Coronavirus and oil crash: Saudi Arabia is battling double crises

The Kingdom decides to take a slew of austerity measures, including raising value-added tax and cutting a cost of living allowance for government employees.

Saudi Arabia, which under Crown Prince Mohammed bin Salman has been trying to diversify its economy away from oil and expand its regional influence through aggressive foreign policy posturing, has run into trouble with the economy hit by the double crises of the coronavirus pandemic and the oil price crash.

The Kingdom, 87% of whose budget revenues come from the petroleum sector, has already announced some “painful” economic decisions and signalled a rare readiness to scale back its regional operations to lift itself out of the “worst crisis in decades”.

On May 11, the official Saudi Press Agency (SPA) reported that the Kingdom decided to take a slew of austerity measures, including raising value-added tax (VAT) and cutting a cost of living allowance for government employees. The allowance, which was introduced in 2018 to help workers tide over the effects of austerity measures taken during the last oil crash, will be suspended as of June 1, and the VAT, which was also rolled out in 2018, will be increased to 15% from 5% as of July 1, SPA reported, citing a statement of the Ministry of Finance.

Last month, the Kingdom announced a unilateral ceasefire in Yemen after five years of war in the clearest signal that Riyadh seeks to depart from its expensive military intervention in the neighbouring country parts of which are controlled by Shia Houthis rebels.

Worst crisis in decades

Finance Minister Mohammed Al-Jadaan had warned earlier that the government was considering painful measures to deal with the crisis. “The Kingdom hasn’t witnessed a crisis of this severity over the past decades,” he told the state broadcaster Al-Arabia on May 3.

When Saudi officials announced the Kingdom’s budget in December 2019, crude oil prices were over $60 a barrel. To balance its budget this year, Saudi Arabia requires oil prices to be around $76 a barrel, according to the International Monetary Fund (IMF). But price of Brent crude, the international benchmark, crashed by 50% in March. Brent crude price was at $26.31 on May 11 afternoon in London.

Amid the deteriorating situation, the Saudi government dipped its hands into the foreign reserves for meeting expenditures. The Kingdom saw a record $24 billion drop monthly drop in its reserves in March to $479 million. It is also raising billions in debt from the bond market.

Impact of virus

The coronavirus pandemic has aggravated the crisis with most economic activities suspended under a curfew. In March, the Kingdom shut down shops, malls, restaurants, cafes and other public places. All pilgrimages, including the annual Haj to Mecca, which hasn’t been interrupted since Napoleon’s 1798 attack of Egypt, were stopped.

Despite these actions, the virus continued to spread across the country. As of May 11 evening, the Kingdom has reported over 39,000 coronavirus infections and 246 deaths, according to the Johns Hopkins Coronavirus Resource Centre. On top of it, it has also aggravated that economic woes. The IMF now forecasts the country’s GDP will fall 2.3% this year.

“The situation in Saudi Arabia has been deteriorating well before the pandemic. Economic pressures were already building up on the Kingdom. Coupled with this, we have the war against Yemen. On top of this, while the Crown Prince has projected himself as the fountainhead of liberalism, in actual fact, he’s emerged as a very authoritarian and harsh ruler, who can be extremely impulsive in decision making,” said Talmiz Ahmad, India’s former Ambassador to Saudi Arabia, adding that the oil crash and the pandemic made the situation worse.

Unwinnable oil war

“The recent oil problem is almost entirely self-inflicted. Instead of engaging with Russia to discuss how they could consider new policies with regard to the OPEC-plus partnership, the Crown Prince very impulsively rejected Russia and started a completely unwinnable oil war, which has wounded not just Saudi Arabia, but also a very large number of countries in the region who are dependent on their oil revenues,” Mr. Ahmad told The Hindu.

Early March, Saudi Arabia decided to ram up oil production and offered discounts to buyers in a bid to win market share after it failed to reach an agreement with Russia on output cuts. The subsequent supply glut pulled down the prices. By the time the Saudis, Russians, and other major major oil producers agreed to cut output by 9.7 million barrels a day on April 13, it was too late. Daily demand had already fallen by more 20 million barrels a day as global economic activity came to a grinding half amid virus lockdowns.

Saudi officials agree that they are facing a history-changing crisis. “I do not think the world or the Kingdom will go back to the way things were before coronavirus,” Finance Minister Al-Jadaan said earlier this month. Besides the austerity measures already announced, the Kingdom will also defer some of the big-ticket projects initiated by the Crown Prince, which includes an expansion of the Mecca Mosque and building sports stadia and a $500 billion mega city in the deserts.

“Oil prices are unlikely to swing back to the pre-crisis levels any time soon as the world economy remains in doldrums. So the Kingdom has to look for fresh policy decisions,” said Mr. Ahmad. He added that his prognosis of the condition of the Kingdom is “negative”. But MBS could undertake a slew of radical domestic and foreign policy measures to reboot the country. “Domestically, the Kingdom has to cut expenditure, train its youth for new jobs, build a more accountable and responsive political order which the Crown Prince has promised and there has to be a healing touch in the royal family… The royal family can legitimately rule the nation only if it’s a united family,” he said.

“With regard to the foreign policy, the first step should be the engagement with Iran.” Mr. Ahmad added that if Saudi Arabia and Iran start engaging each other a host of conflicts in the region, from Yemen to Syria and Iraq, could be addressed.

With inputs from The Hindu