Under Salman, Saudi takes steps out of welfare state

 Faced with a massive decline in oil revenues, Saudi Arabia's King Salman marked his first year in power by taking steps to end his kingdom's generous welfare system.

In a year that could set the pace for moving the Saudi economy away from near-total dependence on energy, the 80-year-old monarch took surprising decisions to cut subsidies and introduced other key economic reforms.

Analysts say that after decades of using its vast oil resources to subsidise domestic prices and pay generous salaries and benefits, the reality of falling oil prices is hitting home for Saudi authorities.

"I believe we are on the verge of exiting the welfare state," Saudi economist Turki Fadaq said, speaking of a psychological shift in the Saudi ruling circle.
"The final goal of these measures is to restructure the Saudi economy in a way to stop its total dependence on oil," Fadaq, head of research at Riyadh-based Al-Bilad Capital, told AFP.

Oil prices have plunged to more than 12-year lows due to a glut in supply, dropping below $28 a barrel in trading this week, and have lost three-quarters of their value since mid-2014.

For years, 90 percent of state revenues in Saudi Arabia, the world's largest crude exporter, came from oil sales and high prices allowed the government to be generous.

But the plunge in prices has left public finances reeling, with the kingdom recording an unprecedented $98 billion budget deficit in 2015 and projecting a shortfall of $87 billion this year.

- Budget overstretched -

Annual revenues have halved in the 19 months of declining oil prices and the kingdom has been forced to tap its huge fiscal reserves.
The reserves, accumulated when oil prices were high, dropped from $732 billion at the end of 2014 to $632 billion in November.

At first glance it appeared Salman would continue with the country's generous traditions when he took over following the death of his half-brother king Abdullah a year ago.

Shortly after acceding to the throne Salman splashed out more than $30 billion in handouts to government employees, the armed forces, students and others.

That came after generous politically motivated salary increases and handouts made by King Abdullah in 2011 after the outbreak of the Arab Spring uprisings across the region.

And subsidies on basic goods and utilities, including petrol, electricity and water, continued to keep prices low.

But as oil prices have fallen, the high spending on wages and subsidies, coupled with the cost of Saudi Arabia's military intervention in Yemen and continued aid to many Arab countries, have left its budget overstretched.

"The challenge has become too big," Saudi economist Ihsan Bu-Halaiga said.

"It started with the slide in oil prices that began even before King Salman came to power," said Bu-Halaiga, head of Joatha Consultants Centre.

"The most important decision is the resolve to move from the welfare system to a productive economy," he said, pointing to a five-year programme aimed at liberalising energy prices along with other steps to boost non-oil revenues.

- 'Must tighten our belts' - 

Late last year the government took an unprecedented step by raising the prices of petrol, electricity and water, by up to 80 percent in some cases.
Saudi Jadwa Investment estimates the country will save $7 billion a year from reducing energy subsidies.

The move was welcomed by credit ratings agencies, with Fitch praising the "significant reforms".

Fadaq said he believes the turning point was the establishment, shortly after Salman took the throne, of the new Council of Economic Development Affairs chaired by the deputy crown prince and defence minister, Prince Mohammed bin Salman, the king's powerful son.

"That was followed by aggressive and fast economic decision-making," Fadaq said.

Other measures have seen Saudi Arabia open its stock exchange for the first time to non-resident institutional investors and issuing bonds on the domestic market.
More taxation and privatisation measures are planned and observers were stunned when authorities announced this month they may offer shares in national oil giant Saudi Aramco.

Bu-Halaiga said the measures aim to more than double the size of non-oil revenues to $100 billion over the next five years, to "effectively compete with oil income".

Non-oil revenues were boosted by 29 percent to $44 billion in the 2015 budget, while the contribution of oil income to public revenues dropped to 73 percent.

"Adopting populist policies in the past decades made economic reforms difficult. Now, we must tighten our belts, cut spending, downsize government employees and adopt privatisation," Bu-Halaiga said.

Source: AFP