very low rates of inflation in the rest of the GCC where VAT is yet to be introduced (below 1 percent in Kuwait, Qatar and Oman).

The purchasing manager indices (PMIs) for Saudi and the UAE also showed a slump. Saudi had been close to a two-year high in December but dropped in January to a record low of 53 (albeit still above the 50-mark that signals economic expansion).

UAE, which had been at a record level in December, slipped more gradually, down to 54.8 in March, its second lowest reading in a year.

However, the implementation of the tax will prove beneficial for regional economies in the longer term, the report added.

“Although adjustments such as subsidies cuts and the introduction of VAT this year have had short-term negative impacts, they should make the economy more efficient,” the report said, referring to the UAE.

According to the latest IMF forecasts, the country’s real GDP growth is expected to reach 2 percent in 2018 ( up from an estimated 0.5 percent in 2017) and average 3.1 percent in 2019-23. The deficit is narrowing and is expected to return to a surplus by 2022.