World Economy

Saudis Face ‘Economic Bomb’

Saudis Face ‘Economic Bomb’Saudis Face ‘Economic Bomb’

While the world’s attention is focused on Saudi Arabia’s latest flare up with Iran, many Saudis are concerned about the “economic bomb” at home.

The government is slashing a plethora of perks for its citizens. The cash crunch is so dire that the government just hiked the price of gasoline by 50%. Saudis lined up at gas stations to fill up before the higher prices kicked in, FXStreet reports.

“They have announced cutbacks in subsidies that will hurt every single Saudi in the pocketbook,” says Robert Jordan, a former US ambassador to Saudi Arabia and author of “Desert Diplomat: Inside Saudi Arabia Following 9/11”.

Gas used to cost a mere 16 cents a liter in Saudi Arabia, one of the cheapest prices in the world. Many Saudis drive large SUVs and “have no concept of saving gas,” says Jordan.

  Gas Price Hike

The gas hike is just the beginning. Water and electricity prices are also going up, and the government is scaling back spending on roads, buildings and other infrastructure, CNNMoney reported.

Those cuts might sound normal for any government that is running low on cash. But it’s especially problematic in Saudi Arabia because the vast majority of Saudis work in the public sector.

About 75% of the Saudi government’s budget comes from oil. The price of oil has crashed from over $100 a barrel in 2014 to around $36 currently. Most experts don’t expect a rebound anytime soon.

The government used its vast oil wealth to provide generous benefits to its citizens. When the Arab Spring rocked the Middle East in 2011, the Saudi king spent even more in an effort to subdue any discontent in the country.

Perks Saudis Receive: Heavily subsidized gas; free health care; free schooling; subsidized water and electricity; no income tax; public pensions; nearly 90% of Saudis are employed by the government; often higher pay for government jobs than private sector ones; unemployment benefits; a “development fund” that provides interest-free loans to help families buy homes and start businesses.

  New Taxes

Saudi Arabia may have to start taxing its people. It can’t pay for all those benefits. It ran a deficit of nearly $100 billion last year and expects something similar this year, if not worse.

The International Monetary Fund recently predicted that Saudi Arabia could run out of cash in five years or less if oil stays below $50 a barrel.

“The Saudis have used their economic power to buy off their population,” says Jordan. He predicts Saudi Arabia may even have to start collecting an income tax or sales tax.

Unemployment is already high in the country. Official statistics put it at about 12%, but experts say it’s likely much higher since many Saudis don’t even look for work.

  No Cut in Military Spending

Members of the royal family have enjoyed lavish expense accounts for years. Those were detailed in US Embassy cables leaked on WikiLeaks, including a drugs, rock ‘n’ roll lifestyle of many young royals. It’s unclear how much those will be scaled back since many of the royal perks are off budget.

And there’s one area the Saudis are not cutting: defense spending. The country currently spends 11% of its GDP on defense, the highest in the world. It intends to spend even more this year.

  A Fragile State

“Fragile” is the word that journalist Karen Elliott House used to describe Saudi Arabia in her 2012 book about the country. “Observing Saudi Arabia is like watching a gymnast dismount the balance beam in slow motion,” she wrote. The world holds its breath wondering if the Saudis “will nail the landing or crash to the mat,” Washington-based RealClearPolitics reported.

This past week, the House of Saud seemed to have lost its footing. The kingdom’s fear of a rising Iran and a sharp escalation in the sectarian feud that is ravaging the Middle East.

The Saudis’ insecurity, which has led them to make bad choices, needs a thorough examining.

Saudi Arabia is a frightened monarchy. It’s beset by extremists from the Islamic State. It’s bogged down in a costly and unsuccessful war in Yemen. And it mistrusts its superpower patron and protector, the United States, in part because of America’s role in brokering the nuclear deal with Iran.

The Saudis need reassurance that Washington has their back.