World Economy

Saudi Arabia Cuts Bonuses, Salaries to Narrow Budget Deficit

Salaries of Saudi ministers are to be cut by 20% and that of ministers by 15%.Salaries of Saudi ministers are to be cut by 20% and that of ministers by 15%.

Saudi Arabia canceled bonus payments for state employees and cut ministers’ salaries by 20%, steps that further spread the burden of shoring up public finances to a population accustomed to years of government largesse.

The government also decided to suspend wage increases for the lunar year starting next month and curbed allowances for public-sector employees, according to royal decrees and a cabinet statement published by state media. The salaries of members of a legislative body that advises the monarchy were cut by 15%, Bloomberg reported.

By curbing what many Saudis had for years taken for granted, the government is signaling a determination to reduce the highest budget deficit among the world’s 20 biggest economies amid low oil prices and a lingering war in neighboring Yemen. The measures, however, risk deepening the kingdom’s economic slowdown by damaging consumer confidence. Saudi stocks tumbled on Tuesday.

While the government needed to save money, canceling bonuses may affect Saudis “psychologically,” according to Saleh Al Qarni, a government school teacher who also works as a driver to earn extra cash.

Under Deputy Crown Prince Mohammed bin Salman, the world’s biggest oil exporter has already delayed payments owed to contractors and started cutting fuel subsidies as it tries to manage lower oil prices. The budget deficit may narrow to 13% of gross domestic product this year and below 10% in 2017, according to International Monetary Fund estimates.

Past governments have spent billions of dollars on state wage increases, making private-sector jobs less attractive for Saudis. The money, though, fueled a surge in non-oil economic growth, which averaged 6.5% between 2000 and 2012, according to IMF data.

The decisions are part of a plan spearheaded by Prince Mohammed, the king’s son and second-in-line to the throne of the biggest Arab economy. Under his so-called Vision 2030 plan, the government seeks to reduce the public-sector wage bill to 40% of spending by 2020, from 45% today. Public debt is seen climbing to 30% of economic output from 7.7% currently.

Perks for senior officials were also scaled back. The government stopped providing cars to senior state officials for their next financial year and announced that ministers will pay fees for their fixed and mobile phones at the start of the next Islamic year.

The benchmark Tadawul All Share Index tumbled 2.8% in Riyadh, the biggest intraday decline in three months.

The announcements made no mention of how much the cuts would save. Saudi Arabia was weighing plans to cancel more than $20 billion of projects and slash ministry budgets by a quarter to repair its finances, people familiar with the matter said earlier this month. The kingdom also plans to tap international bond markets in a sale that could raise more than $10 billion, according to people aware of the plans.

IMF Recommendation

The IMF recommended in 2015 that Saudi Arabia control its growing wage bill and make changes to government to subsidies for fuel and electricity. In an interview with Bloomberg this year, Prince Mohammed said the government planned to accelerate subsidy cuts and impose more levies to spread the burden of lower oil prices. The measure aimed to raise an extra $100 billion a year by 2020 in non-oil revenue.

Lower oil prices and government austerity measures have started to impact the economy. Growth is forecast to slow to 1.1% this year, the lowest level since 2009, according to a Bloomberg survey. Consumer spending has been hit by government’s efforts to lower the deficit.

Paul Sullivan, an adjunct professor of security studies at Georgetown University in Washington, said that while the decisions may prompt some Saudis to move to the private sector, he doesn’t “expect an exodus out of higher paying solid government jobs to riskier, lower paying private-sector jobs.”