US, WASHINGTON (ORDO NEWS) — Saudi Arabia and other member countries of the Gulf Cooperation Council should drastically reduce spending, not only for megaprojects, as a large annual deficit is expected.
Saudi Minister of Finance Mohammed al-Jadaan outlined to the citizens their economic future, which would clearly require a series of painful adjustments. Any G20 finance minister could say the same about the prospects for recovery from COVID-19. But the reckoning for Saudi Arabia was to come sooner or later, the coronavirus pandemic only accelerated the future.
Dependence on oil revenues and huge government spending on salaries and social benefits have reached limits. The system is overloaded. Jadaan said: “The economy of Saudi Arabia is still dependent on government spending, so we need to support public finances to keep the economy afloat over the next years. We need to tighten regulation of public finances. We will cut costs, even if some steps are painful. All it’s for the good of everyone, for the good of the country and for the good of its citizens.”
How is a sharp reduction in government spending in Saudi Arabia? There are simple ways to reduce the budget of Saudi Arabia, starting with megaprojects, such as the planned Neom metropolis, and ending with the ministries, whose work should become more effective. Defense spending is another sector where you can save money. In addition, ending the war in Yemen would also help cut costs. It will be much more difficult to reduce the wage bill in the public sector. In order to allocate funds for assistance with COVID-19 and provide economic incentives, I had to abandon visa fees and reduce subsidies for electricity and water. At the same time, the government provided a 30% reduction in utility tariffs for industries and suspended a number of visa fees.
It is not unusual to manage a financial deficit or enter international capital markets in an attempt to overcome a difficult period. Saudi Arabia is not alone in this. However, there is no reason to expect that future revenues will ever recover, especially to the level of the “magic decade” of 2003-2014, when oil revenues soared. Those days are already in the past, but the government revenue model has not yet been adjusted. The structural reasons for the current deficit are the same as they were when oil prices fell at the end of 2014. The double crisis associated with COVID-19 and the collapse of oil prices simply brought the inevitable closer.
At current oil prices, the same revenues as during 2003-2014 are not possible. HSBC studies show that the Gulf’s Collaboration Council states have been spending $ 550 billion a year since the end of 2014, although revenues in 2015-2019 ranged from $ 400 billion to $ 500 billion a year (GCC government revenues averaged around $ 700 billions per year in 2012 and early 2013). State and social stability will be a priority in any case. Then in the future we should expect an increase in debt and a different type of fiscal policy. Public sector wage costs are important to all oil exporters.
Saudi Arabia needs to cut government spending, but public sector wages are at the very end of the list. Recently, the government announced that companies could reduce private sector wages by 40%, previously the government guaranteed that private sector wages would be maintained at 60% of their wages through a support fund of $ 2.4 billion. In the period 2016-2019, efforts were made to suspend employment, reduce benefits and transfer as many citizens as possible to the private sector. It was not easy. At the moment, working in the public sector provides social protection for most Saudis.
For the government, this is the best way to maintain consumption or not crash. This is the same as stimulating unemployment benefits in the US, however, these steps do not support productivity growth or economic growth. This model allows you to keep people registered as public servants and to support domestic consumption of basic goods. Now, consumer behavior in Saudi Arabia is the same as in the rest of the world: discretionary spending on clothing, luxury goods, travel and hotel services are falling, only food consumption has increased.
In order for the government to reduce costs, first of all, it is necessary to reduce capital costs for megaprojects and even not very large state projects: reduction of reserves, possible sale of assets in the State Investment Fund, possible privatization of assets that have already been planned, but now will bring less than expected.
In addition, there is an opinion that the average income level will fall. The life of the modern young generation will be significantly different from the life of their parents, and most young people can be satisfied with this reality if they understand that certain social opportunities and freedoms are open to them under the reign of Crown Prince Ben Salman. As part of Vision 2030, a restructuring of the labor market is underway, as many foreign workers will lose their jobs and leave the kingdom. Economic difficulties and strong nationalist sentiments underline the crown prince’s strengths.
But many wealthy Saudis with good ties, including members of the ruling family, consider his leadership in the price war to be unsuccessful.
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