Saudi Prince Says Kingdom Working to Soften Subsidy Cut Blow

Inside Saudi Decision to Sell Shares in Aramco Parent
  • Government wants burden of price rises limited to the wealthy
  • Prince Mohammed bin Salman spoke in a Bloomberg interview

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 on Thursday at King Salman’s private farm in Diriyah, the original home of the Al Saud royal family. Under the previous system, 70 percent of the subsidies benefited high income people, he said.

Mohammed Bin Salman
Mohammed Bin Salman
Source: Saudi Arabia’s Royal Court

"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, which has grown accustomed to government largess in exchange for political loyalty. A survey released this month found that 86 percent of Saudi youth think electricity and fuel should be subsidized 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 should people have to pay market prices for their utilities.

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"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.

Water bills have increased by 400 to 500 percent, according to John Sfakianakis, Riyadh-based director of economic research at the Gulf Research Center, a think tank.

Post-Oil Era

"Honestly speaking, what happened wasn’t in accordance with the plan that we’ve approved," Prince Mohammed 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, the king’s son and second-in-line to the throne, is leading the biggest shake-up of the economy since Saudi Arabia’s founding. The kingdom will announce its vision for the future in the post-oil era on April 25, the prince said.

One component will be the National Transformation Program, to be announced a month to 45 days after the vision, 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.

Inflation

In January, as the subsidy reductions took effect in Saudi Arabia, inflation accelerated to 4.3 percent after hovering around 2 percent for years.

"People are impacted, and they do talk about it," Sfakianakis at the Gulf Research Center said. However, implementing a cash assistance program for those in need will not be easy because Saudi Arabia doesn’t have income tax and therefore lacks an easy way of determining income levels, he said.

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"It has to be carefully thought through in terms of who gets it and for how long they get it, and what is an appropriate measurement to calculate household incomes," he said.

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.

Oil Reliance

Still, oil revenue made up 73 percent 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 percent.

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 percent 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."

Budget Revamp

With the new process in place, Al-Sheikh said Saudi Arabia will be able to sustain spending growth of 3 to 5 percent 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 programs.”

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