Saudi Arabia cuts back gravy to get finances under control

SAUDI Arabia has cancelled bonus payments for state employees and cut ministers’ salaries by 20% — steps that further spread the burden of shoring up public finances to a population accustomed to years of government largesse.

Stocks tumbled the most in eight months on Tuesday after the government decided to suspend wage increases for the lunar year starting in October and curbed allowances for public sector employees, according to royal decrees and a cabinet statement. The salaries of members of a legislative body that advises the monarchy were cut 15%.

In Riyadh the Tadawul all share index closed 3.8% weaker, the most since January 20.

By curbing what many Saudis have for years taken for granted, the government is signalling a determination to reduce the highest budget deficit among the world’s 20 biggest economies amid low oil prices and a lingering war in neighbouring Yemen. The measures, however, risk deepening the kingdom’s economic slowdown by damaging consumer confidence.

While the government needed to save money, cancelling bonuses might affect Saudis “psychologically”, according to Saleh alQarni, a government school teacher who also works as a driver to earn extra cash. “For me as a teacher, it might affect me in school, honestly,” he said as he drove through the crowded streets of the capital, Riyadh, on Monday evening.

Under Deputy Crown Prince Mohammed bin Salman, the world’s biggest oil exporter has already delayed payments owed to contractors and started cutting fuel subsidies as it tries to manage lower oil prices. The budget deficit may narrow to 13% of GDP in 2016 and below 10% in 2017, according to IMF estimates.

Past governments have spent billions of dollars on state wage increases, making private sector jobs less attractive for Saudis.

“Spending on wages soared as oil prices boomed,” said Simon Williams, an economist at HSBC Holdings. With the deficit set to run above 10% of GDP for a second year in succession, “that era is over; wage spending has to be cut”.

The decisions are part of a plan spearheaded by Prince Mohammed, who is second in line to the throne. Under his Vision 2030 plan, the government seeks to reduce the public sector wage bill to 40% of spending by 2020, from 45%. Public debt is seen climbing to 30% of economic output from 7.7% at present.

Perks for senior officials were also scaled back. The government stopped providing cars to senior state officials for their next financial year and announced that ministers would pay fees for their fixed-line phones and cellphones.

The announcements made no mention of how much the cuts would save.

Saudi Arabia was weighing plans to cancel more than $20bn of projects and slash ministry budgets by a quarter to repair its finances, people familiar with the matter said earlier in September. The kingdom also planned to tap international bond markets in a sale that could raise more than $10bn, according to people aware of the plans.

“The ministers’ wage cut is symbolic in nature but overall it demonstrates to the world — because this is prior to the bond issuance programme — that Saudi Arabia is quite serious to tackle things that were once quite taboo issues,” said John Sfakianakis, director of economic research at the Gulf Research Centre.

The measures were signalling “that the public sector will not be the first and last employer, so people cannot resort to the public sector as before”, he said. “They’re telling people that the incentive to go there is going to be reduced.”

The IMF recommended in 2015 that Saudi Arabia control its growing wage bill and make changes to subsidies for fuel and electricity.

In an interview with Bloomberg in 2016, Prince Mohammed said the government planned to accelerate subsidy cuts and impose more levies to spread the burden of lower oil prices. The measure aimed to raise an extra $100bn a year by 2020 in non-oil revenue.

Lower oil prices and government austerity measures have started to have an effect on the economy. Growth is forecast to slow to 1.1% in 2016, according to a Bloomberg survey.