Austerity experiment in oil-rich Gulf may falter post-crisis
Saudi Arabia, the Arab world’s largest economy, announced a surprise tripling of value-added-taxes and trimmed allowances for government workers.
Portraits of Mohammed bin Salman, Saudi Arabia’s crown prince and King Salman, Saudi Arabia’s king, sit on display at a construction site in the King Abdullah Financial District (KAFD) in Riyadh, Saudi Arabia, on Tuesday, May 19, 2020. (Photographer: Tasneem Alsultan/Bloomberg)
The coronavirus pandemic is hitting Gulf Arab economies hard and emboldening the region’s dynastic rulers to push through unpopular fiscal measures that will impact their citizens. The question now is how long their resolve will last.
Saudi Arabia, the Arab world’s largest economy, announced a surprise tripling of value-added-taxes and trimmed allowances for government workers. Oman cut salaries of new state employees. Even in the United Arab Emirates, a financial and commercial hub with the Gulf’s most diversified economy, there are calls for overhauling a “rentier-state” model dependent on energy resources, state jobs and a foreign-majority private workforce.
Yet for all the talk of accelerating overdue changes, there were also moves to protect state jobs and shield nationals from cuts in the private sector, casting doubt on whether the downturn will trigger deeper reforms that outlive the crisis.
Oman has already called for foreigners to be replaced with nationals in government jobs, the UAE is preventing banks from firing citizens and Saudi Arabia’s finance minister alluded to state support for the kingdom’s workforce.
(Source: Bloomberg)
The decisions taken will affect Saudis like Mohammed, who gets his salary from the state, along with almost two-thirds of his compatriots. Even as his pay was cut by 1,000 riyals ($266) a month when a cost-of-living allowance was canceled, the 29-year-old doctor says recent measures were necessary.
“If it’s temporary, one or two years, I can adapt,” he said, asking to withhold his full name. “My concern is that more taxes will be permanent — and that will be an issue.”
Fiscal thrift may be in place for longer this time given the fiscal outlook, though, and with less money to spend on citizens, governments across the region will likely face increased public scrutiny on how their oil wealth is being used.
Fiscal Woes
Almost all of the countries in the region are expected to run large budget shortfalls of 15%-25% of economic output, leading to a build-up of debt, a dwindling of reserves, and tough choices about how to spend. Saudi Arabia is forecast to contract by 2.9% this year, the most since 1999, according to Bloomberg Economics, and the risks are tilted toward an even deeper downturn.
“The global economic recession has become a trigger for real reconsideration of the fundamentals of the economic models in the Gulf,” said Ayham Kamel, head of Middle East and North Africa at Eurasia Group. “In Saudi, Crown Prince Mohammad bin Salman wants change, but it’s far from easy to kill off the rentier-state model.”
Saudi Arabia had been aggressively looking for ways to reduce its dependence on oil and trim its wage bill long before the epidemic; both are goals of the so-called Vision 2030 championed by the crown prince. The kingdom’s de-facto ruler has pushed through some big changes since late 2015. Simultaneously, he’s cracked down on dissent, limiting criticism of the new policies and the rapid pace of social transformation. The crisis could be an opportunity to intensify those changes, particularly when nationalism is running high.
Others around the region are following suit.
“We will have a lot of questions about what constitutes a Gulf rentier-state model,” UAE Minister of State Anwar Gargash said on a panel last month. “I think this is going to accelerate the necessity for us to find something a little bit more sustainable.”
In Kuwait, ruler Sheikh Sabah Al-Ahmed Al-Sabah renewed a call for an economy less reliant on oil and urged rationalizing spending. His son, who sits on the planning & development council, lamented a lack of progress and said the impact of the pandemic might make such changes unavoidable.
What Our Economists Say…
“You have seen some examples of austerity measures but we have also seen moves that indicate a doubling-down on rentierism.”
— Ziad Daoud
Saudi Arabia’s decisions are worth emulating, said Eid Alshihri, a 42-year-old business consultant and a member of the Kuwaiti Entrepreneurs Society. But reforms are caught up in a domestic political struggle with Kuwaiti lawmakers blocking them for fear of losing seats and instead pointing to the sovereign wealth fund to weather the crisis.
Government steps to help businesses were too little too, late, and the result will be the opposite of diversification, he said. “Many will shut down and apply for government jobs.”
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