Austerity has hit the Saudi street. But this may kickstart a new, innovative economy
“The wake-up call has arrived. The politics of waste must end,” Khaled Al Maeena says in his 27th floor office in the Saudi city of Jeddah. He was referring to a transformation plan that has shaken Saudi Arabia—the biggest in decades. At the turn of the year, a newly-consolidated Ministry of Economy and Planning announced ambitious reforms, some applied with immediate effect, that would have an impact on the daily lives of the nation’s residents.
Among them was the removal of various key subsidies, the introduction of several fees—and perhaps most jarring of all—bold talk of privatization.
Driven by the startling and sudden advent of a national deficit, these changes were unimaginable for residents even a few years ago. From nearly zero, the national deficit shot up to 367 billion riyals ($98 billion) in 2015. “For years it’s been a free ride,” says Al Maeena, editor at large and former editor in chief of the nation’s leading English newspaper, Arab News, for 25 years.
“It’s time for us to give back.”
The End of Profligacy
The decade ending in 2013 has been one of abundance in Saudi Arabia, with oil prices having risen to a two-year sustained peak of $110 per barrel. At a time of global financial crises and growing indebtedness across the globe, the Saudi government had the opportunity—and presence of mind—to shore up national reserves.
At 2.8 trillion riyals, ($732 billion), these reserves were equivalent to almost 100 percent of its GDP in 2014. The country had the lowest GDP-debt ratio in the world at 1.6. These public reserves have helped Saudi Arabia weather the recent nose-dive in oil prices from $105 per barrel to $31. But the kingdom has realized that public spending must be curtailed. This year it plans to lower its national deficit to 326 billion riyals ($87 billion). And just as Saudi Arabia’s population has benefited from the state’s generous public spending to date, they will also begin to contribute to the treasury.
Ahmad Sabri, a Saudi activist, argues that the abundance of wealth had led to stagnation. “In Gulf Cooperation Council (GCC) countries, the muscles of the state had become very relaxed over time,” he says. “Oil revenue had made it easy to manoeuvre around actual socioeconomic demands,” he adds. Sabri, 28, is one image of Saudi Arabia’s millennials; passionate, articulate—and a rebel with a cause. “Everything was okay—because we had the money to just buy the products or services from abroad,” he says. Innovation that would have spurred economic growth was set aside in a ‘resting position.’
Austerity, at least in theory, will likely be a welcome change. “In any change, there will be casualties,” says Asya Alashaikh, CEO of boutique sustainability consultancy, Tamkeen CSR. Alashaikh is also among a select cadre of women who served as consultants to the kingdom’s Shura Council, akin to a parliament, before females were allowed to join the consultative body.
“In the long run, we understand what the government is trying to do, to create different sources of income for the country and not be dependent on oil. It is a very bitter pill,” Alashaikh says. “We know we will suffer for a year or so,” she adds.
Alashaikh is focused on her country’s future. “We are willing to take this bitter medicine—as long as we can protect the really needy.” The upper-middle and upper classes have enough liquidity to absorb the additional fees and subsidy lifts. However, at the moment, it is the under-privileged, the lower and the lower-middle classes that are most affected, in absolute terms, by the subsidy lifts underway.
The new thrift: household consumption
The change is already being felt in households where budgets are being tightened; water, electricity, and petrol costs are taking a hit. “Families are making do with what they have,” says Samar Fatany, a Jeddah-based activist and author. As with most public services, the government provides water almost for free to Saudi families. Much of this water comes from desalination.
“It was alright if we had water problems,” Sabri says. “We didn’t need creative solutions. We could buy desalination plants, despite their environmental and financial costs.” Through its 30 stations, Saudi Arabia desalinates more than 1 billion m3 annually—26 percent of global desalination. It’s not cheap, at $0.80/m3. The average family in Saudi Arabia though, only pays about $2 a month for their water use. Water outages have already been frequent in humbler parts of towns. The Ministry of Water and Electricity has, for non-residential buildings, raised water and sanitation services tariffs by 50 percent. The hike has impacted government bodies and large industrial and commercial establishments.
A culture of thrift—in contrast to the lavish spending habits of the past—is slowly seeping into cultural norms. And the trend kicked off before residents saw an approximately 40 percent spike in their electricity bills, effective as of January. At a popular breakfast restaurant with a glass facade near Jeddah’s Corniche, Fatany is optimistic. Wasteful tendencies will finally be curbed, she hopes. “We tried so many campaigns to urge people to save water, save electricity, but with limited results.”
Saudi Arabia’s annual per capita consumption of motor gasoline is 641 liters per person, while the world average is 179, the United Nations Environment Program said in 2000. “Our national consumption of gasoline is so high, we [are] continually limiting our ability to export it,” Sabri says. “It is time to take drastic steps to save. We are collectively facing issues that know no borders—such as global warming and water scarcity,” he adds.
Saudi Arabia’s electric power consumption per capita is 7,870 kilowatts-hour (kwh). The average consumption in the Middle East and North Africa is 1,684 kwh per capita, according to a 2011 World Bank report. Turning off switches has more than a vague environmental benefit. “Now if we conserve, our own personal purchasing power will increase,” Sabri says.
Among the first casualties of austerity was the reduction in petrol subsidies. For decades, in a country where a liter of petrol was cheaper than a liter of water, petrol prices were inconsequential to even the most hard up of motorists. While still not a pinch for most, the price hike has meant that more eyes have started watching their cars’ fuel consumption. While money is not something Basma—not her real name—a mother of four has to worry about, she too is beginning to take note. She shared, not without consternation, that she now pays about 40 riyals ($10.7) to fill the fuel-efficient family sedan’s petrol tank. Before, she paid about 24 riyals ($6.4). When she has to fill up the SUV, Basma now pays about 100 riyals ($26.7). Premium petrol costs 90 halala per liter (24 cents) now, up from 45 halala (12 cents). Regular costs 75 halala per liter ($0.20), up from the same 45 halala ($0.12).
Lulu—not her real name—believes that life in Jeddah is still better than elsewhere, “despite the overall increase in prices and inflation.” Fresh produce prices have certainly gone up, she acknowledges. A chartered accountant, the expat mother of four moved to Saudi Arabia from the U.K. several years ago. Fresh produce prices have increased, she acknowledges, but where else in the world, she asks, can you still buy a decent meal for two; half a grilled chicken with rice, for only 16 riyals ($4)—her kids’ favorite? “Prosperity really is in the eye of the beholder.”
Taxation and Representation
Between an increasingly waning popular support for the ongoing war in Yemen, the lifting of subsidies and overnight implementation of government fees and taxes, there is a shift, albeit not a precarious one in the delicately-balanced societal equation of “you leave politics to us and we will leave some socio-economic benefits to you.” For Sabri it’s an inversely proportionate relationship: When austerity measures were introduced by other governments in the region, they were straddled with political liberalization to maintain stability. Greater citizen involvement is the other side of the coin of reduced economic benefits, he says. Both must come hand-in-hand.
Saudis are seeing similarities; the government introduced municipal elections in 2005—and now subsidies are being gradually lifted. Sabri sees the introduction of small fees here and there, such as the recently introduced 89 riyal ($24) fee on all air tickets, as steps that will in turn enable deeper political participation. “No taxation without representation,” says Sabri, quoting from the American revolutionary slogan. If taxes are coming, so must genuine accountability, transparency and political participation. “Sooner or later the man on the street will say, ‘I’m paying more money and taxes—it’s my money—where is it going?’”
Calls for more accountability, transparency and improved fiscal management are getting louder, Al Maeena says. Citizens are becoming more vocal about seeing more change at the top of the socio-economic pyramid. Balanced by realistic expectations, Sabri thinks “the current economic crisis offers huge opportunities—but only if we seize them. If the opportunity isn’t seized, and there is a good chance of this, the consequences can be far-reaching.”
It’s not just the general public. Government spending will also be curtailed to 840 billion riyals this year—down from 975 billion in 2015. The government has already implemented measures to show it means business. It is slashing its 450 billion-riyal government employee payroll down to half. The kingdom’s complex circumstances present a much-needed set of opportunities, providing just the kind of pressure needed to catalyze the country’s change for the better: austerity, innovation and a prudent creative solution-finding approach. The government announced plans to launch an ‘affordable mortgage’ program on Sunday, a step in the right direction.
In addition to the declining oil revenue, some citizens believe that the war on Yemen is also draining the national treasury. Saudi Arabia has been leading an airstrike campaign against Yemen since March 2015. The war costs the nation, along with its coalition members, 22.5 billion riyals ($6 billion) a month—or 200 million riyals every day. The human cost at both sides of the border brings with it deep disquiet. “Wars are not cheap,” one laborer tells Newsweek Middle East—a sentiment echoed elsewhere on the street. The war has compounded the depleting treasury-related problems. The largest chunk of the 2016 budget has been allotted to military spending, 210 billion riyals ($56 billion), at 25 percent of the total budget. Of the 2015 budget, increased military spending accounted for 20 billion riyals ($5.3 billion) of last year’s overshoot, Economy Minister Adel Fakeih has said.
But the kingdom’s necessary push for diversification will continue to mean pumping more money into the economy—money that isn’t as flush as it used to be. During the late King Abdullah’s rule, seven economic-acceleration cities were planned. Of those, four hubs (King Abdullah Economic City in Rabigh; Knowledge Economic City in Madinah; Jazan Economic City; Prince Abdulaziz bin Musaid Economic City in Hael) have been built and there is little talk of the remaining three.
One of the deepest causes for discomfort in this complex picture is that the foundation of human capital necessary to carry the nation’s much needed diversification strategy is yet to be fully realized, says Alashaikh.
The human capital has the potential but a large segment still has a long way to go before it can shoulder the short or medium term national needs, shared local leaders. This reality is partly causing Saudi Arabia’s uncomfortable levels of unemployment. As the largest employer, the government helps absorb unemployment. The public sector employs more than two-thirds of all Saudi workers, which in turn has helped it grow by more than one million employees during the boom decade from 2003-2013, according to McKinsey Global Institute. This absorption is unlikely to continue.
“Everyone is looking at the private sector—and they are really feeling the pressure,” says Alashaikh. Corporations in turn are far more cautious. “No one is spending,” Alashaikh adds, in animated tones in her high-rise corner office overlooking the Red Sea.
Large government contractors who were routinely paid within 30 days are now seeing 3- 4-month delays, a senior Riyadh-based corporate manager tells Newsweek Middle East. That in turn means wages, especially of the more junior staff, are also stalling. Companies are in turn announcing layoffs, major projects are stalling and others are officially on hold.
The few who will comment on the potential privatization of an asset as strategic and sensitive as Aramco, Saudi Arabia’s oil company, prefer to write it off as just that: a buzz, and something they hope won’t happen. Some though, will venture to say it is not entirely impossible, citing the complete privatization of arms of the national carrier, Saudia Airlines, such as catering.
Alashaikh is also concerned about the fact that Saudi specialists in planning, budgeting and development are being largely sidelined in the efforts to design the country’s transformation strategy. Instead, economists and development experts are being hired from international consultancies, according to common belief in local circles. At the moment, Alashaikh says, the largely foreigner-developed change programs seem to focus on the nation’s weaknesses. Al Maeena also thinks it pertinent to suggest that some of the nation’s key leaders expand the circle of advisors around them. “We can do change our way,” Alashaikh says.
No one is denying the need for change. And many Saudi specialists like her would only be too pleased to contribute to a strategy that is sincerely informed by those rooted, and invested, in the unique circumstances of Saudi Arabia.