Cheap oil pushes Saudi reform

Riyadh’s King Abdullah financial district seen from a skyscraper under construction. Many projects are on hold in the kingdom following the sharp drop in the oil price. (Waseem Obaidi, Bloomberg)

Riyadh’s King Abdullah financial district seen from a skyscraper under construction. Many projects are on hold in the kingdom following the sharp drop in the oil price. (Waseem Obaidi, Bloomberg)

In the Al-Faisaliah mall in central Riyadh, the call to midday prayers brings down the shutters on shops selling luxurious global brands and the basement mosque fills up.

Customers are searched at the entrance – a woman guard in a niqab, black abaya and white gloves sits with a metal detector. Cafés and restaurants have mixed “family sections” to ensure privacy. The British department store chain Harvey Nichols is having a holiday sale.

Business seems slow, though visitors look in vain for any serious signs of Saudi Arabia’s gathering economic crisis, born of the lowest oil revenues in decades and subsidy cuts to reduce a $98-billion budget deficit – 15% of the country’s gross domestic product. The price of petrol has just gone up by 60%, though it is still comparatively dirt cheap, and value-added tax (VAT) and other taxes are planned – significant novelties in a country where most people have not known such things in their lifetimes.

“There isn’t much economic pressure here because we deal with rich people,” says Tamer, an affable Egyptian who lost his clerical job at a Saudi construction company and now sells timeshare in Dubai.

But, beyond Al-Faisaliah’s marbled halls, many government projects have stopped, expenditure has been slashed and rents have risen sharply. The housing shortage is a major preoccupation.

Khaled, a taxi driver touting for custom at Riyadh’s international airport, manages to keep his family comfortable with the help of an army pension, but he worries what will happen when all subsidies end in five years.

Mohammed, a fiftysomething from Medina who has 10 children, moonlights on top of his undemanding government job, and his wife also works in an effort make ends meet.  “There’s a war in Yemen,” he says. “It causes economic problems [in the region], but it’s not so bad.”

But, for some, it is. Just a few kilometres from the city centre, near walled royal estates, mothers and children huddle outside over makeshift fires to save electricity and take the chill off a winter’s evening. Poor Saudis, badly educated and ill-equipped to compete with foreign workers, are not a contradiction in terms. An estimated two to four million of King Salman’s 21-million subjects live beneath the poverty line.

Salman’s first year on the throne saw oil prices drop to below $35 a barrel and, even if they recover in the long term, demand is shifting. The growing scale of shale oil production in the United States is a major factor. Iran’s re-entry into the market after the lifting of sanctions related to its suspected nuclear weapons programme will also boost an existing supply glut.

The low oil price and costly conflict in Yemen will affect Saudis’ lives, such as the fishermen outside Duba, as economic reforms kick in. (Mohamed Al Hwaityan, Reuters)

Mohammed is right. The conflict in Yemen reportedly costs Saudi Arabia $6-billion a month and shows no sign of ending soon. By any reasonable assessment, leaner times lie ahead.

“It was okay when you could throw money at a problem,” says Hisham Alhegelan, the chief executive of a solar energy company. “But when you have to start counting the pennies, the pennies matter.”

Austerity, Saudi-style, means the wealthy are talking about emptying their swimming pools, swapping gas-guzzling sports utility vehicles for something greener and even turning off the air conditioning when they travel abroad.

Change is being driven by the king’s ambitious and powerful son, the deputy crown prince and defence minister, Mohammed bin Salman. The idea is to raise non-oil revenue without hindering competitiveness and causing unrest.

“Everyone used to say subsidies were a political taboo and that, if you increased the price of water, gasoline and electricity, there would be revolution,” says John Sfakianakis, a Greek economist who has advised the Saudi government. “Well, people are not out in the streets, but that doesn’t mean the government will be complacent and forget about the average citizen.”

After years of overspending, the 2016 budget bears the stamp of Bin Salman’s quest for innovation. There is also rare transparency, including the revelation that military and security expenditure makes up 25% of the total. Talk is rife of improved governance and the use of key performance indicators to monitor a multiyear strategy of the kind employed by Dubai and Abu Dhabi. Ministers have come and gone with unusual speed, generating wry jokes about brisker management style.

News that even the state oil behemoth,  Saudi Aramco, may be sold off has underlined the scale of an effort that will include an increase in the private provision of healthcare and education. The word khaskhasa, Arabic for privatisation, is being bandied around. Vast tracts of land could be up for grabs, along with lucrative untapped mineral resources. Tackling corruption and job creation are also being highlighted.

A picture of King Salman lies at a cultural centre in Yemen after an air strike. (Mohamed al-Sayaghi, Reuters)

None of these ideas is new. Subsidy reform has been discussed for years and value-added tax came up in 2012, but Salman’s predecessor, King Abdullah, then still raking in healthy oil revenues, vetoed it. Now a sales tax is on the way, by agreement with the other five members of the Gulf Co-operation Council. So are “sin” taxes on cool drinks, which may help to tackle the country’s obesity problem.

Further subsidy cuts seem certain. Key details are expected with the publication of a heavily flagged “national transformation plan”, drawn up with the help of McKinsey and other blue-chip consultants.

“With some tweaking they can do a lot to raise revenue from non-oil sources and use it to invest and pay salaries,” says Sfakianasis. “They can’t let themselves believe that one day oil prices will rise again and the Saudi economy will recuperate. They don’t want to let luck or Allah decide their future.”

Saudis recognise the universal truth that economic reform will have political consequences.

“People will expect something in return,” says the historian Mohammed al-Zulfa, a veteran of the appointed Majlis al-Shura, or consultative council. “The government takes all the oil revenue and there is huge government expenditure. But, if Aramco does go to the private sector and you introduce taxes, people will ask ‘what’s in it for me?’

“If the king says the Majlis al-Shura has the authority to question ministers or check the budget, then maybe things will be different. But unfortunately our society is not ready for that. Saudi education does not promote the right to participate. We need more time.”

The view that change needs to be slow and cautious appears to be widely shared. “No one talks about income tax so the representation-taxation equation is inapplicable in the Saudi case,” says Saud al-Tamamy, a political scientist at King Saud University.

If there is to be greater public participation in decision-making, it is likely to be incremental, says Haifa al-Hababi, a Riyadh architect who stood in the recent municipal elections – the first time Saudi women were allowed to vote. Failure to win a seat has not deterred her.

“In Saudi Arabia and the Gulf, we are selfish,” she says. “It’s all about what people get from the government. We treat it as a father who must look after us. Prince Moham­med is doing what Thatcher did in Britain. That is a part of the solution, though it is not just an economic problem but a political one too.”

Saudi dissidents, some of them Muslim Brotherhood sympathisers who call for a constitutional monarchy, are in exile or behind bars, intimidated into silence, so it is hard to gauge the level of support for far-reaching change. Democracy is not discussed on the street and the elite appears to have no interest in it.

The maximum that seems likely is “the habit-forming effect” of limited political participation rather than any “grand departures”, in the words of one academic expert. “Why would you want representation if you have a good standard of living and the government is responsive?” asks Alhegelan. “If we were a democracy I don’t think I would live here because it would be dominated by fundamentalists. Look around; the countries that were autocracies and tried to be democracies are now in ruins. That was the Arab Spring. And this is Saudi Arabia.” – © Guardian News & Media 2016



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