Saudi Arabia is not for U-turning on economic benefits of transformation

One man’s U-turn is another man’s strategic rethink in light of changing circumstances.
While some in the media chose to present this week’s announcement of the reinstatement of benefits to Saudi Arabia’s government employees as a policy flip-flop, wiser heads recognized it for what it was: A sensible bit of fine-tuning to an important part of the overall economic strategy, in recognition of a significantly altered budget position.
This is what pragmatic governments are supposed to do. It is no sign of strength to adhere to a policy when the circumstances that gave rise to that policy have altered dramatically. It is blind stubbornness.
 Track back to last year, when the decision was taken to cancel benefits and bonuses for Saudi Arabia’s civil servants. It was a headline-grabbing measure, for sure. Around 60 percent of Saudi gross domestic product (GDP) comes from the government sector, where employment is dominated — as much as 90 percent, by some estimates — by Saudi nationals.
It was a cost-control measure — some called it austerity — designed to send a clear and unmistakable message to the country: The fall in oil prices was a serious affair for the Kingdom’s finances and everyone would have to bear some of the burden.
There was outrage in the Twittersphere, and a sharp decline in consumer spending, but it was the right message to send.
The budget deficit had reached a record SR367 billion ($98 billion) in 2015, and with oil stubbornly hovering around $50, analysts were calculating the year when the Kingdom’s foreign reserves would be entirely dissipated.
It was shock medicine but appeared to have an almost instant effect. By December, when the budget was drawn up for the current year, the deficit had fallen to an estimated SR297 billion and is forecast to fall further this year. The benefit cuts on their own are estimated to have reduced government spending by billions of riyals.
It was not all about “austerity” in government spending, however. The first fruits of the National Transformation Program (NTP) 2020 and the Vision 2030 strategy were also beginning to show. These aim to diversify the Kingdom’s economy away from oil dependency and toward a greater involvement of the private sector.
Capital Economics (CapEcon), the London-based consultancy that has pretty much called it right for the past couple of years in its Saudi coverage, said that the non-oil sector of the economy — the crucial part that has to be bolstered — lifted its share of the economy by 25 percent in the course of 2015-16, the best improvement in the Kingdom’s public finances since the early 1990s.
Further, the decision to reinstate the benefits was taken after official figures showed a big reduction in the overall fiscal deficit in the first quarter of the year, as had been forecast in the budget for 2017. The deficit was about half of what had been expected, reflecting the spending cuts, and better revenue performance.
The 2017 budget was drawn up on the basis of oil at $50 per barrel, so the fact it has averaged above that over most of this year has no doubt boosted government revenues. But the big impact from the reinstatement of government benefits will come from its effect on the increasingly important consumer sectors of the Saudi economy.
This week’s announcement will be music to the ears of mall operators, retailers, food and beverage industry operators and travel companies.
When the benefits were suspended last year, the consumer confidence indices took a big hit as it sunk in that there would be fewer riyals for discretionary spending.
The consumer sector is an important part of the non-oil economy, and it helps to counterbalance the effect of lower oil production in overall economic activity.
CapEcon sums up the effect: “The reinstatement of civil service benefits should bolster consumer confidence and support stronger growth in consumer-facing sectors in the coming months. This supports our view that a recovery in the non-oil economy will help to partially offset the impact of oil production cuts on headline GDP growth this year. We expect GDP growth of 1 percent this year, which is a touch stronger than consensus and the International Monetary Fund (IMF) expectations,” said analyst Jason Tuvey.
It is not all good news for the Saudi consumer. There are more fiscal tightening measures planned for later this year, with a batch of new subsidy cuts and, of course, the introduction of value-added tax (VAT) early next year.
But the fact that the government is set to press ahead with these “austerity” measures will reassure international markets that the long-term transformation plans are unchanged, despite the change of tack on benefits.