Click here for the hard truth about the current job marketAugust 31, 2015 8:50
Is the Saudi Economic Power More Fragile Than It Looks
Given Saudi's high energy inefficiency and increased public sector spending, Una Galani thinks it might be the time of the Saudi government to tackle its potentially foreseeable financial problems.
July 29, 2011 10:09 by Reuters
Saudi Arabia’s economic power is more fragile that it looks. High energy inefficiency and public sector spending are two trends which, left unchecked, will start eating into the kingdom’s petrodollar reserves within a decade. But while the Saudi government doesn’t have its head stuck in the sand, it isn’t clear that it is doing enough to tackle the country’s foreseeable financial problems.
The surprising sums have been laid out by Jadwa Investment, a firm founded by Saudi royalty. Based on past spending patterns, and assuming no significant ramp up in oil production which accounts for 85 percent of government revenues, it reckons the country’s net foreign reserves would shrink by around 45 percent — to around $267 billion by the end of 2021 and to $100 billion in 2024.
How does it happen? The kingdom’s own energy consumption is forecast to grow at an annual rate between 8-10 percent for the next decade. That means less of the black stuff will be available to export at international prices. Saudi consumers and businesses pay as little as 3 percent of the global price. And they and use 11 times more oil than the Chinese to generate the same amount of GDP, according to 2009 numbers.
Government spending, meanwhile, is forecast by Jadwa to grow at an average annual rate of 7 percent for the next 20 years. That’s half the rate of the previous decade. But spending on infrastructure and other projects to create a knowledge-based economy and renewable energy sources makes up roughly just 30 percent of the total. The rest is current spending, the largest part of which being public payrolls. Public sector wages rise too fast, and are already higher on average than those of the private sector.
The problem is that the Arab Spring has limited the capacity of Saudi rulers to reform wages and food subsidies. But it hasn’t left the kingdom powerless in other areas. Ambitious projects in renewable energies are a long way off. So it would make sense to act sooner rather than later.
There is scope for action. Corporate electricity tariffs, currently below the cost of production, could be increased. Limiting gas-guzzling cars, enforcing stricter building regulations would also help. Of course ideally the government could also think about introducing taxes, both on companies and individuals. But what then if Saudis decide there can be no taxation without representation? Whatever the kingdom decides, spending now, while delaying tough decisions, will not be part of the answer to its problem.