International Finance
Economy

Saudi looks to austerity measures to cut losses

Government is seeking advice from experts on downsizing budget Suparna Goswami Bhattacharya January 25, 2016: Saudi Arabia has reveled in its oil-rich economy for years, but is finally feeling the pressure of falling oil prices. So much that the government is considering austerity measures. There are enough reasons to think about austerity, especially since the kingdom has pampered its citizens with cushy government jobs and...

Government is seeking advice from experts on downsizing budget

Suparna Goswami Bhattacharya

January 25, 2016: Saudi Arabia has reveled in its oil-rich economy for years, but is finally feeling the pressure of falling oil prices. So much that the government is considering austerity measures.

There are enough reasons to think about austerity, especially since the kingdom has pampered its citizens with cushy government jobs and lavish salaries post the Arab Spring. Add to this, almost all basic necessities are subsidised — right from oil to power.

Though officially nothing has been confirmed, the government is seeking advice from experts on ways to downsize its financial budget for 2016.

For over a year now, plummeting oil prices has been taking a toll on the economy. Since July last year, the government has borrowed about $15 billion from its citizens through local bonds, the first issuance of debt since 2007.

The government is also looking at other measures to cut costs. For instance, a leaked memo from the finance minister dated September 28, 2015 reveals that ministries were instructed to stop new projects and cease buying cars, furniture and lavish goods. The government never denied the contents of the memo.

In the past decade or so, government spending quadrupled across a range of key industrial sectors, subsidies increased and so did salaries. As a result, the price of oil at which the government can balance its books went up to $100 per barrel. However, the price is now hovering around $30 per barrel.

Hussein Hassan, a former UN public policies and anti-corruption expert, says, “There is no denying the fact that Saudi Arabia has enough reserves to survive for now. But if the price of oil remains at this level and expenditure is not cut, the reserves will be depleted in the next five years.”

Earlier this year, the IMF predicted that Saudi Arabia would post a deficit of 20 per cent of GDP for 2015, and that economic growth would slow down to 2.4 per cent, down from the current level of 2.8 per cent.

Hassan opines that the government has to do away with subsidies, which is still a sensitive subject. “It is difficult to snatch something that people have got used to. Subsidies are now taken for granted. These are some hard decisions that need to be taken fast.”

Dr Steffen Hertog, Associate Professor in Comparative Politics, London School of Economics, says currently the government is focusing on cutting project spending, which is less politically sensitive. “It is also preparing energy pricing reforms though these are politically sensitive and would require careful communication, sequencing and potentially compensatory measures at least for lower-income households. Substantial tax reforms appear less likely at this point.”

Additionally, financial support to Syria and Egypt is also hurting its finances. It supports Syrian rebel forces fighting Islamic State militants. Moreover, in early 2015, Saudi Arabia, Kuwait, UAE and Oman together pledged $12.5 billion in aid to stimulate the Egyptian economy during an investment summit. “Besides, the Yemen war is costing the kingdom too much money. Saudi happens to be one of those countries which have a very high defence import cost. In order to reduce that, it has to stop participating in these wars,” says Hassan.

Hertog says that just increasing VAT as is planned on the GCC level will not help in the long run. “There is no doubt that the government should gradually look to increase VAT. But the revenue potential is somewhat limited as state spending (and hence revenue need) is quite large relative to the size of the Saudi private sector. Substantial taxes would decrease economic activity at a time when the economy is already slowing down. So some potential is there, but by itself, it is far from sufficient.”

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