OIL PRICES still hover well below the $50 mark. The Organisation of the Petroleum Exporting Countries is still broken. Oil producers are trying to cobble together a deal to freeze output at current (already excessively high) production levels but it seems highly unlikely to materialise. To anyone whos been following the news, it isnt surprising that the recent Doha meeting was a bust. And meanwhile dramatic changes are underway in Saudi Arabia, the architect of this whole game, which could fundamentally transform the Middle East.
Currently Saudi Arabia is haemorrhaging its vast wealth reserves to plug the gaping holes in its budget, defend its currency and wage war in Yemen. Last year, the kingdom reported a record high budget deficit of about 21 per cent of GDP (almost a $100 billion) a stunning amount considering that it was merely three per cent of GDP the year before. In February, Standard & Poor downgraded Saudi Arabias credit rating for the second time in four months, down by two notches this time. The economy is hurting. Growth in non-oil sectors is falling. Consumers are spending less. Layoffs are underway and are expected to escalate. One excutive estimates that of the 10 million foreign workforce, one million workers may be sent home over the year, and much more shocking next year, Saudi workers themselves may start getting laid off.
To shake up economic policy, the kingdom has recruited a veritable army of Western consultants, assumed to number in the hundreds. Last year, the government halted new development projects, froze new job appointments and promotions, and stopped purchasing new furniture and vehicles. It now intends to reduce investment spending on transport and infrastructure by 63 per cent. A special department has been set up in the finance ministry, tasked with keeping government spending within targets.
Predictably, the welfare state is being dismantled one bit at a time. Citizen benefits are being withdrawn, particularly the precious subsidy on gasoline. Prices at the local pump have gone up 50 per cent, from 16 cents to 24 cents a litre. The government is even considering implementing VAT. Significant privatisation is also planned in government-funded healthcare and education. Unsurprisingly though, defence spending is expected to increase this year. For a country like Saudi Arabia, which literally keeps its citizenry in line with handouts and perks, this kind of downsizing has truly dramatic implications. Part of the leverage the regime has had on their people is that they dont impose taxes and therefore people dont expect representation, comments Robert Jordan, a former US ambassador to Riyadh. But once they pay taxes, youre likely to see an increase in political unrest.
The biggest shocker though is that the government is thinking of opening Aramco up to public investors and use the funds to launch what would be by far the worlds largest sovereign wealth fund. Aramco is the national company, which manages the kingdoms vast oil reserves, rumoured to be worth trillions of dollars, and widely considered the worlds most valuable company. At 261 billion barrels, Aramco has the worlds largest known oil reserves, about 10 times more than Exxon Mobil. Commentators see this act as proof of Saudi desperation. The kingdom needs oil prices to hit the $60 threshold to balance its books. At current prices, it has a three to five year window before it burns through its savings and goes broke. Selling shares in Aramco might give it a year or two more. Apart from major privatisation and de-subsidisation, the government is also planning heavy diversification away from oil into industries like ship-building, IT and tourism. This sounds like a great idea but it falls flat against the fundamental limits of Saudi cultural conservatism. For one, there is the formidable gender problem. Women cant drive, fundamentally limiting their opportunities to contribute to the economy not to mention the cost of hundreds of millions of dollars spent on foreign chauffeurs to drive them around. Also, the workplace requirements are unique it remains to be seen how gender segregation in offices can work on a large scale. The issue of integrating women into the economy is a minefield of controversy.
Second, some 90 per cent of Saudis have cushy, well-paying jobs with the state and there is a very fierce ingrained cultural resistance to private sector jobs. For menial and demanding jobs, they bring in truckloads of labourers from poor countries. For highly skilled work, they turn to Western professionals. It is, therefore, not surprising that since the 1970, Saudi Arabia has issued at least 10 development plans, each emphasising economic diversification, and there is still zero progress on this front. A real change in cultural attitudes could take decades.
The Saudi governments cash problems also have dramatic implications for the Middle East. Saudi money has been instrumental in propping up dictatorships in the region, including in Bahrain, Jordan, Morocco, etc. Egypt is particularly worried because its economy is a mess and it has almost exhausted the $12 billion bailout it received from Saudi Arabia last year. Tourism has gone flat. Forex reserves are dropping dangerously low. Even the rich are now feeling the crunch in Egypt. It is only a matter of time before bread becomes too expensive and the spectre of the dreaded Arab Spring rises again.
Likewise, the Saudis have spent lavishly in exporting their unique brand of ideology to poorer Muslim nations. Foreign-funded madrassas and mosques are so entrenched in the Pakistani landscape now that we are hard pressed to appreciate the tremendous financial muscle behind them. As per Wikileaks an estimated $100 million is dispatched to religious clerics in Pakistan alone every year, presumably with direct support of the Saudi government.
This then is the Saudi dilemma: a lot stands to change if the oil wars continue. The stakes could not be higher. How will this struggle affect us here in Pakistan? Well, we could certainly do without the financial stranglehold the Saudis have on our religious institutions and madrassa system. And by firmly hitching our wagon to China, our economy is no longer critically reliant on Saudi Arabia. But the Chinese are facing a mighty economic reckoning of their own at the moment and all bets are off. It is too early to say how all of this will play out. Let us hope for the best. For everyone.
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