Rob L. Wagner روب لستر واقنر

December 25, 2016

GCC Countries Embrace Social, Economic Change for Survival

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By Rob L. Wagner

The Arab Weekly

25 December 2016

Jeddah – When General Motors chief Charles Wil­son was misquoted as saying, “What’s good for General Motors is good for the country” in 1953, there was outrage that he put GM’s interests first and the coun­try’s economic welfare second. Yet many observers attending his con­firmation hearing to be US Defense secretary silently agreed with the sentiment.

The same can be said for Saudi Arabia’s $650 billion economy be­cause a robust Saudi economy brings fiscal stability to the Gulf Co­operation Council (GCC), if not to the world. Simply, what is good for Saudi Arabia is good for the GCC.

British Prime Minister Theresa May said as much at December’s GCC summit in Bahrain when she urged Arab leaders to build with Britain “economies that work for everyone”.

“We in the UK are determined to continue to be your partner of choice as you embed international norms and see through the reforms, which are so essential for all of your people,” May told the leaders of Saudi Arabia, Bahrain, Kuwait, the United Arab Emirates, Oman and Qatar.

May singled out Saudi Arabia’s Vision 2030 as a bold step to enact social and economic reforms along with changes proposed by other Gulf countries “for more funda­mental and lasting change”.

At the helm of that engine of change is Saudi Deputy Crown Prince Mohammed bin Salman bin Abdulaziz, second in line to the throne and the first prince in Saudi Arabia’s 85-year monarchy to im­plement radical economic and so­cial reforms.

Saudi Arabia has long been a country of soft diplomacy and a go-it-slow, test-the-waters philosophy in implementing social changes. But Prince Mohammed, faced with a $98 billion budget deficit and oil revenue dropping to less than $30 a barrel in January, has shaken the country from complacency.

His Vision 2030 austerity pro­gramme, at least in the eyes of many Saudis, is severe if not brutal. If that is not enough pressure, other Arab leaders are carefully looking at whether he will succeed.

Promising to force the kingdom to quit cold turkey its addiction to oil revenues, he focused on Saudis’ spendthrift habits. He slashed min­isters’ salaries 15%, government employees’ pay and allowances as much as 40% and planned to priva­tise ministries and force employees to reapply for their jobs.

Among the many non-oil revenue alternatives explored by Saudi Ara­bia is expanding its tourism indus­try by inviting more investors to build hotels and to improve infra­structure at heritage sites.

For the first time, the govern­ment is opening portions of the country to haj and umrah pilgrims who were once restricted to the holy cities of Mecca and Medina. Although non-Muslims struggle to obtain tourist visas, Western expa­triate workers and business- and family-related visitors have freer access to venues once deemed off-limits. Tourism is perhaps the king­dom’s greatest non-oil revenue that has yet to be fully exploited.

Western economic analysts lauded Prince Mohammed’s pro­grammes as a bold move to wean Saudis from cushy government jobs that, in their view, are nothing more than entitlements. Many Sau­di fiscal observers, however, com­plain that cutting workers’ salaries will affect consumer spending, putting pressure on small and me­dium-sized businesses to generate revenue and possibly leading bank customers to default on loans.

Ehsan Ahrari, adjunct research professor at the Pennsylvania-based Strategic Studies Institute, Army War College and chief execu­tive officer of Strategic Paradigms, said he was sympathetic to the challenges the deputy crown prince faces.

“I very much would want him to succeed,” said Ahrari. “The big­gest fly in the ointment remains the Yemeni war, which is eating up Saudi dollar reserves.”

Ahrari said Prince Mohammed’s success depends on the support he is currently enjoying from the royal family and the stability of the gov­ernment.

Some Saudi analysts have warned since April, when Saudi Vision 2030 was announced, that a fiscal aus­terity programme could lead to a recession. Indeed, London-based BMI Research concluded in Decem­ber that Saudi Arabia is headed for a recession in 2017, its first since 1999.

The kingdom’s economy is ex­pected to contract 0.2% as non-oil growth continues its slow pace along with declining oil produc­tion and the austerity drive. Saudi Arabia saw slight growth of 0.8% in 2016.

“There is no way not to expect consequences when consumers stay at home instead of spending their money for goods and servic­es,” one Jeddah-based Saudi econo­mist told The Arab Weekly.

To further complicate efforts to boost the economies of GCC member states is the US Federal Reserve’s interest rate increase. It raised its benchmark interest rate to a range of 0.50% to 0.75%.

The United Arab Emirates, Ku­wait, Qatar and Bahrain joined Saudi Arabia in raising its interest rates to match the Federal Reserve and remain committed to pegging their currencies to the US dollar. As the cost of borrowing money rises, however, it will be more difficult to ease the squeeze on cash that is hindering growth.

Qatar, which is considering spending cuts and eliminating some entitlements, recently report­ed its 2017 budget has a $7.8 bil­lion deficit. It is not on the scale of Saudi Arabia’s but large enough for the GCC member to ponder what the new year will look like without a more aggressive austerity pro­gramme.

November 6, 2016

Saudi Government Employees Face Austerity

Filed under: Uncategorized — Rob L. Wagner @ 04:41
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By Rob L. Wagner

The Arab Weekly

6 November 2016

Jeddah – Saudi government employ­ees have received their first pay cheques since the an­nouncement that salaries would be slashed as part of a fiscal austerity programme.

The new salaries, deposited in bank accounts at the end of Octo­ber, provided Saudis — including all ministers and Shura Council mem­bers — with their first glimpse that belt-tightening was a stark, and per­haps permanent, reality.

“The economic programme will affect the lower- and middle-in­come people and won’t affect the wealthy,” said Assad Jawhar, an eco­nomics professor at King Abdulaziz University in Jeddah.

The salary cuts are a bitter pill for many Saudis to swallow. Basic sala­ries are not particularly high in the government sector but allowances for housing, transportation, com­puter skills and other competencies vital to performing duties can add up to 40% to the total salary pack­age.

By eliminating allowances, some public workers saw their take-home pay reduced almost half. In some cases, Saudi workers had previ­ous deductions of up to one-third of their basic salary to repay gov­ernment overpayments. With the elimination of allowances and up to one-third in deductions from their basic pay, some employees saw their monthly income drop as much as 60%.

The Saudi middle class has been steadily shrinking and the cuts in wages among government workers will have a significant effect on the growth of middle-income bread­winners.

The salary cuts are just one av­enue Deputy Crown Prince Moham­med bin Salman bin Abdulaziz Al Saud and his advisers are pursuing to boost government coffers. It also raises the issue of whether austerity programmes work, especially when sacrifices from lower- and middle-income workers serve as the back­bone of the programme.

Economists caution that Saudi Arabia’s economic woes cannot be compared to those of the European Union or the severe austerity plan that caused considerable upset in Greece. Consumer confidence, high among the desirables to produce a robust economy, does not necessar­ily apply to Saudi Arabia.

Charles Schmitz, professor of ge­ography at Towson University in Baltimore, Maryland, and a special­ist in Gulf economic policies, said Saudi Arabia’s austerity programme and salary cuts are painful but nec­essary.

“State employment in the king­dom is welfare,” he said. “The state’s bureaucracy is bloated as a means of passing the revenues from the state to society.

“The Saudis are used to a high standard of living that is based upon rents from oil, not labour produc­tivity. The prince’s programme is to help Saudis get used to the idea of tying their level of living to their productivity. It may be hard landing for a lot of Saudis but it is a neces­sary one.”

While salary cuts among minis­ters and the Shura Council and the recent sacking of Finance minister Ibrahim al-Assaf and replacing him with Mohammed al-Jadaan have garnered attention, most of the ministries have quietly reduced the number of expatriate workers, cur­tailed travel to seminars and confer­ences and discouraged extra train­ing at the employer’s expense.

In October, the Civil Service Min­istry’s Replacement Administration rejected 478 out of 516 contract re­newals for expatriate medical work­ers at King Saud University. The de­cision affects employees on the job for more than ten years and paves the way for the university to hire Saudis with postgraduate degrees.

Jawhar said the burden of the government’s programme is placed squarely on the average worker. He said spending is higher among the low- and middle-income Saudis in proportion to their monthly salaries compared to the buying habits of the wealthy.

He said a priority should be to eliminate corruption but also to ensure high-income earners con­tribute revenue to the government through taxation.

“They should go to the rich and target companies,” Jawhar said.

“The question is who is going to be affected negatively by the deci­sion? During the past ten years, the middle class has been shrinking. [The programme] will affect them.”

The Saudi government is deter­mined to eliminate entitlements to reduce the country’s $98 billion fis­cal budget deficit. The International Monterey Fund is optimistic that the government can cut the deficit to 13% of the gross domestic prod­uct in 2016 and to less than 10% in 2017.

To help accomplish this, Saudi consumers have been encouraged to curb recreational activities and spend less on luxury items and even curtail how much they spend at the market.

Schmitz said he is optimistic the strategy will be successful. “De­mand comes from two sources: Consumers and investors. The Sau­dis want to shift the demand from the consumer market to the private investment market so that there is more investment in the non-oil pri­vate sector. Investment can drive an economy just as much as consumer demand.”

February 12, 2016

Saudi Reactions Mixed Over Fuel Hikes

Filed under: Uncategorized — Rob L. Wagner @ 07:29
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By Rob L. Wagner

The Arab Weekly

12 February 2016

Jeddah – Irfan Mohammed stared at the pump at a petrol station as the cost to fill the tank of his 2001 Toyota Camry rose steadily to about $8.70.

“I guess that’s one less sandwich for lunch today,” said Mohammed, a mid-level manager for a food ven­dor as he sat in his car on the Mec­ca-Jeddah Highway about 20km south of Jeddah. Mohammed, who drives all day, six days a week for his job, was joking. Still, he admit­ted to some anxiety that the cost of driving his own car for his compa­ny comes out of his pocket.

 

Before the Saudi government raised petrol prices by as much as 100% in December, Mohammed rarely paid more than $5 to top off the fuel tank of his car. He calcu­lated that an additional $75-$85 would come out of his pocket each month. “It adds up,” he said.

Petrol prices rose to 20 US cents from 12 cents per litre for regular grade fuel and 24 cents from 12 cents for premium grade. Water and electricity price rises became effective on January 11th. The price increases were the first wave of economic reforms the Saudi gov­ernment is scheduling to boost rev­enues to try to close a $98 billion budget deficit.

A steep decline in revenue as crude oil prices fell as low as $31 per barrel prompted the Saudi government to implement austere economic measures to generate revenue and educate citizens that government spending must be curbed.

The increases at the pump were met with mixed reactions from the public, ranging from outrage to res­ignation as the government signals that the era of subsidies and enti­tlements is ending.

Economists caution that the ef­fect of the fuel price hikes will not be apparent until late summer. The poor and small and medium-sized businesses will likely be affected the most.

Muhammad Naqvi, a driver for a women’s college with a long list of private female clients, said he drives 16 hours a day, often seven days a week. Unlike most drivers who own their vehicles — often economical Toyota Camrys — Naqvi drives a Toyota Fortuner SUV, with relatively poor fuel consumption. Often making multiple trips a day to Jeddah’s far-flung international airport terminal, it is not usual for Naqvi to fill his tank daily.

“I’m in real financial trouble,” he said. “I haven’t raised my rates for my private clients yet because they complain but eventually I will have no choice.”

Bill Farren-Price, chief executive officer of Petroleum Policy Intelli­gence, a London-based global ener­gy research company that focuses on the Middle East, said Saudi Ara­bia’s poor will be hit the hardest.

“There will be an impact on the poorer elements of society,” Far­ren-Price said. “There is not an al­ternative to move around and not a great deal of public transport. They have no choice but to drive.”

Farren-Price said that perhaps of equal concern is the effect on Saudi Arabia’s inflation rate.

“The other issue will be raising some inflationary impact and it will be interesting to see how the Saudi economy will handle it,” he said.

Saudi Arabia averaged about a 2.76% inflation rate from 2000 to December 2015, with a drop in December to 2.3%. Food prices averaged about a 1.4% increase year-on-year, and transportation inflation rates rose an average of 1.3%, according to Trading Eco­nomics, which provides economic data for 196 countries.

Saudi Arabia can expect to see overall inflation rise to at least 2.8% in 2016 and up to 3.5% in 2017, ac­cording to the UN Consumer Price Inflation Forecast.

The International Monetary Fund forecast is a little more op­timistic, pegging the kingdom’s 2016 inflation rate at 2.33%, rising to 2.85% in 2017 and 2.89% in 2018. However, the projections were made before the fuel price increase announcement.

Turki H. Fadaak, research and advisory manager for Al-Bilad In­vestment Company, noted the ef­fects of higher fuel prices spur­ring inflation may not be as great as some consumers anticipate and current predictions may remain unchanged.

“The increase in fuel rates will not show any impact soon but we can expect sometime in the future that it might affect prices of goods and services,” Fadaak said. “How­ever, the decrease in the prices of (imported) international goods due to the (US) Federal Reserve raising the interest rates will make up for any negative effect.”

Saudis are taking the slow ap­proach to dealing with the budget shortfall and looking for long-term solutions. Limiting oil production may not be a practical option for Saudi Arabia as a means to boost oil prices to increase revenue.

“If Saudi Arabia and [the Organi­sation of the Petroleum Exporting Countries] limit oil production we will see sustained higher oil prices but a long-term decline in the mar­ket share,” Farren-Price said.


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