Seminar| Economic and Fiscal Challenges in Saudi Arabia

OxGAPS hosted a seminar on “Economic and Fiscal Challenges in Saudi Arabia” chaired by Oliver Cornock (Regional Director, Oxford Business Group). The speakers included Tim Callen (Mission Chief for Saudi Arabia and Deputy Director in the Middle East and Central Asia Department, IMF), Adel Hamaizia (DPhil Candidate, St. Antony's College) and Bill Law (Director, The Gulf Matters). Cornock introduced the three speakers, and highlighted that time was of the essence for Saudi Arabia to execute the several economic and fiscal plans it has laid out, not least for Vision 2030’s interim agenda, the National Transformation Program 2020, which aims for fiscal balance inter alia in just three years from now.

Fiscal and employment challenges

Callen opened with the concerns that the IMF had regarding Saudi Arabia’s fiscal situation, following the precipitous decline in oil prices in 2014. He commended Saudi Arabia for its endeavors to cut government expenditure and for introducing a raft of measures including the initiation and diversification of non-oil revenue streams, energy and water price reforms, and an all-round review of the spending envelope. Callen suggested that in fact the plans in the Saudi fiscal balance program—which aims to cut fiscal deficits to zero by 2020—surpass the pace of adjustment that was expected. He pointed to other new excise duties and taxes including those on tobacco and soft drinks, which are considered to be easier to implement from an administrative perspective, while the introduction of VAT in 2018, is expected to be more challenging. Callen also discussed the compensation system (citizen’s account) that was being introduced to lessen the increase in energy prices etc, and that while there would be teething problems, this would be positive for the wider population. Non-oil sector growth slowed in recent years, along with Saudi job creation, which begs the question on where job creation is likely to come from in the near term. Callen also highlighted that there will be a need in the mid- to long-term to grow the wage share in the economy when compared to the capital share. In sum, the employment growth situation is critical, yet still unclear on how it evolves, while on the fiscal side, things are clear, though it will be a case of implementation.

The transformation agenda and the social contract

Hamaizia began with a brief summary of Saudi’s status as a rentier state par excellence, and continued to explain that in Saudi Arabia, there is not a social contract, but social contracts ‘plural’, including with the merchant/business community, royals, expatriates, and the wider Saudi populace (tribal, regional etc). How these implied unwritten contracts are renegotiated and reconfigured are vital. He reminded participants that protracted periods of fiscal deficits (and drawing down financial reserves) in Saudi Arabia are not new in of themselves, while what makes this current phase unique is the context and confluence of circumstances, including but not limited to: the demographics (population having doubled since the Gulf War); an unprecedented and costly security situation; regional competition with Iran; slowing China; un(der)employment; shale gas as a disruptor; rising energy consumption; and OPEC politics inter alia. Hamaizia continued to discuss some of the social implications of fiscal consolidation and reforms for the social contract, and alluded to the fiscal breakeven price (which is not an exact science) in the late $70s in 2016, against an average oil price of $43. Deputy Crown Prince Mohammad bin Salman, as President of the Council of Economic and Development Affairs (CEDA), was described as the architect of Vision 2030 (announced in April 2016) and its interim agenda National Transformation Program 2020 (announced in June 2016). The vision’s program was also supported closely by Minister of Economy and Planning, Adel Fakeih, and a range of consultancy firms. Hamaizia covered some of the new non-oil revenue generating measures including visa fee hikes, and questioned how this can be reconciled with tourism promotion and expansion. Furthermore, he explained the various challenges associated with the introduction of draconian traffic fees and fines, sin taxes, white land taxes, and the VAT. Hamaizia highlighted high levels of military expenditure, and switched to clarify what an Aramco IPO could/would look like. He concluded with energy price reform challenges and the importance of pace, sequence, data, compensation and communication.

Political and social implications

Law followed on from the previous speakers, by explaining that the various economic and fiscal plans will have social and political implications. He explained that the difficulties encountered in the Yemen war, meant that Mohammed bin Salman required wins on the economic front, with job creation and the housing crisis as key issues. The white land tax was described as a positive, as it will go some way in freeing up urban land that can be used to tackle the housing situation. Law explained that Saudi Arabia was also suffering from ‘brain drain’ with many young Saudis going abroad for white collar jobs in places such as the UAE. This was described as a shame for those who come home after studying abroad on a scholarship, to find that there are no suitable jobs available for them. The earlier cancellations of contracts and suspension of contractor payments was bad for investor confidence according to Law. He also explained that grand reforms required buy-in from the traditionalists and Ulema. This included, but not limited to, education reform that would be more aligned with the demands of the private sector and job market. Law concluded by suggesting that Deputy Crown Prince Mohammad bin Salman as a  figure resonated with the young majority Saudi population, and that it was necessary to include the youth in dialogue pertaining to the future of the Kingdom.