Saudi Arabia working to limit impact of subsidy cuts

Business Monday 18/April/2016 18:47 PM
By: Times News Service
Saudi Arabia working to limit impact of subsidy cuts

Riyadh: Saudi Arabia will limit the impact of subsidy cuts on its citizens as the world’s largest oil exporter overhauls its economy for the post-oil era, Deputy Crown Prince Mohammed bin Salman said.
The government is developing a mechanism to provide cash to low- and middle-income Saudis who rely on subsidies, Prince Mohammed said in an interview. Under the previous system, 70 per cent of the subsidies benefited high income people, he said.
“We don’t want to change the life of the average Saudi,” the prince said. “We want to exert pressure on wealthy people, those who use resources extensively.”
Past rulers of Saudi Arabia have largely avoided seeking additional revenue from the public. A survey released this month found that 86 per cent of Saudi youth think electricity and fuel should be subsidised by the government, and last month’s water price increase led to a flurry of complaints reported in local media.
Non-oil revenue
As producers from Oman to Venezuela feel the pinch in global energy markets, Saudi Arabia has raised prices for gasoline, electricity and water to rein in spending. Including future cuts, the subsidy restructuring is expected to generate $30 billion a year by 2020, part of a broader plan to raise non-oil revenue by $100 billion to reduce the kingdom’s reliance on crude.
The prince also suggested that cash handouts may reduce consumption.
"Let’s say the international price for electricity is 1,000 riyals and you only pay 50, we will give you the 1,000 riyals and increase the price of electricity," he said. "You will have two options: You either spend the 1,000 on electricity bills like you used to, or you can lower your electricity consumption and use it on something else."
While higher gasoline and electricity prices were implemented without affecting ordinary citizens, the new water tariff was applied in an ‘unsatisfactory’ way that will be rectified, the prince said.
Post-oil era
"Honestly speaking, what happened wasn’t in accordance with the plan that we’ve approved," he said. "Now, we are working diligently on reforms within the Water Ministry so that things will be in accordance with the agreed plan," he said, without providing details.
Prince Mohammed is leading the biggest shake-up of the economy since Saudi Arabia’s founding. A comprehensive plan to prepare the kingdom for the post-oil era will be announced on April 25, the prince said.
One component will be the National Transformation Programme, to be announced a month to 45 days later, which focuses on ways to boost economic growth, create jobs, attract investors and hold government offices more accountable. The plan to transform Saudi Aramco from an oil company into an energy and industrial conglomerate, as well as the future of the Public Investment Fund, will also be included, he said
Other Gulf nations, including Kuwait and the United Arab Emirates, are also scaling back subsidies and other welfare payments to cope with declining oil revenue.
Saudi officials say that low crude prices have allowed the government to push through reforms that would have been taboo when prices were high. "We have our own programs that don’t need high oil prices," Prince Mohammed said.
Still, oil revenue made up 73 per cent of government revenue in 2015. As the oil price slump pressured state finances last year, net foreign assets held by the central bank declined by $115 billion, while the benchmark Tadawul All Share Index tumbled 17 per cent.
Budget revamp
The International Monetary Fund predicted in October that if the status quo held, Saudi Arabia risked draining its financial reserves in five years. The budget deficit ballooned last year to nearly $100 billion, equivalent to about 15 percent of economic output.
The government has revamped the way it plans the budget, Minister of State Mohammad Al Sheikh said in an interview last month. Previously, budget planners looked first at revenue, before deciding on spending. The government was overspending by an average 25 to 30 per cent a year, he said.
"This year, we kind of reverse-engineered the process where we started with the expense side and focused on that," he said. "Then we see how are we going to fund that through the various revenue sources."
With the new process in place, Al-Sheikh said Saudi Arabia will be able to sustain spending growth of 3 to 5 per cent a year, with the budget balanced by 2020, he said. Prince Mohammed said his concern over the kingdom’s fiscal policy started before the plunge in crude prices.
"Most concerning was when oil prices went up to over $100 and we started increasing our spending as if it will continue to stay over $100,” he said. “This is when I started to be concerned. When they went up, we should not have increased our spending. We should have used this to fund future programmes.”