Saudi retreat from austerity may hit economic diversification

By on 11/05/2017
Salman bin Abdulaziz, king of Saudi Arabia

Saudi Arabia’s decision to reverse cuts to civil service pay and benefits reflect a wobble in the Kingdom’s determination to diversify its economy away from dependence on oil, a UK economist has told Global Government Forum.

Tom Rogers, associate director at EMEA Macro Consulting and a consultant at Oxford Economics, said that the retreat from austerity in part reflects the easing of pressures on the Kingdom’s public finances. “The Kingdom has not yet published data on revenues and expenditures for Q1 [2017-18], but since the oil price has tracked the government’s Budget 2017 path closely and production has fallen in line with the OPEC deal, the implication is that non-oil revenues outperformed, or other spending cuts were sharper than planned,” he said.

Nonetheless, he added, “it is slightly surprising that measures implemented just months ago are being undone. Possible motivations include the observation that the oil price is currently $20 higher than when the measures were first proposed [in January 2016], or the Kingdom reacting to the possibility of anti-austerity protests.

“In our view around three-quarters of the necessary spending cuts have now been implemented, so the recent announcements are not too great a cause for concern. But they do underline that the road to a less oil-dependent economy will probably not be a straight one.”

Cuts to ministerial and public sector salaries and benefits were implemented in September 2016, leaving many officials with frozen salaries and caps on overtime payments and annual leave. But late last month King Salman unexpectedly reversed the cuts, with state-run TV channel Ekhbariya announcing that “all allowances, financial benefits, and bonuses to civil servants and military staff have been restored.”

According to minister of state Mohammed Alsheikh, Deputy Crown Prince Mohammed bin Salman made the reinstatement after an official review and a better-than-expected budgetary performance in the first quarter of 2017-18.

Alsheikh said: “The government has conducted a review of the measures initiated in the fall in relation to the public-sector employees’ allowances. A number of fiscal adjustment measures were taken over the last two years, which led to a strong improvement in the government’s fiscal position.

“We believe this move will boost positive sentiment as domestic demand recovers on the back of enhanced government employees’ disposable income.”

The former Saudi Central Bank governor Fahd al-Mubarak said the trade deficit is expected to drop in 2017, possibly moving into a surplus. And the deputy economy minister, Mohammed al-Tuwaijri, said the kingdom has reduced its deficit in the first quarter of the year by more than half, in part due to prudent management of government spending.

He said: “The fact is that the first quarter deficit was 26 billion riyals (US$6.93 billion), when 54 billion riyals was projected at the beginning of the year. This is a very excellent step toward rationalized spending.”

However, the U-turn leaves Saudi Arabia facing its original challenge: a workforce of Saudi nationals that is two-thirds employed in the public sector, and a weak non-oil private sector economy. As part of Saudi Vision 2030, the Kingdom is attempting to reduce dependence on oil revenues and to encourage economic diversification and the development of service sectors. Small and medium-sized businesses are being encouraged to employ 4.1 million Saudi Arabian workers by 2030.

As Rogers said: “The key challenge looking forward will be creating enough private sector employment, as opposed to employment within the civil service.” This task will not, of course, be made easier by protecting the salaries and benefits of public sector jobs.

Graham Griffiths, a consultant at Middle East Control Risks, argued that the restored salaries and bonuses are affordable. “Given what the Saudi Arabian government has achieved in terms of spending control, non-oil revenue and in the bond markets, [this] indicates it can afford to restore civil service revenues.

“It has judged between keeping popular opinion and pursuing long-term goals under Vision 2030. Government spending will continue to be monitored and if there is a deterioration in balancing its budget, civil service spending will be reviewed again.”

However, other analysts are less sanguine. Prior to the introduction of austerity measures the kingdom ran up a budget deficit of $79bn in 2016. According to the Economist magazine, restoring civil service allowances will add a further $13bn to a shortfall already projected to reach $86bn this year, or 12% of GDP.

For up to date government news and international best practice follow us on Twitter @globegov

See also:

Saudi Arabia Looking For Over 2,500 New Civil Servants

Government departments in Mexico to face significant cuts, as 2017 budget sets out fresh austerity plans

Report reveals how governments can do more with less

About Glen Munro

Glen Munro has worked as a journalist for a wide variety of trade and consumer titles, including the Daily Express, the Independent and the Evening Standard. Topics he has covered during his career include business issues, personal finance, travel and African and Caribbean affairs.

Leave a Reply

Your email address will not be published. Required fields are marked *