Saudis Cut Subsidy to Increase Fuel and Electricity Price
Confronting a drop in oil prices and
mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated
the biggest part of government spending in next year’s budget to defense and security.
Authorities announced increases to the prices of fuel, electricity
and water as part of a plan to restructure subsidies within five years. The
government intends to cut spending next year and gradually privatize some
state-owned entities and introduce value-added taxation as well as a levy on
tobacco.
The biggest shake-up of Saudi economic policy in recent
history coincides with growing regional unrest, including a war in Yemen, where
a Saudi-led coalition is battling pro-Iranian Shiite rebels. In attempting to
reduce its reliance on oil, the kingdom is seeking to put an end to the
population’s dependence on government handouts.
Experts say, “This is the beginning of the end of the era of
free money. “Saudi society will have to get used to a new way of working with
the government. This is a wake-up call for both Saudi society and the
government that things are changing.”
This
is the first budget under King Salman, who ascended to the throne in January,
and for an economic council dominated by his increasingly powerful son, Deputy
Crown Prince Mohammed bin Salman. In its first months in power, the new
administration brought swift change to the traditionally slow-moving kingdom,
overhauling the cabinet, merging ministries and realigning the royal
succession.
The
collapse in oil prices has slashed government revenue, forcing officials to
draw on reserves and issue bonds for the first time in nearly a decade. The
government recorded a budget deficit of 367 billion riyals ($98 billion) in
2015. That’s about 16 percent of gross domestic product, according to the
National Bank of Abu Dhabi, but below the 20 percent forecast by the
International Monetary Fund.
For 2016, the government expects the deficit to narrow to 326
billion riyals. Spending, which reached 975 billion riyals this year, is
projected to drop to 840 billion riyals. Revenue is forecast to decline to
513.8 billion riyals from 608 billion riyals.
Oil
made up 73 percent of this year’s revenue, according to the Finance Ministry.
Non-oil income rose 29 percent to 163.5 billion riyals.
Significant progress in economic diversification relies
largely on policies put in place before the price shock, according to an
International Monetary Fund study released in December 2014. It cited Dubai,
the business hub of the United Arab Emirates, as the main successful example
among Gulf Arab monarchies.
For
2016, the government allocated 213 billion riyals for military and security
spending, the largest component of the budget as the kingdom fights a war in
Yemen against Shiite rebels.