- Saudi Arabia has long maintained a social contract whereby citizens enjoy state subsidies and handouts in return for loyalty to the regime.
- This contract is increasingly unsustainable, as oil prices remain low, the population booms and the government’s resources are depleted.
- Diversifying the economy and unravelling years of “social experimentation” is likely to cause “dissatisfaction” and “disappointment.”
LONDON — On December 28 2015, queues formed outside petrol stations in Saudi Arabia following an official announcement that fuel prices would soon be hiked 40%, to $US0.24 per litre, as the Kingdom’s economy struggled to adjust to plummeting global oil prices.
The move symbolized a change in the social contract between Saudi Arabia’s absolute monarchy and its people.
This delicate balance has long been characterised by state handouts and subsidies in return for loyalty, but has become less and less tenable.
Consequently, the Saudi government is now trying to “unravel the many years of social experimentation,” Mihir Kapadia, CEO of Sun Global Investments, tells Business Insider. Although the delicate balance “worked for a while,” he says, low oil prices “threw the entire mechanism out of whack.”
“The government are spending far too much money”
Many goods in Saudi Arabia are still exempt from the standard VAT rate of 5%, and a high proportion (67% in 2016, excluding non-Saudi nationals) of the workforce is employed by the public sector — which paid almost double private sector wages, on average, in 2015.
In response to the Arab Spring in 2011, the Saudi government increased its spending by 25% on the previous year to quell potential dissent, which included around $US130 billion of social spending, higher pay and bonuses for public sector workers.
But the kingdom’s economy is heavily reliant on oil. Prices fell sharply in 2014, and in 2015 the International Monetary Fund predicted Saudi could run out of resources within five years, if its rate of spending and the oil price slump continued. In January 2016, crude oil plunged to a low of $US33.62 per barrel, and is yet to recover to anywhere near 2013’s high of $US107.65.
“To manage the expectations of their citizens, the government is spending far too much money,” says Kapadia.
Diversifying the economy
The Saudi government is now pursuing its Vision 2030 strategy, a state-led drive to diversify the economy away from oil, encourage international investment and change the media perception of the country as a “closed, desert kingdom.”
“Huge tracts of the economy” are being privatised, says Mark O’Connell, CEO of investment advisory firm OCO Global, which will mean fewer highly-paid public sector workers.
According to O’Connell, well-paid public sector workers currently visit “all of the restaurants in Riyadh — there are hundreds of them” on a quarterly basis, to carry out hygiene and compliance inspections.
“You can imagine that’s deeply inefficient and very expensive,” he says.
The government also plans to publicly float state oil giant Saudi Aramco, worth an estimated £1.5 trillion ($US2 trillion), in 2018. But this has created the unwelcome impression among some Saudis, says O’Connell that the “family silver is up for sale.”
A booming population
In addition to oil price woes, the Saudi population has mushroomed over the last 25 years. A large proportion is now under 30, and the median age is 27.5.
“25, 30, 40 years ago, the rural population was probably a quarter of what it is now,” says Kapadia, which made maintaining the social contract “much easier.”
To boost the economy, he says, “what is required is a change of mindset.” The Saudi government must invest in skills development and encourage private investment, he says, both from foreigners and Saudi businesses and individuals.
A “rebalancing act”
According to Chatham House’s Vision 2030 and Saudi Arabia’s Social Contract report, if the Saudi government is unable to continue distributing subsidies and gifts to its population, “it will need to focus on alternative sources of legitimacy.”
“This could mean greater consultation and public involvement in decision making, or, perhaps more likely, emphasising the importance of royal rule as a bulwark against insecurity, terrorism and chaos, while maintaining or intensifying an authoritarian model of rule,” it said.
If the government pulls back on financial incentives without tempering its autocratic nature, says Kapadia, “there will certainly be some dissatisfaction. Certain people who are used to a certain way of life, living on… subsidies and handouts… will be disappointed,” he says.
But this system was “going to come to an end anyway,” he says, “it was not sustainable.”
“We’ve seen these social experiments fail significantly in Russia and the Eastern Bloc, and even China has since moderated its communist philosophy and allowed for private enterprise to grow,” he says. Countries with “extremes of governance” routinely go through such “rebalancing acts,” says Kapadia, largely as a result of economic conditions that are “forced upon them.”
The good news for Saudi, he says, is that the young understand “there have to be certain changes,” and are starting to look for work with new urgency. As part of this new interest in building careers, he says, young Saudis have much greater work-related aspirations than their parents’ or grandparents’ generations did.
Government subsidies, says Kapadia, have become a type of “social security.” In their absence, it is “imperative” that new jobs are created, to accommodate this new workforce and fulfil their aspirations.
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