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Oil dependency may stymie Saudi prince’s ‘vision’

BloombergBloomberg 25/04/2016 Glen Carey
Mohammed bin Salman: In this Nov. 11, 2015, photo, Saudi Arabian Deputy Crown Prince Mohammed bin Salman attends a summit of Arab and Latin American leaders in Riyadh, Saudi Arabia. Saudi Arabia said Tuesday, Dec. 15, that 34 nations have agreed to form a new "Islamic military alliance" to fight terrorism with a joint operations center based in the kingdom's capital, Riyadh. Mohammed bin Salman said the new Islamic military coalition will develop mechanisms for working with other countries and international bodies to support counterterrorism efforts. © AP Photo/Hasan Jamali In this Nov. 11, 2015, photo, Saudi Arabian Deputy Crown Prince Mohammed bin Salman attends a summit of Arab and Latin American leaders in Riyadh, Saudi Arabia. Saudi Arabia said Tuesday, Dec. 15, that 34 nations have agreed to form a new "Islamic military alliance" to fight terrorism with a joint operations center based in the kingdom's capital, Riyadh. Mohammed bin Salman said the new Islamic military coalition will develop mechanisms for working with other countries and international bodies to support counterterrorism efforts.

Saudi Arabia’s plan for the post-hydrocarbon era will have to overcome habits developed over decades of relying on crude sales to fuel economic growth, create job and build infrastructure.

Almost eight decades after oil was first found in the country, officials are set to unveil Deputy Crown Prince Mohammed bin Salman’s “Vision for the Kingdom of Saudi Arabia” on Monday, a blueprint seeking to reduce the reliance on revenue from crude exports. The plan will encompass developmental, economic, social and other programs, Prince Mohammed, known as MbS among diplomats and Saudi watchers, told Bloomberg in an interview this month.

“Shifting from an oil-based economy to something different is very difficult,” said Gregory Gause, a professor at Texas A&M University. “The Saudis have been talking about it for decades, but have made little progress. So MbS has his work cut out for him.”

Prince Mohammed is leading the biggest economic shakeup since the founding of Saudi Arabia in 1932, with measures that represent a radical shift for a country built on petrodollars. His drive may face resentment from a population accustomed to government largess and power circles stunned by the rapid rise of the 30 year-old prince, political analysts say.

Subsidy Restructuring

Part of the plan envisages selling less than 5 percent of Saudi Aramco and the creation of the world’s largest sovereign wealth fund.

Authorities are also considering more steps to restructure subsidies, a value-added tax as well as a levy on energy and sugary drinks and luxury items. The National Transformation Program, which will be launched within 45 days of Monday’s announcement, will focus on ways to boost economic growth, create jobs, attract investors and hold government offices more accountable.

Other countries have tried in the past to reform their economies, and those that have succeeded started before the drop in oil revenue, according to an International Monetary Fund study in 2014, suggesting that Arab producers may have missed the best opportunity to move beyond oil when prices were high.

The drop in crude prices has prompted Gulf Arab monarchies to dip into reserves they had accumulated since 2000. Saudi Arabia’s net foreign assets fell by $115 billion last year to plug a budget deficit that reached about 15 percent of economic output. The government also turned to the domestic bond market and is planning its first international dollar bond sale.

Regional Efforts

Other Gulf Arab monarchies are also taking steps to reduce spending. The United Arab Emirates scrapped subsidies for transport fuels. The Kuwaiti parliament approved a government plan to increase the price of water and electricity for expatriates and businesses in the OPEC nation, but voted against including the homes of Kuwaiti citizens. A second and final round of voting is scheduled on April 26. 

The challenges are still daunting.

After decades of talk of diversification, more than 70 percent of Saudi government revenue came from oil in 2015 and the state still employs two-thirds of Saudi workers. Foreigners account for nearly 80 percent of the private-sector payroll.

“The issue really is how to get the Saudi private sector to hire locals, how to make the numbers on that right, since so much of the Saudi private sector has had business models based on lower-wage foreign labor,” said Gause.

Non-Oil Revenue

In response to the country’s weakened fiscal position, Prince Mohammed’s plan is to raise non-oil revenue by $100 billion by 2020. The government announced cuts in utility and gasoline subsidies in December. Including future reductions, authorities expect the restructuring to generate $30 billion a year by 2020.

“There is a realization among many Saudis that the economic challenges that the kingdom is facing are daunting,” said Fahad Nazer, who worked at the Saudi embassy in Washington and is now a political analyst at JTG Inc. “Given the fact that some 70 percent of Saudis are under age 30, Prince Mohammed’s penchant for making quick decisions and holding officials accountable for their performance – or lack thereof - does have wide support among Saudis.”

Past rulers of Saudi Arabia have largely avoided seeking additional revenue from their citizens. As water prices surged after the reduction in subsidies, Saudis turned to social media to express their anger at the government. King Salman fired the water minister on Saturday.

Saudi leaders also have unique social challenges that other nations implementing economic changes didn’t have to manage. While steps have been taken to get women into the workforce, the kingdom still prohibits them from driving. The country’s feared religious police, despite having their powers to arrest curbed this month, still enforce gender segregation and prayer times.

‘Foremost Challenge’

“The foremost challenge Mohammed bin Salman faces over time is the inevitable need to restructure the Al Sauds’ relationship with the Wahhabis,” said James Dorsey, a senior fellow in international studies at Nanyang Technological University in Singapore. “This restructuring is inevitable both to be able to truly reform the economy and because the increasing toll identification with the puritan sect is taking on Saudi Arabia’s international reputation.”

The prince told Bloomberg that he has no problem with the official religious authority on the issue of women driving, but rather “with those who distort the facts of the religious establishment so that women don’t get their complete rights granted them by Islam.”

His efforts to shake up the economy come against the backdrop of mounting domestic security threats and regional turmoil, with the Sunni-ruled kingdom bogged down in a war in Yemen against Shiite rebels it says are backed by Iran. He has also consolidated more power than anyone in his position since the founding of the kingdom.

Consolidating Power

As defense minister, Prince Mohammed leads the military effort. He also oversees ministries including finance, oil and the economy through the Council for Economic and Development Affairs. The council, established after his father became king, also controls the Public Investment Fund.

Other royal family members may challenge his rise to power, according to Paul Pillar, a senior fellow at Georgetown University’s Center for Security Studies and a former senior CIA official.

“Within Saudi Arabia, the main challenges MbS will face will involve not the substance of oil policy but rather resistance within the royal family to so much power being concentrated in the hands of one prince of his generation,” he said.

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