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Austerity hits hard for Saudis after decade of oil-rich magic

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Saudi Arabia announced a tripling of its value added tax from July (representational)

Riyadh, Saudi Arabia:

Juggling two mortgages and part-time jobs, the Saudi academic Abdullah ultimately failed to build his own house, but his kingdom’s coronavirus austerity campaign struck a fatal blow to his dreams.

Saudi Arabia announced a tripling of its value added tax from July and has suspended monthly allowance for state employees from next month as oil prices plummet while continuing simultaneously a series of asset purchases abroad, including an English football club.

This shock decision highlights the risky strategy of Crown Prince Mohammed bin Salman to further erode a once generous social protection system, leaving the overwhelmingly young population to face a new reality of reduced incomes, fewer jobs and a deterioration in the way of life. life.

Changing fortunes could fuel public resentment and strain a decades-old social contract under which citizens received tax-exempt grants and donations in return for their loyalty to the absolute monarchy.

Abdullah, a 40-year-old father of three, five percent VAT introduced in 2018 and the apparent phasing out of long-standing government policy to offer interest-free housing loans – among several grants cut in recent years – have been bad enough.

Struggling with a stagnant government salary, Abdullah undertook part-time concerts, notably by offering plumbing services and working for a carpool application, while taking out a second mortgage to build a house on the outskirts of Riyadh.

Now, an increase in triple VAT – which would increase the cost of all construction items, from cement to bricks and rebar – has reduced it even more.

“Expensive building materials have become more expensive with triple VAT,” said Abdullah, who no longer knows if his house will ever be built.

He asked that his real name not be released for fear of reprisals from the government.

Few Saudis are likely to speak openly in growing nationalism and strident repression against dissent.

“Magic decade”

But many citizens are nostalgic for what Saudi expert Karen Young calls the “magic decade” between 2003 and 2014, when the kingdom accumulated spectacular oil wealth that funded a generous welfare state.

Cutting back on the largesse of the state should cut consumption, with businesses anticipating depressed sales of everything from cars to cosmetics and appliances.

“For the average Saudi household, the cost of living has become much higher. The ripple effects will … (hinder) the growth of private sector businesses,” said Young, an American academic Enterprise Institute.

“VAT increases household spending – from food to housing, water, electricity, restaurant bills, transportation, education, health.”

The kingdom is also likely to become less competitive compared to the other Gulf States which introduced the VAT at the same time but have so far refrained from increasing it beyond 5%.

Saudi Arabia, however, has limited options, as public finances are affected by the decline in oil revenues as well as the coronavirus crisis, which practically halted the local economy.

State oil giant Aramco – the cash cow of Saudi Arabia – posted a 25% drop in profits for the first quarter, and the rest of 2020 could be even darker.

The $ 27 billion austerity measures will only partially limit a yawning budget deficit, which is expected to hit a record $ 112 billion this year.

But the government is careful not to cut public jobs and wages amid already high youth unemployment.

Almost two-thirds of all Saudis are employed by the government, and the public sector wage bill accounts for about half of all public spending.

“Shopping madness”

Although it has reduced the “cost of living” allowance for state employees, the government retains another monthly document known as the “citizen account”, which benefits about 12 million Saudis and costs billions of dollars a year.

“Cutting subsidies while people are suffering from economic suffering is a risky decision,” said Quentin de Pimodan, of the Research Institute for European and American Studies.

“To avoid a backlash, Saudi Arabia cuts one allowance but preserves the other even if it cannot afford it either.”

The pro-government newspaper Okaz said the austerity measures included an $ 8 billion cut to “Vision 2030”, Prince Mohammed’s ambitious plan to swing the economy away from oil.

But it is not yet known whether this will include his dream project, the NEOM’s 500 billion dollar megalopolis on the west coast of the kingdom.

The austerity campaign has led some like Abdullah to question the government’s lavish spending on sports entertainment and extravagance, as part of slow but costly economic diversification.

Under the scanner is also the recent spate of spending from the Saudi Public Investment Fund.

This includes a $ 372 million project for Newcastle United football club, a $ 775 million stake in cruise ship Carnival and an investment of $ 450 million in Hollywood event promoter Live Nation.

The FRP did not respond to requests for comment.

“Buying distressed assets at unbeatable prices could make strategic sense for PIF,” said de Pimodan.

“But in times of painful cuts at home, they would be inclined to keep their shopping discreet.”

(With the exception of the title, this story was not edited by NDTV staff and is published from a syndicated feed.)

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