Saudi Ara­bia reel­ing from fall­ing oil prices

The Pak Banker - - OPINION - Hugh Naylor

STUNG by fall­ing oil prices, Saudi Ara­bia has cut spend­ing and sub­si­dies as part of harsh aus­ter­ity mea­sures that threaten the lav­ish wel­fare pro­grams un­der­pin­ning its sta­bil­ity. The oil-ex­port­ing gi­ant's econ­omy has gone from pro­duc­ing wind­falls to deficits, and Saudi rulers in­creas­ingly strug­gle to pro­vide the cushy govern­ment jobs, ex­pen­sive state hand­outs and tax-free liv­ing that have long bought them do­mes­tic obe­di­ence. The pivot to aus­ter­ity - which also has been im­posed by neigh­bor­ing Gulf Arab oil monar­chies - risks trig­ger­ing un­rest in a Saudi so­ci­ety that is con­ser­va­tive and par­tic­u­larly re­sis­tant to change, an­a­lysts and di­plo­mats warn. The cut­backs are seen as nec­es­sary by King Sal­man's son, de­fense min­is­ter and head of eco­nomic plan­ning, Mo­hammed bin Sal­man. The 30-year-old prince has raised eye­brows for over­see­ing lead­er­ship shake-ups at home and two wars abroad. Ad­vis­ers say he also in­tends to wean the coun­try off its over­whelm­ing de­pen­dence on oil sales and re­form a bloated and opaque pub­lic sec­tor."He un­der­stands that now is the mo­ment to cap­i­tal­ize on low oil prices by cut­ting waste­ful sub­si­dies and re­form­ing our econ­omy to make us stronger," said Fa­had Bin Jumah, a Saudi econ­o­mist and mem­ber of the coun­try's Con­sul­ta­tive As­sem­bly who has ad­vised Prince Mo­hammed.

Oil prices have plunged by about 70 per­cent over the last year and a half, even fall­ing below $30 a bar­rel this month, bat­ter­ing the world's se­cond-largest pro­ducer and jar­ring a so­ci­ety that has grown ac­cus­tomed to easy money and ex­trav­a­gant con­sumerism. Oil rev­enue ac­counts for an es­ti­mated 90 per­cent of the Saudi govern­ment's in­come, lead­ing to last year's large bud­get deficit of $98 bil­lion, or about 15 per­cent of gross do­mes­tic prod­uct. Saudi Ara­bia, a U.S. ally and ab­so­lute monar­chy, has for decades man­aged to ride out manic oil-price fluc­tu­a­tions, amass­ing as­ton­ish­ing rev­enue that has fi­nanced a healthy cush­ion of backup for­eign­cur­rency re­serves worth hun­dreds of bil­lions of dol­lars. But in Oc­to­ber, the In­ter­na­tional Mon­e­tary Fund warned that the govern­ment, which projects a deficit of $87 bil­lion for 2016, could run out of money within five years if it did not tighten spend­ing.

In re­sponse, Prince Mo­hammed pushed a raft of cost-cut­ting mea­sures late last year that in­cluded a par­tial lift­ing of costly sub­si­dies on gaso­line, elec­tric­ity and wa­ter. Au­thor­i­ties have reined in pub­lic spend­ing, im­posed hir­ing freezes and halted work on in­fra­struc­ture and real es­tate projects. Of­fi­cials talk about pri­va­tiz­ing in­dus­try, in­clud­ing the prized na­tional oil com­pany. The prince even dis­cussed im­pos­ing taxes, a sen­si­tive sub­ject for Saudis, dur­ing an in­ter­view pub­lished last month by the Econ­o­mist. "We're talk­ing about taxes or fees that are sup­ported by the ci­ti­zen," he told the mag­a­zine, al­though he ex­plic­itly ruled out im­pos­ing in­come taxes. For many here, aus­ter­ity has not been easy. Shop­ping cen­ters no longer fill with pa­trons as they used to. Busi­ness own­ers com­plain of ane­mic sales. And many Saudis, even those who flaunt lux­ury cars and live in pala­tial homes, seem in­creas­ingly con­cerned about per­sonal fi­nances. "Look, I'm not go­ing shop­ping as much, and I'm not spend­ing like I used to," said Mo­hammed Ab­dul­lah, 25, an em­ployee at a govern­ment-run char­ity in the cap­i­tal, Riyadh. "I'm spend­ing more money on gas th­ese days." Busi­nesses say they have had to in­crease prices to cope with the ris­ing costs from sub­sidy cuts. "We've ba­si­cally stopped hir­ing, too," said Mo­hammed, a man­ager of a com­pany in Jid­dah that im­ports Euro­pean foods. He asked that his full name not be used be­cause of con­cerns over reper­cus­sions for his busi­ness.

The oil crash has rip­pled be­yond Saudi Ara­bia, spurring sim­i­lar sub­sidy cut­sand hir­ing freezes among fel­low mem­bers of the Gulf Co­op­er­a­tion Coun­cil (GCC), a re­gional political and eco­nomic union of six pe­tro­leum-rich Gulf Arab monar­chies. The United Arab Emi­rates, Qatar, Oman and Bahrain have joined Saudi Ara­bia in aus­ter­ity and ap­pear close to fi­nal­iz­ing a GCCwide value-added tax that could come into ef­fect in 2018. An­a­lysts say the moves sig­nal recog­ni­tion in th­ese coun­tries that ris­ing in­ter­na­tional com­pe­ti­tion in en­ergy pro­duc­tion means the days of $100 or more for a bar­rel of crude oil may for­ever be a thing of the past. "I think there is grow­ing recog­ni­tion here that we need re­form," said Khalid al-Dakhil, a Saudi an­a­lyst based in Riyadh. But re­forms could undo a bar­gain that for decades has pre­served sta­bil­ity in Saudi Ara­bia and its smaller neigh­bors, where in­flated govern­ment salaries and ben­e­fits in­clud­ing free health care and education, as well as hand­some cash trans­fers, have also largely paci­fied cit­i­zens and fos­tered a high-spend­ing cul­ture. Range Rovers, Gucci bags and other lux­u­ries are con­sumed like mun­dane ob­jects in th­ese coun­tries. "The Gulf Arabs are look­ing vul­ner­a­ble, and I don't know if they can weather the storm," said Labib Kamhawi, a Jor­dan-based an­a­lyst.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.