Saudi Arabia: A theory of diminishing (oil) returns

THE recent news that the Kingdom of Saudi Arabia is tripling the value-added tax (VAT) and canceling the cost of living allowance of its citizens caught my eye and interest because during my assignment in that country in the early 1980s, those things did not exist. There were no taxes at all. It was much later that the first VAT was imposed. Sin taxes on cigarettes, beverages and luxury goods were also imposed quite recently.

The Kingdom has been a welfare state in the fullest meaning of the term. It takes care of its citizens from cradle to grave, providing them housing, education, healthcare, employment in the public sector and gasoline and electricity subsidies; and does not even collect from them personal income taxes. (The term “welfare state” has been earlier associated with Scandinavian countries, which tax their citizens heavily.) That the Saudis had, until the recent action of the Kingdom, also provided cost of living allowances for its citizens, obviously to protect them from inflation, seems no less than pampering.

The Kingdom is the world’s largest exporter of oil and its oil reserves are among the largest in the world, too. It may also be the most popular exporter because it can produce oil at the lowest cost; its oil reserves are close to the ground. So astronomic were its revenues from the sale of oil that it could rely on just these revenues to support the Kingdom’s budget.

My expectations of Saudi Arabia may have been influenced by the movie of David Lean, “Lawrence of Arabia.” I expected to live in tents in the middle of the desert and to ride on camels to go to the office. Whether the movie’s production design was true or not, a long time had passed. There had been changes. The tremendous wealth of Saudi Arabia from oil revenues has made up for all shortcomings of nature, climate and geography.

The year was 1980, now recorded as the year that the gross national product per capita of Saudi Arabia was at its highest, a time that while oil revenues were massive, the population was quite small. It was the reign of King Khaled, remembered as a time of great transformation, of great infrastructure building. And Filipinos in the hundreds of thousands took a great part in all that infrastructure-building. When I arrived in Jeddah, then the diplomatic capital before moving to Riyad, Filipino contractors, engineers and construction workers had built the airport and the port of the city. But for the state-of-the-art appearance of the airport and the various nationalities on the way to the Haj, one would think he was in the Philippines. There were so many Filipinos coming and going, many making their connections to their workplaces in other parts of the Kingdom. Where they would make buildings and palaces, highways and so on.

Housing was not a problem. Because of the influx of foreign workers, many Saudis became instant landlords. They would go to the bank and get money to build apartments which they rented out. There were no skyscrapers then, but there were already a few multi-star hotels.

The temperature around noontime reached boiling point, you could fry an egg on the pavement. But thank God for air conditioning and the low price of electricity, you could put the air conditioner on high the whole day. The temperature dropped precipitously at night, and it was nice to go around then, especially to the souk, the traditional marketplace made famous by the Ali Baba movies, now confined to the selling of gold jewelry. Like oil, gold was cheap in Saudi Arabia because it is a big producer of the mineral. Or you could go to the department store, which had the name of a popular American grocery but in Saudi Arabia was more like Macy’s. You would find cheeses from France, Italy and the United States, as well as fresh oranges, cherries and vegetables in the supermarket. There were signature items and fine houseware items galore too at oo-la-la prices. Perhaps to encourage customers to purchase oil, the Kingdom did not impose tariffs either. There was everything money could buy at prices lower than everywhere else.

Or one could walk on the seaside. Saudi Arabia has a coastline and with its oil revenues has been able to turn the sea into water suitable for bathing and gardening. It was said to be also potable. There were many brands of mineral water available one could choose for drinking. Later the desalinated water would make it possible for grass and trees to grow.

Some 10 years ago, I was back in Saudi Arabia to find it changed tremendously. I was in Riyadh, which during my assignment in the Kingdom was almost all desert punctuated by the Royal Palace and a few government buildings and residences. Now it is full of skyscrapers screaming commerce. Riyadh has emerged as one of the leading financial centers of the world. Recent photos of the city landscape are marked by buildings of the fantastic architecture of Dubai.

It was not just because of its being the No.1 oil exporter that the Kingdom of Saudi Arabia has joined the ranks of developed countries and is the only Arab country in the Group of 20. It rates high in the Development Index of the United Nations. The

Kingdom has certainly much to show for the oil revenues it has amassed, apart from its subjects enjoying the blessings of the welfare state.

The Kingdom has always realized that oil and gas are finite resources and someday they will be gone. Even when I was there, the Kingdom had sought to diversify the economy away from oil and gas. The infrastructure building program of the Kingdom was geared to the building of cities that will provide the people opportunities for various means of livelihood.

The Kingdom now assures its subjects food security not only because it has the money to import food with. It has in fact attained not only self-sufficiency in agriculture but the capacity to export wheat, fruits, and vegetables. If and when the Kingdom runs out of oil reserves, its citizens at least will not go hungry.

The modern history of Saudi Arabia may be divided into two periods: the first of soaring oil revenues and the second of declining oil revenues. The latter does not coincide with a depletion of the oil reserves but is largely in response to the volatility of the oil market brought by circumstances affecting demand.

The discovery and development of shale oil in the US has produced a glut in the market driving prices down. Demand is falling with the increasing preoccupation of the public with the threat of global warming and climate change. The current coronavirus pandemic drives a lesson on how unexpected public health crisis can have a most devastating impact on the oil market and everything else.

It was calculated in 2014 that for the Kingdom to balance its budget the price of a barrel of oil should be $106. The price of a barrel of oil has of late fallen to as low as $20. Saudi population grows at a high rate of 2 percent a year. If the Kingdom keeps on borrowing or dipping at its vast Treasury reserves to cover the deficit, it has been estimated that the Kingdom will be heavily in debt or go bankrupt in a decade.

The core document that future students of the contemporary history of Saudi Arabia will refer to is the Vision 2030 proclaimed by Crown Prince Mohammed bin Salman. The announcement of the tripling of the VAT and cancellation of the costof-living allowance whose timing makes it appear as consequence of the coronavirus economic lockdown are anticipated in the document. It calls for the search for additional sources of government revenue and savings such as taxes and the cutting of subsidies.

The perks of the welfare state can stand some trimming. The gasoline and electricity subsidies will have to be cut. Beyond that little else can be subtracted from the way of life of the subjects of the Kingdom, a young population, any turn unhappy and restive. The Kingdom must find other sources of revenue. Governance must focus on bolstering the confidence of the citizenry in their future by presenting them a real horizon of opportunities for self-realization.

The Kingdom has inaugurated a policy of welcoming foreign investments and has plans of privatizing the oil industry and other public enterprises. The World Bank has already raised the rating of the Kingdom by several notches in its listing of the most competitive countries and where it is easiest to do business in.

It has launched a tourism development program, and the Kingdom has certainly a lot to offer tourists in archaeological, historical and natural landmarks, apart from world-class accommodations. Men and women will be able to check in hotels without proving their marital status. Female tourists will be required only modest dressing, instead of full covering from head to foot. There is a plan to build a resort near the capital where women will even be allowed to wear bikinis.

Vision 3030 has, however, been criticized for threatening measures for social and economic stability and sustainability secondary to military spending. The budget of the Kingdom since under Vision 2030 gives primacy to military arms buildup. It is today the second largest arms importer in the world. Military spending makes up a fifth of the entire budget. It spends 10 percent of its gross domestic product, more than even the US, China, the UK and France. Much of the Kingdom’s arms purchases are with the US and described by as motivated by political reasons rather than actual military strategic needs..

The Kingdom does not appear bent on pursuing expansionist adventures. As one writer observes, it seems to be content with coping with the annual logistical challenge it is presented as keeper of the holiest shrines in Islam. Its worries are about the intentions or inclinations of other countries and non-state actors whether directly or indirectly affecting the Kingdom. There is the rivalry with Iran based on the so called Shia-Sunni divide, much of which is provoked or fabricated by third countries and players for their own self-interest. Shiites and Sunnis belong to one religion and share the same basic tenets. They have always lived in peace together whether they are the majority or the minority. Even after the Iranian revolution, there was a time when the two countries had diplomatic relations. They can make peace by emphasizing their similarities rather than their differences. The differences between Shia and Sunni happened after the death of Mohammed. It was surely not the wish of the Prophet they should be divided.