December 29, 2015 / 1:55 PM / 4 years ago

Saudi rulers weigh political cost of tough economic reforms

RIYADH (Reuters) - The queues of cars stretching outside petrol stations in Saudi Arabia on Monday night to fill up before higher fuel prices came into effect underscored the immediate impact of economic changes in the kingdom and pointed to the risks facing reformers.

Saudi King Salman bin Abdulaziz attends the final session of the South American-Arab Countries summit, in Riyadh November 11, 2015. REUTERS/Faisal Al Nasser

By raising petrol prices by half, from a negligible $0.16 a liter to a merely cheap $0.24 a liter, Saudi Arabia’s new rulers showed willing to make some tough decisions in their quest to enact sweeping economic reforms for an era of low oil revenue.

The financial viability of the world’s top oil exporter and its Al Saud ruling family hinges on its stomach to sustain such extensive changes in a country that has no elections and where political legitimacy rests on distribution of oil revenue.

Lavish fuel subsidies, a vast public sector, lack of taxes and free-flowing government spending are luxuries state technocrats have long warned are unaffordable, but are seen as a right by many subjects because of the kingdom’s high oil output.

Motorists filling their cars on Monday night appeared to take the price hike in their stride, well aware that Saudi petrol was still cheaper than that of almost any other country, but it is unclear if they will accept more changes so blithely.

The government has pledged to reduce growth in the public payroll of 450 billion riyals ($120 billion), for example, but has given little information of how it will do so in a country where the majority of working Saudis are employed by the state.

The Al Saud, nervous of inciting unrest, has often fought shy of reforms that may anger normal Saudis, but with oil prices seemingly locked in at low levels, the administration of King Salman, who took power in January, is pushing big changes.

Driving this program is the monarch’s son, Deputy Crown Prince Mohammed bin Salman, who heads a new supercommittee on the economy and has demanded a host of reforms to revitalize the private sector, slim the state, and get more Saudis into work.

Besides enacting a first jump in petrol prices in a decade, Prince Mohammed’s committee has already created a new project management office to rein in spending, tightened departmental budgets and committed to introducing value added tax (VAT). Next year’s budget broke down figures more transparently than before.

INTRACTABLE PROBLEMS

Reducing dependence on oil revenue has proved an intractable problem for generations of Saudi leaders, whose periodic efforts to reform the economy have traditionally faltered as soon as public feeling turned against change or crude prices rose.

The unwritten social contract that swaps public obedience to the Al Saud in return for widespread state employment, good government services and rule by traditional values has afforded Saudi Arabia far greater stability than its poorer neighbors.

But as the population has grown, it has become increasingly unsustainable, and haphazard government reforms over the past 15 years have aimed at reducing the burden on the government by getting more Saudis into private sector employment.

Riyadh opened previously off-limits parts of the economy to private and foreign investment and strengthened the stock market to help boost growth, then changed labor laws to ensure Saudis, rather than foreigners, would benefit from the new jobs.

It was only partly successful, however, as private sector growth has remained closely tied to government spending and most working Saudis are still employed by the government rather than by private companies.

As oil prices soared last decade after dropping below $10 a barrel in 1999, the impetus for change dissipated, state spending inexorably rose and initial efforts to reduce dependence on crude revenue ran out of steam.

Some changes that did come - labor reforms that favor Saudis, a mortgage law, privatization of some state enterprises, tax on unused land - were complex and tough to enact, but they did not threaten living standards or risk popular anger.

“We should be explaining to the masses that this is in their benefit... it is important that they understand that if we do not reform today, it is going to be difficult for our children to live happily,” said Fawaz al-Alamy, a former deputy commerce and industry minister. He added that he did not believe the reforms would be difficult to implement.

LARGESSE

Whether any serious political opposition is likely in the face of austerity is impossible to say. Previous episodes of pushback or unrest, such as protests in the 1990s, were a response by conservatives to social change rather than caused by anger at cuts to social benefits.

However, the Al Saud has traditionally responded to tough times by pulling out its wallet, a recourse that is inimical with economic reform.

Both the late King Abdullah, and the new King Salman, resisted potential moments of upheaval, during the Arab spring and after last year’s leadership succession, with huge displays of largesse in the form of payments to citizens.

A war in neighboring Yemen and Riyadh’s support for Syrian rebels cost money too, though it is not clear how much. Economy and Planning Minister Adel Fakieh on Monday said the Yemen war had cost only $5.3 billion so far, but the 2016 budget planned for total military and security spending of $57 billion.

Much needed investment in infrastructure, from new schools and hospitals to railways, roads and ports, was complemented by projects such as a series of lavish stadiums that have now been ditched and richly endowed foundations.

Monday’s budget promised “comprehensive economic, fiscal and structural reforms”, but besides the immediate rise in fuel prices, it gave no specific details on how the new policies would be implemented, offering few clues as to its commitment to radical change.

Petrol prices are still very cheap and rises in power costs will only affect very big consumers, officials said. The budget calls for a gradual increase in fuel prices over the next five years in order to “achieve efficiency”, but sets no eventual targets.

Jihad al-Najjar, a woolly hat pulled down low against the chilly winter weather as he queued for a last fill of petrol at the old price, was sanguine.

“It’s not the real price. It’s supported by the government, but now they are entering too many wars and need more money,” the 22-year-old medical student said.

Whether he and other Saudis will remain philosophical if prices rise further, and other reforms that inconvenience citizens are enacted, and how Prince Mohammed responds to that, will determine the monarchy’s future.

Editing by Philippa Fletcher

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