Saudi gain before more pain
The rescinding of civil servants' pay cuts will not deflect the government from pursuing broad economic reforms
The unexpected sight of shut-down shops in the smartest malls in Riyadh and the scores of unfinished construction projects abandoned midstream tells a story. Saudi Arabia has been living through some hard times as it has struggled to cope with relatively low oil prices.
In addition to cancelling several public projects, leaving private firms waiting months to be paid, last year the government went one step further. Having partially lifted subsidies on some basic goods and services, it shocked its citizens by cutting up to one-third from the salaries of civil servants. And there are a lot of civil servants in Saudi Arabia, around 70% of the total workforce. Directly or indirectly, the measure hurt millions of people.
Out of the blue, in April this year, all the salary cuts were rescinded. Saudi Arabia's deputy economy minister, Muhammed al-Tuwaijri, addressed the nation on television saying the move reflected better-than-expected economic results over recent months because of prudent public spending and higher oil prices. "The fact is that the first quarter deficit was SR26bn ($6.93bn) when SR54bn was projected at the beginning of the year," Tuwaijri explained. The kingdom's deficit fell to SR297bn in 2016 from SR367bn the previous year.
While there's no doubting that the economic picture is brighter than it was a year ago, with oil revenues in February this year totalling SR53.164bn, up from SR30.321bn in the same month in 2016, there were other reasons for the about-turn in policy. Public discontent was rising fast and was being expressed ever more vocally on social media. Deputy crown prince Muhammed bin Salman, the architect of Vision 2030, is known to monitor social media closely.
With threats even of public protests, which are banned under Saudi law, a decision was taken to restore salaries and perks. With the sacred fasting month of Ramadan approaching, typically a time of high spending, the public now has renewed purchasing power representing a morale booster and a stimulus for the economy as a whole.
"It was a tactical decision," said Hoda al-Helaissi, a member of the advisory Shura Council. "People were already feeling the effects of austerity before the wage cuts. The cuts were too much, too fast."
Rescinding the cuts doesn't, however, imply that the strategy of introducing economic reforms as part of Vision 2030 is being abandoned. Far from it, for the direction defined in the strategy is clear and the status quo ante is no longer acceptable.
Slowly does it
The likelihood, though, is that the pace of change will be more gradual. For example, the plan to raise gasoline and diesel to international market prices and to hike electricity to the cost of production in July this year is likely to be pared back. A new incremental programme of rises will alleviate the impact on consumers and reduce the risk of negative blowback.
Still on course, too, is the plan to sell off up to 5% of Saudi Aramco—the centrepiece of the strategy to diversify away from oil. HSBC, which has joined JPMorgan Chase and Morgan Stanley as an adviser on the initial public offering, says the deal is expected to raise some $100bn, making it the largest-ever sale of its kind. Proceeds will be paid into the Public Investment Fund (PIF) which will then invest in non-oil based projects. While the IPO was scheduled to take place in early 2018, Saudi economists say they expect it to be delayed until later that year or even 2019.
Other targets of Vision 2030 are to reduce unemployment and increase the private sector's contribution to GDP from 40% to 65%. Saudi economics commentator Rashid al-Fawzan says that these goals are non-negotiable. "We have to realise in the coming years that the source of employment, work and revenue is the private sector and nothing else. Neither our state, nor any other, can accommodate all the men and women who are unemployed."
A major problem still to be overcome is adjusting school and university curricula to enable students to be better qualified for the job market. Economist Jamal Banoun insists that the labour market "needs graduates in science rather than humanities and theoretical subjects. This requires a bold decision to force colleges to close departments that are producing graduates who become nothing but unemployment statistics."
In the short term, a key driver for the economy and the easing of austerity measures will continue to be the kingdom's success in accessing international credit. The $9bn sukuk—an investment vehicle compatible with the requirements of Islamic finance—issued in April this year was nearly four-times oversubscribed. The government is planning to tap the international debt markets again this year. Also, original plans outlined in 2016 to erase the budget deficit by 2020 are being side-lined, with private sector growth being given priority over fiscal prudence.
While some of the closed shops may reopen and building projects proceed, Saudis are bracing themselves for more sacrifices. As one Saudi banker in Riyadh said, "we enjoyed the years of gain, now we have to endure the years of pain".
This article is part of a report series on Saudi Arabia. Next article is: Refining Saudi Arabia's future