The spate of spending commitments announced by King Abdullah bin Abdulaziz al-Saud within the space of barely a month in February and March says much about the Saudi leadership’s attitude to preventing popular protests. It believes that financial largesse, rather than political reform, is the key to nipping social unrest in the bud.

The lavishing of an estimated $129bn on Saudi citizens – more than the gross domestic product of some states in the region – is intended to ensure the kingdom remains insulated from the tide of change sweeping the Arab world, once considered immune to popular revolt.

When you are spending $100bn … you are taking a shotgun approach and [will] hit a lot of stuff

Gregory Gause, University of Vermont

On 23 February, as Egypt’s former president Hosni Mubarak settled down to an uncomfortable retirement, King Abdullah announced a $36bn spending plan targeted at addressing unemployment and housing shortages. As if this would fail to impress, on 18 March he followed up with an additional $90bn-worth of spending commitments directed at the main sources of social discontent in the kingdom.

Morale booster for Saudis

One-off cash injections into state employees’ bonuses, promises of half a million new homes, a fresh top-up of the state real-estate fund, as well as the introduction of minimum wages and universal healthcare are all listed in the spending plan.

All make for a morale booster for locals, who have felt the impact of rising prices, housing shortages and restricted employment opportunities more keenly in the past couple of years.

Rather than kick-starting private enterprise, advocated by many as a more durable means of addressing the social drivers that threaten the stability of the kingdom, the government has chosen to focus on state-led initiatives.

The announced anti-corruption drive to be spearheaded by the new National Authority for Combating Corruption, appeared tacked on as an afterthought – passing almost unnoticed amid the multibillion-riyal pronouncements.

The 41 Royal Decrees emanating from Riyadh over the past couple of months confirm a huge financial commitment that will ease the daily pressures faced by many ordinary citizens. Two extra months’ pay for every public official should help ease the impact of rising prices, which has emerged as the most troublesome issue for most nationals. Newspaper cartoons – a bellwether of Saudi sentiment – have shown a marked focus on inflation in recent months.

The cash handouts are intended to be more than a short-term palliative to locals. These generous benefits are meant to show that the government remains firmly on their side.

Yet critics detect more than a hint of panic. “It is not fixing any real issues, but it is fixing the issue of a sudden flare-up. It’s an anti-inflammatory prescription medicine,” says a Saudi-based lawyer.  

Financial support is directed towards lower-income brackets, the prime beneficiaries of the social security and housing benefit increases. It is those sectors of society that are viewed as the most susceptible to the wave of popular uprising that has spread throughout the region.

Labour market restructuring and greater competition is key to increasing incomes

John Sfakianakis, Banque Saudi Fransi

“The measures announced are geared toward the less endowed in general, such as housing loans and building 500,000 new units, unemployment benefits, public-sector bonus benefits and a minimum wage for all Saudis,” says John Sfakianakis, chief economist at the local Banque Saudi Fransi.

Social challenges in Saudi Arabia

The measures do, however, cut across all age groups, says Sfakianakis, as the state is trying to create mechanisms of growth and support systems for greater economic inclusiveness.

“When you are spending $100bn in a country of 28 million, of which 21 million are Saudi citizens, you are taking a shotgun approach and you’re going to hit a lot of stuff,” says Gregory Gause, a Middle East scholar at the University of Vermont in the US.

There are also nuances within the spending commitments that suggest a more sensitive understanding of where the kingdom’s most pressing long-term social challenges lie, as shown by in the housing push.

“There is a major shortage of housing and housing finance,” says James Reeve, an economist at Samba Group. “This is one of the most pressing social issues. Nevertheless, a meaningful expansion of affordable housing is likely to take time and related issues, such as the shortage of buildable land, also need to be addressed.”

Housing an urgent priority

Housing has become an urgent priority. The government hopes to increase home ownership levels from 60 per cent to 80 per cent by 2024 by boosting the supply of affordable housing and expanding financing options for locals.

The state has allocated SR250bn for the new 500,000 housing units, and raised the maximum size of interest-free loans issued by the Real Estate Development Fund from SR300,000 to SR500,000 per applicant.

More action may be needed to resolve the housing crisis. According to Banque Saudi Fransi’s March 2011 report on the Saudi economy, private and public developers need to build about 275,000 units a year until 2015, a total of 1.65 million homes over six years, to meet the demands of a population that has doubled in size since 1988 and is growing by more than 2 per cent a year.

Once the long-awaited mortgage law is enacted, likely later this year or in 2012, borrowers will be able to secure loans at lower costs. The approval of specific articles in that legislation by the Majlis al-Shura on 28 March is a positive indicator that progress on the law is finally being made.

Resolving housing shortages are a critical way of mitigating societal inequality, but also offer other payoffs, such as helping the Saudi contractors who will be doing much of the building. “One of complaints about the building spree of 2000s was that a lot of big-ticket items went to foreign contractors. This commitment to build 500,000 housing units may give a fillip to the local contracting sector,” says Gause.

Inadequate infrastructure is another associated issue that will need to be addressed. The wretched condition of sewerage systems across large areas of Jeddah presents a huge challenge, with floods hitting the city on more than one occasion over the past two years. About 120 people died in flash floods there in November 2009 that also wrecked thousands of homes.

Job creation in Saudi Arabia

Unemployment is another driver of domestic discontent that has caught the leadership’s attention. But while King Abdullah’s spending boost does provide a focus on creating jobs, it appears to be more by edict than enablement.

Simply creating jobs in the public sector or increasing Saudisation quotas are short-term fixes. More preparatory work will need to be done to provide a solution to Saudi Arabia’s intractable employment crisis.

“The boost to foreign education is encouraging, since ultimately education represents the only sustainable way of increasing locals’ employability in the private sector,” says Reeve.

It is unlikely the public purse will pay for a job creation programme beyond the 60,000 new employees set to inflate the ranks of the Interior Ministry.

Youth unemployment is as much as four times greater than in other age brackets, suggesting education and labour market reform are the foremost challenges facing the country. Of the kingdom’s population of 18.5 million locals, 47 per cent are 18 years old or younger.

Of those aged 20-24, 39.3 per cent were unemployed in 2009 – up from 28.5 per cent in 2000, according to the Central Department of Statistics & Information.

The Saudi private sector

Only one in 10 employees working for a Saudi private-sector company is a local citizen. This must be reversed if the private sector is to shoulder the burden of future job creation.

“There will be job creation, but it doesn’t seem like there’s a real commitment to the private sector,” says Gause. “The private sector issue is dominated by foreign labour and there doesn’t seem to be serious moves there to raise the cost of foreign labour.”

Despite a rhetorical commitment to Saudisation, the king has not announced any plans to raise economic incentives to hire locals.

The only option for the government is to focus on the long term and to work towards a more sustained improvement in educational standards. “Labour market restructuring and greater competition is key to increasing incomes and productivity. Training, opportunities and innovation will follow,” says Sfakianakis.

Joblessness is a clear driver of unrest among the young in underdeveloped regions, but rising inflation is also a major concern – and the invisible hand guiding many of the measures announced in February and March.

Inflation is expected to average 5.5 per cent in 2011, according to the local Jadwa Investment. Although below the peak in 2008 when inflation averaged 9.9 per cent, the average Saudi national is nonetheless affected by the rise in global food prices, as well as local issues, such as rising rents. The irony is the immediate impact of the increased benefits will be a spike in inflation.

The additional two month’s salary given to public-sector employees will cause a significant increase in spending in 2011. The payment of unemployment benefit from November will also boost spending, as people on low incomes tend to spend more as a proportion of total income than those on higher salaries, says Jadwa. Higher consumer spending will put upward pressure on the price of consumer goods, many of which are imported.

The wage increase only applies to public-sector workers, but pressure will grow for the private sector to follow suit.

“Many employees in the private sector will be wondering how government workers got a 15 per cent increase and a two-month salary bonus, but they didn’t,” says the lawyer.

Business owners will be considering whether to risk provoking labour stoppages if they do not match the wage hikes.

Now, though, is not the time to panic about the inflationary impact, says Sfakianakis. “There will be some inflation, not a significant amount, but its impact will depend on the amount of money injected and the time frame [in which] the money is expended. Inflation could rise from 5.1 per cent to about 5.6-5.7 per cent,” he says.

Lining up alongside the stark economic drivers of discontent, the Saudi authorities must also react to political dislocation that is never far from the surface. A brewing sense of political alienation in the kingdom has clearly been fed by recent events in other Middle Eastern states.

The creation of the anti-corruption body is a reflection of public anger at the perception of a well-connected elite benefiting disproportionately from the economic boom.

The inadequate response to the Jeddah floods of 2009 and 2011 brought public discontent onto the kingdom’s front pages. The lack of accountability and prosecutions over the failure to create infrastructure able to cope with the flooding has left many in the Western Province with a nagging sense of political grievance.

The anti-corruption body will need to show real teeth if it is to stand a chance of redressing discontent. “If this body is headed up by firebrand with the support of the king and who gets things done, then maybe it will work. But if it is just another government bureaucracy, then nothing will change,” says Gause.

Saudi Arabia’s economic priorities

Increasing political participation remains an unresolved issue. King Abdullah’s spending initiatives are noticeable for their lack of political content beyond the empowerment of the religious establishment. There are no moves, for example, to address democratic deficit, a reflection of the pressurised political climate.

“At a time of political uncertainly in the region, it’s not surprising that you go back to your base and the religious establishment has always been the base of the regime – it’s most important coalition partner,” says Gause.

The Saudi leadership is banking on the fact that while the elites might want elections to the Majlis al-Shura, the grassroots people of the sort that took to the streets in other Arab countries are more agitated about economic issues. “The believe they won’t have to deal with politics if they get the economics right,” says Gause.

The king has taken a big gamble, prioritising economy over the politics. Yet he is astute enough to know money alone will not provide the answer to all Saudi Arabia’s social problems.

King Abdullah has, over the past six years, attempted to do much to take his country forward. Many of the measures that bear his imprint, such as the fostering of the national dialogue process of political debate, and a major new university for women in Riyadh, clearly advance an agenda for reform. The call for change in the Middle East, however, has caught the Saudi leadership offguard, as it has other leaders across the region.

Spending sprees will only put off the day of reckoning, if nothing is done to create stronger political institutions to provide a real voice for the millions of Saudi nationals that have not shared in the 10 years of rising wealth. Time is not on King Abdullah’s side.