The Misguided Saudi Bailout
Anyone following the financial news over the past few months would know that Saudi Arabia is on the cusp of an economic revolution. The economic events that have happened over the past few months in this rich and powerful monarchy are nothing less than extraordinary.
Saudi Arabia has been hit hard by the falling oil prices. The development of fracking technology and the easy availability of shale oil have brought down oil prices all across the world. This has proved to be a disaster for countries like Saudi Arabia whose national budget is totally dependent on oil prices.
In modern times, it is dangerous to rely on oil as the major source of revenue for the economy. Venezuela can be considered to be a good case in point. The oil-rich economy of Venezuela is now suddenly bankrupt because oil prices collapsed. The Saudi monarchs did not want their economy to go the Venezuela way. As a result, the Saudis immediately implemented austerity measures. This ensured that the government expenses also dropped in line with the revenues.
Government spending as a percentage of GDP has dropped from 38.3% to 34%. The result of this austerity exercise has been that the private sector in Saudi Arabia is under tremendous duress. It therefore became imperative for the Saudi government to prevent a major jolt to the economy by bailing out the private sector.
The Saudi government has therefore launched a massive $19 billion plan to help the private sector of the nation. This is only the first part of the bailout.
There are rumors that the Saudi government plans to spend a humungous sum of $53 billion over a three year period to save the Saudi private sector. Many experts believe that this plan is misguided and may end up doing more harm than good.
In this article, we will have a closer look at some of the provisions of the bailout plan and how they are likely to affect the economy.
Past Benefits to be Rolled Back
During the year 2011, most Arab nations were facing an uprising. Although the effects of the uprising were brutal and violent, their causes were often rooted in economic inequality. The monarchy of Saudi Arabia was quick to realize this. To avoid any revolution at home, they quickly gave their own people benefits worth $36 billion. These benefits included unemployment allowances and pay raises. That was a time when Saudi Arabia had a cash surplus and thus was able to give this money away.
At the present moment, Saudi Arabia is facing a cash crunch. The fiscal deficit is rising at an alarming speed. It is for this reason that these benefits are going to be rolled off. The crown prince, Muhammad-bin-Salman wants to do away with handouts. Instead, he wants to invest in stimulating the economy. He believes that the stimulus measures will be an investment. In the short term, they will drain cash from the government. However, in the longer term, they will pay rich dividends!
Removal of Fuel Subsidies
Apart from the rollback of the above-mentioned benefits, the Saudi government is preparing to roll back its fuel subsidies. Since Saudi Arabia was one of the largest producers of oil in the world, the residents were given oil at throwaway prices. Now, the government will roll back the subsidies and raise prices.
Also, the crown prince has implemented new policies which will allow women to drive in the most conservative Islamic monarchy. This should lead to a rapid increase in the number of cars on the roads which in turn will dramatically increase the total fuel consumption.
Introduction of Value Added Tax
The Saudi government also plans to introduce Value Added Tax. This move is aimed at collecting more money from their citizens when they make purchases. It is ironical that the Saudi government has introduced a bailout and also plans to implement a tax within a short span of time.
Incentives for Housing Industry
The main focus of the Saudi bailout plan has been on the housing industry. The government has earmarked a fund of 21 billion riyals for housing projects. Another 14 million riyals have also been earmarked for advances in home design and engineering. This adds up to nearly half of the 72 billion riyal bailout plan! The reason behind this is simple.
Housing purchases are big-ticket purchases. Hence if the housing sector picks up, the GDP of the nation rises very quickly. This will be important for Saudi Arabia which has recorded less than one percent growth in the past three years.
A sharp increase in the GDP will provide some much-needed confidence. Foreign investors have been avoiding investing in the Saudi economy thanks to the purge which was conducted at the behest of the crown prince.
Focus on the Internet
The Saudi government is also focusing on internet and related technologies. 2.6 billion riyals have been earmarked for this purpose. Saudi Arabia does not have the manpower required to become an information technology behemoth.
However, internet firms like Google and Amazon tend to drive growth in the economy. Saudi may want to create a favorable environment so that these companies may want to set up their regional headquarters in the monarchy.
The bottom line is that the Saudi Arabian economy is in shambles. The world may not be able to see it yet. However, the desperation is apparent from the haste with which the royal kingdom is taking these decisions. This bailout may be the last attempt to save the Saudi economy from a full-blown Venezuela style collapse.
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