Saudi economic transformation still a long way away

#SaudiPurge

Recent government and military salary hikes are hardly in line with the radical fiscal overhaul proposed by Saudi Arabia’s crown prince

Kieran Cooke's picture
Tuesday 6 February 2018 14:00 UTC
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The arrests were the easy part. Removing generous state subsidies, transforming the economy and dealing with chronic environmental problems will be far more difficult. 

If the official narrative is to be believed, a majority of Saudi Arabia's population is in favour of the recent arrests of ministers and royalty and the much-touted crackdown on corruption.

The young in particular - more than half of the kingdom's population is under 25 - are said to have voiced support for the moves, which, according to authorities in Riyadh, form part of a much broader economic and social transformation programme being pushed through by Mohammed bin Salman, the all-powerful crown prince. 

Eliminating lavish subsidies

Under the crown prince's vision for the future, over the next 12 years, wastage will be curtailed and the old, free-spending habits of a pampered elite will be brought to an end. 

The Saudi dependence on oil will be no more. The economy will be diversified. Creaking government ministries will be shaken up. There will be mass privatisation, leading to the creation of more than a million new jobs. A new, entrepreneurial middle class will be born.

Cutting back and eventually eliminating a lavish system of subsidies - along with the creation of a less state-dependent, more dynamic business sector - is seen as essential if these economic goals are to be realised. Removing subsidies is also vital if the dire environmental problems facing the kingdom are going to be properly tackled. 

The recent rise in international oil prices, partly due to nervousness about supplies following the Saudi arrests, has provided the Riyadh exchequer with more funds for increased handouts

But such moves pose serious political and social risks to the Saudi regime. 

For years, the kingdom's rulers have guaranteed consumers some of the lowest fuel, electricity and water charges in the world. There's been free medical care and education. In return, the populace has remained largely quiescent.   

Looming water crisis

The new vision for Saudi Arabia up to the year 2030 was unveiled with great fanfare in mid-2016. 

As part of its recipe for bringing about wide-ranging change, the plan put considerable emphasis on the need for higher and more widely applied taxes and the removal of wasteful subsidies. According to the International Monetary Fund (IMF), energy subsidies alone amounted to 20 percent of gross domestic product in 2011, though that figure is believed to have been substantially reduced in recent years.

At the top of the subsidy removal list is water. Saudi Arabia is facing a water crisis of immense proportions, with forecasts that the kingdom could run out of water in less than 20 years unless use is severely curtailed. 

Saudis, inhabiting one of the most water-scarce countries on earth, are among the world's highest water users

Until recently, water charges for consumers represented less than 5 percent of production costs. The water system is also grossly inefficient, with more than 30 percent lost through faulty pipes and leaks.



Crown Prince Mohammed bin Salman is pushing through a broad economic and social transformation programme (AFP)

Increasingly, the kingdom relies on water generated at its 30 desalination plants for supplies. Aquifers and other groundwater supplies have been largely exhausted, mainly due to mistaken agricultural policies

Desalination creates its own set of problems. It uses up vast amounts of fuel, resulting in less oil being available for export. Desalination plants also release substantial amounts of climate-changing greenhouse gases into the atmosphere and pollute seawater with brine and a range of chemicals used in the water purification process. 

'We are basically drinking oil'

"It is scary to think about the water situation in the next 20 to 30 years if consumption patterns continue to rise," Nour Fitiany of the Jeddah-based environmental NGO Alnabta told Revolve Water, an international nonprofit organisation specialising in sustainable water and energy use. 

"We are basically drinking oil at this point. Relying on desalinated water in this way is not sustainable." 

In moves designed to both cut back on water consumption and lessen subsidies – thus reducing a ballooning budget deficit – the Saudis have brought in a series of large-scale hikes in water charges as part of an overall plan aimed at reducing non-oil subsidies by 20 percent by 2020. 

The price rises have not gone down well; a charging regime introduced in early 2016 had to be scaled back, with consumers protesting over faulty meters and bills that had increased in some cases by more than 100 percent. 

The government appears intent on pushing through a similar programme of subsidy removals and price rises for fuel and electricity. In January, a band of higher taxes, including a value-added tax, were introduced. 

But the rulers are treading delicately. The IMF has warned that the government's austerity measures should not be implemented too fast. There could be widespread social unrest. 

State handouts

The goals of the national transformation programme have been scaled back significantly. Moves to privatise various inefficient state enterprises have been put on hold. There are reports, unconfirmed by authorities, that the giant but troubled BinLadin group, the country's biggest construction company, is being taken into state ownership

Meanwhile, increases in the cost of energy and water have been compensated for by state handouts elsewhere.

Last December, a new welfare system was introduced with an aim to aid three million of the poorest families in the country, King Salman said. 

In recent months, hundreds of thousands of government employees have had a salary rise. Pensions have been increased and student allowances have risen by 10 percent. The military has also had a salary hike

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Salman's vision for Saudi Arabia may lead to popular resistance

All of this - it's estimated the latest round of government largesse amounts to a bill of more than $13bn - is hardly in line with the radical overhaul of the Saudi economy proposed by Mohammed bin Salman and his team of mostly western consultants and advisers. 

The crown prince has been fortunate; the recent rise in international oil prices, partly due to nervousness about supplies following the Saudi arrests, has provided the Riyadh exchequer with more funds for increased handouts. 

But the kingdom is still faced with serious economic and environmental problems. National transformation - despite the recent high-profile crackdown - is still a long way away.    

Kieran Cooke is a former foreign correspondent for the BBC and the Financial Times, and continues to contribute to the BBC as well as international newspapers and radio networks.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.

Photo: A man walks past the Kingdom Centre Tower in Riyadh, Saudi Arabia April 12, 2016 (REUTERS)