How bad is Saudi economic crisis


To offset the oil fall, the kingdom plans to diversify the economy. But there is much pain in store for the people

Reports about thousands of stranded workers from South Asian countries in Saudi Arabia have rekindled discussions about the economic challenges the oil-rich Gulf kingdom is facing. Over the last few months, Saudi companies have laid off thousands of workers, many of them cheap migrant labourers from South Asian countries, including India, Pakistan and Bangladesh. This employment crisis is only the tip of the iceberg. The Saudi economy, heavily dependent on oil revenues, took a beating as crude oil prices fell from $100 per barrel in 2014 to over $40 now. Prices were hovering around $25 barrel in February this year. Oil revenue financed 73% of the government’s budgets 2015. Naturally, the fall in the oil price left a gaping hole in the Saudi budget. Deficit increased from 3.4% of GDP in 2014 to 16.3% in 2015.

The shrinking oil revenues have had an impact on the country’s overall economic growth. If GDP grew 5.5% in 2012, the current year’s growth rate is estimated to be little more than 1%. From 2014, growth rate has steadily been falling. Current year’s fiscal deficit is estimated to be $100 billion. The government’s immediate response was to fund the revenue shortfall drawing from the reserves and tapping local banks. As a result, the country’s foreign exchange reserves dropped by $116 billion in 2015, while interbank rates rose to their highest levels since January 2009. This was, however, unsustainable in the long run. The International Monetary Fund warned the government in October 2015 that the kingdom risked wiping out its financial reserves in five years if it continued the drawing down from the reserves to fund deficits. The Saudi, government, however, admits that the situation is much worse. “They were going to be wiped out in less than two years if we continued at the same spending level,” Minister of State Mohammad Al-Sheikh said in an interview in March. It’s this acute financial crisis that forced Saudi Arabia to look for overseas loans. Earlier this year, the country sealed it first international loan in 15 years to raise 10 billion.

Chances of an immediate recovery from the economic crisis depend on the oil prices. In 2016 and 2017, Saudi Arabia needs crude prices above $60 to balance its budget. Brent crude oil price was $49 on Thursday. The average crude oil price so far this year is $39.63, worse than last year’s $52.35. The economic indicators suggest that there won’t be any surprise spike in oil prices in the near future. This means the prospects of petrodollars powering the economy are low. The Saudi authorities have realised this. Prince Mohammed bin Salman, the deputy crown prince who’s the real man in charge of the kingdom’s economic and foreign policies, had earlier this year unveiled a vision document to veer Saudi Arabia off oil dependence. The document envisages to slash down government subsidies massively, promote privatisation, encourage more local employment and raise the world’s largest sovereign wealth fund that would let the government invest in non-oil sectors. Currently, more than 70% of the workforce is employed by the government. And of the total workforce, some 30% are foreigners. According to the document, Saudi Arabia plans to reduce both.

These are high-risk reform proposals. First, the welfare schemes of the regime had helped the al-Saud ruling family win the people’s loyalty. One has to see what would be the social impact of the government cutting public spending at a time when the Arab street is tense. Second, the plan to diversify the economy is not new. Several oil-dependent economies, from the Gulf to Latin America, had tried it earlier with little success. The Saudi plan is heavily dependent on financial markets—a huge chunk of the proposed $2 trillion wealth fund should come from a public issue of shares of the state-run oil giant Aramco. If markets slide, the plan could collapse. Getting more people to work is also not easy. The Wahhabi elite in the country are not receptive to the idea of increased share of women in the workforce. Women are still not allowed to drive in Saudi Arabia. The strict dress code and segregation of unrelated man-woman could spoil plans to boost tourism. Finally, even if the Saudi authorities overcome these challenges and implement the reforms, the diversification of the economy would be a long process. The transition would be painful. Can Saudi Arabia endure that pain?

One thought on “How bad is Saudi economic crisis

  1. Absolutely loved reading the explainers. Simple, interesting and informative. Have high hopes for this website. Thanks for doing journalism a favour.


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