Saudi king cuts once untouchable wage bill to save economy
SAUDI Arabia cancelled bonus payments for state employees and cut ministers’ salaries by 20 per cent, steps that further spread the burden of shoring up public finances to a population accustomed to years of government largesse.
The government also decided to suspend wage increases for the lunar year starting next month and curbed allowances for public- sector employees, according to royal decrees and a cabinet statement published by state media. The salaries of members of a legislative body that advises the monarchy were cut by 15 per cent.
By curbing what many Saudis had 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. Saudi stocks tumbled last Tuesday.
While the government needed to save money, cancelling bonuses may affect Saudis “psychologically,” according to Saleh Al Qarni, 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 per cent of gross domestic product this year and below 10 per cent in 2017, according to International Monetary Fund estimates.
Past governments have spent billions of dollars on state wage increases, making private-sector jobs less attractive for Saudis. The money, though, fueled a surge in non- oil economic growth, which averaged 6.5 per cent between 2000 and 2012, according to IMF data.
“Spending on wages soared as oil prices boomed,” said Simon Williams, HSBC Holdings Plc’s London-based chief economist for Central and Eastern Europe, the Middle East and North Africa. With the deficit set to run above 10 per cent 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, the king’s son and second in line to the throne of the biggest Arab economy. Under his so- called Vision 2030 plan, the government seeks to reduce the public- sector wage bill to 40 per cent of spending by 2020, from 45 per cent today.
Public debt is seen climbing to 30 per cent of economic output from 7.7 per cent currently.
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 will pay fees for their fixed and mobile phones at the start of the
By curbing what many Saudis had 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.
next Islamic year.
The benchmark Tadawul All Share Index tumbled 2.8 per cent at 12.34pm in Riyadh, the biggest intraday decline in three months. Fawaz Abdulaziz Al Hokair & Co., a clothing retailer, dropped six per cent.
The announcements made no mention of how much the cuts would save. Saudi Arabia was weighing plans to cancel more than US$ 20 billion of projects and slash ministry budgets by a quarter to repair its finances, people familiar with the matter said earlier this month.
The kingdom also plans to tap international bond markets in a sale that could raise more than US$ 10 billion, 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 program – 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 are 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, so that’s important as well.”
The IMF recommended in 2015 that Saudi Arabia control its growing wage bill and make changes to government to subsidies for fuel and electricity.
In an interview with Bloomberg this year, 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 US$ 100 billion a year by 2020 in non- oil revenue.
Lower oil prices and government austerity measures have started to impact the economy. Growth is forecast to slow to 1.1 per cent this year, the lowest level since 2009, according to a Bloomberg survey. Consumer spending has been hit by government’s efforts to lower the deficit. — WP-Bloomberg