The Saudi economy is one of the largest in the Arab world and considered an energy superpower, with its government controlling majority of the economic activities. In its attempt to reinstate economic stability after the tumbling oil prices that hit the country’s financial health, Saudi Arabia has taken austere measures to accrue its income to be sourced from internal changes. In its initiative of boosting markets, the country seeks to restore perks to its state employees. As reported by Reuters, the Minister’s salaries have been cut by 20% in September to funnel back perks for its public sector employees including civil servants and military personnel.
Salman bin Abdulaziz Al Saud, the monarch of Saudi Arabia issued a royal ruling reinstating “all allowances, financial benefits and bonuses”, following calls for protests across four cities in Saudi. The government even announced a two month salary bonus for forces fighting in their recent intervention in Yemen. Government employees constitute almost two thirds of the working force in Saudi and this announcement was the first measure towards pay cuts affecting them all.
Such severe actions prompted complaints from civilians as well. Some features of the “Vision 2030” reform package that were initiated in 2016 had already proven unpopular with the Saudi workers. Expecting possibility of demonstrations, the security forces of Riyadh lined up the streets over the weekend. Just after the news came on Saturday, the Saudi share index gained 1.0 % on Sunday. This jump on .TASI index was sustained by expectations of an affirmative impact from higher disposable income on the consumer sectors.
Statements were circulated last week under the Twitter hashtag “April 21 movement”, that demanded “reinstatement of benefits, a halt to the sale of share of state oil giant Aramco, a constitutional monarchy and the restoration of powers of the religious police”. The subsidies on energy and water were reduced and the government borrowed billions in its attempt to balance its books.
As estimated, around 70% of Saudi nationals are employed by the government. This move saw an imposition on the bonuses and allowances accounting for slashing of their pays by as much as 40%.
Has this move improved the fiscal position?
Minister of State, Mohammed Alsheikh and other principle officials highlighted trends indicating economic recovery. The decree pronounced that the cuts were a response to the sharp decline in the oil prices that had dropped to a low of around $28 in 2016. However, the prices have recovered since late 2016. Brent Crude LCOcl has been reportedly trading $52 per barrel compared to last year’s average price of $45. In fact this change was proposed as a recommendation by the Deputy Crown Prince Mohammed bin Salman after the noted budgetary outperformance in the first quarter this year.
Alsheikh issued a statement to Reuters stating that ““The government has conducted a review of the measures initiated in the fall in relation to the public-sector employees’ allowances and 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.” He also emphasized on the positive sentiments stating that this move is expected to enhance conditions as it seeks to recover the domestic demand.
In a bid to reverse the public sector pay cuts, Salman’s decree called for suspension of wage increases for lower-ranking civil servants, overtime payments and capping of annual leaves. Salaries and allowances that accounted for 45% i.e. around $128billion of government expenditure in 2015, contributed to a budget deficit of $98billion to the kingdom. The Deputy Economy Minister said that the kingdom’s deficit had reduced in the first quarter of the year by about 50% as a result of the judicious management of government spending.
The Governor of the Central Bank added that the trade deficit of the economy was expected to drop this year moving into a surplus. The Central Bank has also instructed the banks to maintain the current favourable terms of loans, especially on consumer goods and property loans as a concession to the low-income Saudis, most affected by the cuts.
The structural reforms:
In a strategic move to secure the next generation of Al Saud leadership, King Salman’s sons were appointed state positions. Prince Khaled bin Salman, has been appointed as Ambassador to Washington. Prince Abdulaziz bin Salman has been appointed State Minister for Energy Affairs. Several other princes from various branches of the Al Saud family have been declared as Deputy Governors of the Saudi provinces.
The Information and Civil Service Minister was replaced and a committee set-up to investigate the allegations of abuse. It was proved by the anti-corruption body that the minister’s son had been appointed in an official post, despite his ineligibility to hold the same owing to lack of required qualifications. Ibrahim al-Omar has been named the Governor of Saudi Arabian General Investment Authority (SAGIA) under the royal court. SAGIA manages foreign investment in the kingdom. Simultaneously, a National Security Centre has also been established.
There is possibility of further slashes on subsidies and an anticipated new sales tax to be introduced in the following year. The country seeks to continue focussing its efforts towards boosting domestic employment in the private sector as a priority.
Article by Rochita.