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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

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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.”

May 1, 2016

Saudi ‘Vision 2030’ Sparks Praise, Skepticism

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By Rob L. Wagner

The Arab Weekly

1 May 2016

RIYADH – Saudi Deputy Crown Prince Mohammed bin Salman bin Abdulaziz’s ambitious reforms to reduce the kingdom’s dependence on oil and turn to investment, manu­facturing and tourism as a major source of revenue have sparked op­timism among the country’s leading economic analysts but also scepti­cism from some market watchers.

Many economists, however, agree that sweeping reforms to shore up Saudi Arabia’s $98 billion budget deficit is long overdue and a major step towards developing other rev­enue-generating industries is vital to the country’s economic survival.

The centrepiece of Salman’s road map that establishes a vision for Saudi Arabia’s future to 2030 is to is­sue an initial public offering (IPO) of 1-5% interest in Saudi Aramco, the world’s largest oil company with a value estimated at $2 trillion, to capital markets. By floating Aramco on the stock exchange and diversi­fying its investments, the deputy crown prince said the Saudi econo­my would be more resilient.

“I think by 2020, if oil stops we can survive,” Salman told al-Arabi­ya television. “We need it, we need it, but I think in 2020 we can live without oil.”

Anwar Majed Eshki, a former ma­jor-general in the Saudi military and president of the Middle East Centre for Strategic and Legal Studies, said the plan doesn’t mean abandoning oil as a revenue source by 2020.

“The plan doesn’t mean that the kingdom lives without oil but it means that the kingdom is to get ready after the oil era by exploit­ing oil to create the alternatives in different fields, most important of which are minerals, investments, industries and tourism,” he said.

Not all economists are convinced. Jason Tuvey, a Middle East econo­mist at the London-based Capital Economics, said revenue will still come from Saudi oil.

“In a sense I think they are try­ing to pull the wool over people’s eyes,” Tuvey said. “The revenue still comes from Aramco. In short, Saudi Arabia will be dependent on oil for many years.”

John Sfakianakis, director of the Economics Research at the Riyadh-based Gulf Research Centre, is more optimistic. He said that, while the road map is ambitious, even meet­ing only some of the prince’s goals would be a vast improvement to the country’s economy.

“It surely can be achieved if it brings everybody under one um­brella,” Sfakianakis said. “Even if it’s not achieved, halfway is enough to dramatically change the country’s dependence on oil. You need to be ambitious to rid yourself of (oil) de­pendency. It’s easier said than done but if accomplished by only 50% it’s very good.”

Ahmed al-Jundi, an executive analyst at the Jeddah-based archi­tectural firm Diyar Consultants, said Salman’s plans can be accomplished if private and public employers are committed.

“This is an ambitious goal but, however, achievable to a large ex­tent,” Jundi said. “It can be achieved through real reforms in all sectors. The current revenues should be reinvested into different markets to guarantee annual returns. The Saudi work force should be utilised correctly to truly provide people the environment to grow. It’s possible to change the economic balance if the entire government machinery completely and seriously submits to the vision 2030.”

Government cooperation is the crux to whether the prince’s vi­sion can be successful; perhaps the most important element to achieve at least partial success to transform Saudi Arabia’s economy from oil de­pendency to a diversified industry and investments is to control cor­ruption.

“The government’s focus should be on achieving goals; systemis­ing, restructuring and allowing the private sector to participate in the different sectors,” Jundi said. “This would lead to transparency and introduce a system of automatic checks and balances.”

He added: “Transparency is a key and market participants are encour­aged, but the government’s sub­stantial attention to the economy and its youth is what truly increases participation and the general confi­dence.”

Tuvey said that by making Ara­mco more transparent, it will “im­prove corporate governance, not just Aramco but also the public sec­tor”.

Unexpected in Salman’s road map are plans to develop a military industry. The prince said in his in­terview: “Is it logical that we are ranked the third in world military spending and yet we do not have any military manufacturing capa­bilities?”

Eshki said Saudi Arabia has had factories to manufacture light arms in Al-Kharj for 50 years, “but the concentration will be in spare parts and some types of weapons”.

Eshki said the Saudi government will impose a condition on compa­nies selling weapons that they must invest 30% from sales in the spare parts industry.

Saudi Arabia has long struggled to jump-start its struggling tourism industry, which is primarily focused on Muslim pilgrims. But haj pilgrims are limited to visiting the holy cities of Medina and Mecca and umrah visitors have only two weeks to visit.

The Commission for Tourism and National Heritage recently an­nounced “Umrah-Plus,” a plan that extends a pilgrim’s visa to 30 days to allow visits to a broader range of tourist destinations, including Islamic archaeological and heritage sites. Saudi Arabia offers no tourist visas.

Salman wants to go further, not­ing that there are plans to open the largest Islamic museum in the country and allow more tourists into Saudi Arabia. The tourism com­mission has always focused on do­mestic tourists first and then Mus­lims from Gulf Cooperation Council countries. When pressed in his al- Arabiya interview about opening doors to tourist of all nationalities, Salman replied: “Undoubtedly, in line with our values and beliefs.”

Sfakianakis said tourism remains underutilised.

For growth, jobs and recreation, tourism is an untapped potential,” he said. “To be the highest multi­player than all the other sectors, that means (the tourism industry) must create jobs and serve other areas of the economy and generate output. It cuts across a lot of sec­tors.”

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