Saudi Handouts to Wipe Out Savings

Saudi authorities may have underestimated the financial cost of handouts doled out to citizens complaining about rising prices, according to Bank of America Merrill Lynch.

The government will spend 61.8 billion riyals ($16.48 billion) on a package that included paying civil servants a monthly 1,000-riyal allowance for a year and restoring annual pay raises suspended in 2017, London-based economist Jean-Michel Saliba wrote in a report. Officials said the package would cost about 50 billion riyals, Bloomberg reported.

King Salman issued the order this month after public complaints about the impact of higher fuel prices and the introduction of a 5% value-added tax. The measures will likely make the government more reliant on higher oil prices to boost revenue, chipping at the credibility of Crown Prince Mohammed bin Salman’s plan to end the economy’s addiction to hydrocarbons.

“Nearly all announced payments risk having a permanent impact on the budget,” Saliba wrote. “They may not be phased out in a year, especially as they set a precedent and their re-introduction or continuation would be anticipated by Saudi nationals if further fiscal reform efforts push inflation higher.”

The government will also pay part of the newly introduced VAT recently implemented to help diversify state revenue. The measures will almost wipe out savings planned in this year’s budget, according to Cairo-based investment bank EFG-Hermes.

Meanwhile, Saudi Arabia’s sovereign wealth fund, which aims to become a $2 trillion investment giant, is considering borrowing from banks for the first time as it seeks investments in the kingdom and abroad, according to people familiar with the matter.

The Public Investment Fund has held talks with local and international banks and could raise about $5 billion this year, some of the people said, asking not to be identified because the information is private.