The deep spending cuts in Saudi Arabia’s 2016 budget, unveiled this week, confirm Geopolitical Futures’ assessment of the kingdom as being in a state of slow weakening due to growing internal and external stressors. Heavily reliant on revenues from crude sales, the sharp 50 percent decline in oil prices over the last year has constrain the ability of the Saudis to deal with the historic transition underway at home, which is taking place amid growing instability in the region. The Saudi need to cut spending at home is also bad news for the Arab world, which relies on the kingdom as the only remaining Arab bulwark against the spread of anarchy.
On Dec. 28, the Saudi government unveiled its 2016 budget, which runs a $98 billion deficit – roughly 15 percent of the country’s GDP. The government said it will spend $224 billion in 2016, down from the $260 billion it expects to have spent in the outgoing year – a 14 percent decrease. The government explained that the 2015 budget deficit was in large part due to bonuses given to government employees, which were ordered by King Salman after his ascension to the throne. Since his ascension, however, the Saudis spent an additional $5.3 billion on defense and security due to their involvement in the Yemen war. Considering that cash from oil exports account for about 90 percent of the government’s fiscal revenue and about 40 percent of the country’s overall GDP, a shortfall was likely after oil prices declined.
A major portion of Saudi Arabia’s domestic spending has gone towards heavily subsidizing fuel for citizens. In the new budget though, the kingdom raised the domestic price of gasoline from $0.60 a gallon to $0.94 a gallon. Prices were also increased significantly for gas, diesel, kerosene and other utilities, such as water and electricity – the first such move in many years. These increases are part of a five-year plan to gradually raise prices for petroleum products and utilities to avoid the shock effect a sudden increase could have on lower and middle-income citizens. There are also plans to impose new taxes.
While still flush with some $640 billion in foreign exchange reserves, the new budget clearly reflects deep concern about the new reality of low oil prices and the uncertainty of how long they will remain depressed. In a late October assessment, the IMF warned that the country is at risk of exhausting its reserves by 2020 if the government does not revise current spending policies. The Saudis, however, like all other nations, are constrained by social and political realities within both their own country and the region.
There are severe limits to how much Riyadh can reform policies before upsetting the social order of things. Since shortly after inception, the Saudi public has become used to a political economy where the state is flush with petro-dollars and provides for the needs of the public. Saudi Arabia’s petroleum wealth and its patronage system has played a key role in sustaining the legitimacy of the monarchy. This is all the more critical now because of the difficult transition underway to a third generation of leadership and the turmoil in the Arab world resulting from the phenomenon of autocratic meltdown that has enabled the rise of jihadist non-state actors.
What this means is that the hollowing out of the Arab world has left Saudi Arabia with the responsibility of ensuring regional security, as it also struggles to manage internal changes. This is all the more complicated because the rise of the Islamic State and other non-state actors has drawn international players (Iran, Turkey, United States, Europe and Russia) to the Middle East, thereby rendering the region more unpredictable and thus perilous. The Saudis have no choice but to spend resources in not just Yemen, where it is leading a major war effort, but all along its periphery – in particular Syria, Egypt, Jordan, and Bahrain.
Therefore, not only must the Saudis avoid seriously engaging in political, social and economic reforms encouraged by the West, they cannot disengage from the region. On the contrary, both their domestic and international policies are critical to the state’s survival and the government has a very narrow menu of options to choose from. Meanwhile, no one can predict how long oil prices will remain low. They may rebound but, by the time they do, the Saudis will already be in a weakened and more vulnerable position.