Saudi Arabia wants higher prices to kick oil addiction
LONDON: Saudi Arabia’s financial position has stabilised as a result of the increase in oil prices as well as efforts to raise non-oil revenues and trim government spending.
But the country probably needs even higher prices and revenues in the next few years to pay for its ambitious transformation programme while maintaining internal stability.
The kingdom’s foreign reserves stood at US$493 billion at the end of March 2018 and have been basically stable for eight months after declining steadily for nearly three years.
The government has introduced a value-added tax and raised other fees and taxes to compensate for the decline in oil revenues during the slump and to diversify the revenue base.
Utility prices have been increased and some subsidies have been reduced to ease pressure on the budget and clean up the accounts of the state-owned oil company Saudi Aramco ahead of its planned share sale.
But the biggest contribution to the improvement in the government’s budget and the balance of payments position has come from rising oil prices.
Benchmark Brent prices have risen by about US$47 a barrel, or 175 per cent, since hitting a cyclical low in January 2016.
As prices have risen, the kingdom’s drawdown on foreign reserves has eased and now stabilised, according to data from the Saudi Arabian Monetary Authority.
The rise in oil revenues has provided much-needed fiscal breathing room and the International Monetary Fund has encouraged the government to slow the pace of tax increases and spending cuts.
The government has announced big ambitions to transform the economy by diversifying away from oil and making it less dependent on state spending as part of its ‘Vision 2030’.
In the meantime, however, the kingdom remains reliant on a single commodity to an unusual degree and almost the entire economy is linked to state spending.
Commodity exports account for 30-40 per cent of GDP and nearly all of this is crude oil, LPG and refined products, according to the United Nations Conference on Trade and Development.
There was no reduction in the kingdom’s dependence on oil exports between 1995 and 2015 despite repeated pledges about diversification.
In turn, oil revenues support an enormous number of government jobs. The kingdom depends far more on public employment than most other countries.
Public sector jobs account for nearly 35 per cent of all employment and the wage bill alone absorbs 12 per cent of GDP, according to the International Monetary Fund.
Real gross domestic product declined by 0.7 per cent in 2017, the first annual decrease since 2009, according to the IMF.
The decline was because of a combination of lower oil production and the adverse impact of fiscal austerity on the rest of the economy.
The government wants to shift the focus of the economy towards the non-oil private sector, but the transition will require enormous investment, even assuming it is eventually possible.
Economic transformation will need hundreds of billions of dollars, and financing can come only from the kingdom’s internal resources, or in the form of foreign loans, equity sales or direct investment.
The crown prince’s recent extended tour of the United States and Europe was intended partly as a roadshow to encourage foreign investment and partly to cement government-to-government alliances.
But foreign investment on its own is unlikely to be enough, given the scale of the task and lingering concerns about the kingdom’s political direction and business environment. — Reuters