Author of the Article:SHRUTI CHAUDHARY
Saudi Arabia, run by Crown Prince Mohammed bin Salman has been striving to transform its economy away from oil and develop its regional supremacy through belligerent foreign policy attitudinizing, has crashed into turbulence with the economy hit by the dual crises of the COVID-19 pandemic and the oil price crash.
The Kingdom, 87% of whose budget income comes from the petroleum department, has already posted some “painful” economic decisions and gesticulated a sporadic willingness to extend its regional processes to boost itself out of the “most miserable emergency in years”.
On May 11, the official Saudi Press Agency (SPA) announced that the Kingdom has decided to adopt some strict and prudent measures, including raising value-added tax (VAT) and cutting a cost of living allowance for government employees. This allowance, which came into force in 2018 to help workers tide over the effects of austerity measures taken during the last oil crash, will be dangled as of June 1, and the VAT, which was also introduced in 2018, will be increased to 15% from 5% as of July 1, the agency reported, quoting a statement of the Ministry of Finance.
Last month, the Kingdom had announced an incommunicado ceasefire in Yemen after five years of war in the comprehensible indicator that Riyadh seeks to withdraw from its expensive military intervention in the neighbouring country fractions of which are dominated and ruled by by Shia Houthis rebels.
Worst crisis in years
Finance Minister of Saudi Arabia Mohammed Al-Jadaan had alerted earlier that the government was contemplating stringent course of action to tackle the crisis. “The Kingdom hasn’t experienced a crisis of this gravity over the past decades,” he told the state broadcaster Al-Arabia on May 3.
When the officials in Saudi Arabia declared the Kingdom’s budget in December 2019, crude oil prices were over $60 a barrel. To stabilize its budget this year, Saudi Arabia necessitates oil rates to be approximately $76 a barrel, according to the International Monetary Fund (IMF). But price of Brent crude, the international benchmark, collapsed by 50% in March. Brent crude price was at $26.31 approximately on May 10.
At the time of the worsening situation, the Saudi government immersed its hands into the foreign reserves for fulfilling expenditures. The Kingdom saw a record $24 billion fall monthly drop in its reserves in March to $479 million. It is also escalating billions in debt from the bond market.
Impact of outbreak
The COVID-19 outbreak has provoked the crisis with most economic activities suspended under a curfew. In March, the Kingdom closed down almost all public places such as shops, malls, restaurants, cafes. All pilgrimages, including the prestigious annual Haj to Mecca, which hasn’t been terminated since Napoleon’s 1798 attack of Egypt, were put to a halt.
Despite these efforts, the virus continued to expand all around the country. As of May 11, the Kingdom has recorded over 39,000 coronavirus infections and 246 deaths, according to the Johns Hopkins Coronavirus Resource Centre. Furthermore, it has also exasperated the economic woes. The IMF now forecasts the country’s GDP will drop to 2.3% this year.
The monetary equalizing cost for oil — the rate required to stabilize a nation’s budget — is of vital importance to the countries exporting oil. Low crude oil prices endangers the economic strength and payment calendars and budgets of such oil-producing countries like Saudi Arabia.
Unwinnable oil war
“The recent oil problem is almost entirely self-inflicted. Rather than participating 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 injured not just Saudi Arabia, but also a very large number of countries in the region who are dependent on their oil revenues,” Mr. Ahmad stated while in conversation with The Hindu.
During early days of March, Saudi Arabia made a decision to boost oil production and offered to provide incentives and discounts to buyers so as to win market share after it couldn’t reach any amicable agreement with Russia on output cuts. The ensuing supply excess decimated down the prices. By the time the Saudi nationals, Russians, and other primary oil producers reached an agreement to cut output by 9.7 million barrels a day in April, it was far too late. Every day demand had already dropped by more than 20 million barrels a day as international economic activity came to a grinding half owing to the virus lockdowns.
Saudi officials are very well-aware 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 had exclaimed a few days ago. Apart from the stringent measures already put in place by the government, the Kingdom will also suspend some of the big-ticket projects initiated by the Crown Prince, which involves an expansion of the Mecca Mosque and constructing sports stadia and a $500 billion mega city in the deserts of the country.
“Oil prices are improbable to swing back to the pre-crisis levels any day soon as the global economy remains in doldrums. So the Kingdom has to look for new 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. “Nationally, the Kingdom has to cut expenditure, train its young population for new jobs, construct a more accountable and responsive political system 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.