Kemp: Saudi Arabia Eases Austerity Just As Oil Prices Decline

Kemp: Saudi Arabia Eases Austerity Just As Oil Prices Decline
Saudi Arabia's decision to reverse some of last year's austerity measures coincides with a renewed decline in oil prices and complicates the financial and economic outlook.


(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, June 21 (Reuters) - Saudi Arabia’s decision to reverse some of last year’s austerity measures coincides with a renewed decline in oil prices and complicates the financial and economic outlook for the kingdom.

All allowances, bonuses and financial benefits for civil servants and military personnel cancelled, amended or suspended in September 2016 have been restored and backdated by a royal decree issued by King Salman ("Saudi Arabia slashes ministers' pay, cuts public sector bonuses", Reuters, Sept. 26, 2016).

The decision coincides with the alteration of the succession in favour of the king’s son Mohammad bin Salman and relieves the previous crown prince of all his posts.

The distribution of largesse to coincide with changes in the succession is common in monarchical systems to cement loyalty to the ruler and the chosen heir.

Saudi successions have normally been accompanied by generous financial packages for employees on the government payroll and distributions have also been made at other times of political stress.

The government has been gradually relaxing some austerity measures in recent months and signalling it would go further.

The decision to pair the change in succession with a relaxation of austerity is not surprising but there are questions about its affordability in the medium term.


Austerity measures were introduced by the government in response to the sharp drop in oil prices and revenues (

Saudi Arabia’s earnings from petroleum exports shrank to $134 billion in 2016, from $322 billion in 2013, the last full year before oil prices slumped (“Annual Statistical Bulletin”, OPEC, 2017).

As spending outstripped income, the country’s foreign reserves were depleted by $116 billion in 2015 and another $81 billion in 2016, according to statistics from the Saudi Arabian Monetary Agency.

Saudi Arabia’s official foreign assets have fallen by a third to $500 billion at the end of April 2017, from a peak of $746 billion in August 2014 (“Monthly Statistical Bulletin”, SAMA, April 2017).

The combination of spending controls, increases in taxes and utility fees, and higher oil prices at the end of 2016 and in early 2017 narrowed the budget deficit and stemmed the depletion of reserves.

But austerity has provoked complaints from Saudi citizens and a broad slowdown in the private-sector economy, which relies heavily on government spending and oil revenues as the ultimate source of almost all activity.


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