Saudi Arabia at a crossroads: NTP promises reform
Sayed Kamaluddin | Tuesday, 28 June 2016
The sharp fall in the global fossil oil prices since 2014 has put Saudi Arabia in deep trouble. Last 18 months of yawning budget deficit has put the Kingdom in tight spot. All major oil-revenue-dependent nations are in trouble, but the Saudi situation is perhaps more serious than meets the eyes.
According to Economic Monitor, about 73 per cent of the Saudi budget was financed out of oil revenue in 2015. Budget deficit during the year (2015) rose to 16.3 per cent from 3.4 per cent in 2014. This has happened because per barrel oil price was $100 in February 2014 which had plummeted to $26 in 2015. However, oil prices by June 2016 became a little upbeat and rose to around $50. The price situation is volatile. But if the prices remain around this level or even somewhat less, the International Monetary Fund (IMF) has estimated that budget deficit during 2016 would be slightly eased to 14 per cent.
The kingdom's involvement with the prolonged war in Yemen with no sign of its ending in the near future has proved to be a drag on its economy.
There are other compulsions as well. Saudi Arabia has gradually become the world's third largest spender on defence - below the United States and China while the Russian Federation trails in the fourth position.
However, in the midst of an otherwise gloomy scenario, observers familiar with the Middle East politics suggest that there appears to be a silver lining. The new Saudi King, Salman bin Abdulaziz has appointed a new administration with people seemingly committed to the much-needed economic reforms.
MAJOR REFORM PROGRAMMES LAUNCHED: The new Saudi administration launched earlier in April this year the National Transformation Plan (NTP) to overhaul the country's oil-dependent economy. The NTP is called "Vision 2030" and its basic goal is to reduce the importance of oil to the Saudi economy. The plan (NIP) seeks to diversify economy with an initial $72 billion investment programme. To fund the project, the NIP aims to reduce subsidies on electricity, fuel and water. Retail prices of some of were raised in 2015.
Apart from an all-important nod from King Salman bin Abdulaziz, the man behind this ambitious reform programme is the youthful 30-year-old Deputy Crown Prince Mohammad bin Salman who is guiding its implementation.
The NIP proposes to cut public wages to 40 per cent from 45 per cent of the current budget allocation by 2020. According to a Financial Times of London report earlier in June, this measure would reduce public salaries from (Saudi Arabian Real) Sar 480 billion to Sar 465 billion during this 5-year period. It is to be noted that two-thirds of the Saudi workforce are government employees; 30 per cent of all workforce accounts for non-Saudi residents. The plan proposes to generate over 450,000 new jobs outside the government sector.
The reform measures also aims at raising revenue from non-oil sources from 2015 figure of Sar 163.5 billion to Sar 530 billion by way of increasing government fees and taxes including a sales tax, income taxes on non-resident expatriates, "sin taxes" on harmful products such as tobacco. In addition to these efforts, the NIP suggested to balancing the budget by 2020 by raising national debts by 30 per cent of the gross domestic product (GDP) from the present 7.7 per cent. The International Monetary Fund has calculated 2016's budget deficit to be around 14 per cent.
By far the most important measure to raise fund is to sell five per cent share of the giant national oil company Aramco through an initial public offering (IPO). It is also envisaged that the company will play a major role in developing industrial projects and diversifying the country's energy-centred economy. The Aramco shares would become publicly traded in some major stock exchanges and investment bankers have already expressed willingness to participate. However, to sell Aramco shares on public exchanges, the company has to become more transparent about its revenue, costs and details of management plan relevant to prospective shareholders. The company was actually a private entity before it was nationalised by the government four decades ago.
ARAMCO'S DIVERSIFICATION AND GLOBAL EXPANSION PLAN: As the Saudi administration appears serious about its reform programme, and the unfamiliar and uncharted route it has to pass through for the programme's implementation, it is likely to confront problems and pitfalls before the end result could become visible. In this context the Saudi administration has chosen Aramco to play a pivotal role. Its chief executive Amin Nasser, an experienced old hand, recently met a group of newsmen at the company's Dhahran headquarters to explain the formidable challenges that lie ahead of him.
The company had taken up multi-pronged tasks to help the country's economy even before the NIP was announced. Reuters quoted Nasser saying that the company on average produced 10.2 billion bpd of crude in 2015 and its latest stage of expansion work in its southeastern Shaybagh oil field would be completed within this or next month. With this, Shaybagh's total production capacity would reach one million bpd and is likely to rebalance Saudi crude oil quality and compensating for falling output at other fields as they mature. He calculated that an extra 1.2 million bpd would be added to global oil demand this year.
Aramco is already developing, Reuters report said early in June, a huge ship repair and shipbuilding complex at Ras al-Khair in the country's east coast. The first part of this complex would be ready by 2018. This is a part of Riyadh's plans to boost industrial diversification and will end up in manufacturing oil rigs and tankers. The complex would be fully operational by 2021. When completed, this complex alone would create about 80,000 jobs and reduce the country's imports by $12 billion. This and some other projects being contemplated now really offer a rosy picture.
However, the tentative decision to impose income tax on the foreign employees and professionals has already been critically responded to by a Saudi Arabia-based consultant Talal Malik, as reported by the Financial Times recently. The tax-free lucrative salaries lured the foreign expatriates into Saudi Arabia and other Gulf states. It is, however, natural that Saudi Arabia and the Gulf states where huge number of expatriates are employed, would eventually like to replace them by well-educated and trained locals, but the time has not yet come to replace all of them and they are still dependent on expats substantially.
Saudi finance minister Ibrahim al-Assaf, however, clarified the issue at a press conference to soothe the expats that it was still "a proposal" and that "nothing has been approved yet and it will be examined."
Many other issues are likely to steadily crop up as things move and they may create more difficulties for both the government and the end users when the administration gears up to gradually implement the NIP.
A long needed beginning has been made by the new Saudi administration and it is to be seen how the 'ambitious' plan in time could be perfected through pragmatic and rational approach and be guided to its destination. Indeed, a difficult task, but not impossible.