Riyadh willing to make unpopular decisions to buoy economy

20 January 2016

Reduction of fuel subsidies show the kingdom’s new leadership is serious on economic reform

Few were shocked when Saudi Arabia revealed a significant cut in spending in its 2016, but the remainder of the document was full of surprises.

The budget and subsequent announcements herald the start of the biggest economic shakeup for many years driven in large part by the crash of global crude market – still by far the government’s largest source of revenue.

Although the oil shock has forced the government’s hand, it also provides an opportunity to push through a series of long-needed reforms to boost the private sector and increase productivity in non-oil industries.

Among the reduction of fuel subsidies, the price of gasoline has been increased by 50-67 per cent. While it remains cheap by global standards, the government has showed it is willing to make potentially-unpopular decisions on issues on areas of the economy that were previously thought of as untouchable.

In the weeks after the budget announcement, Deputy Crown Prince Mohammed bin Salman revealed that the government is planning to float shares in oil producer Saudi Aramco as part of a programme of privatisations.

An initial public offering (IPO) at Aramco, which has been 100 per cent state owned for the last 35 years, has the potential to generate significant windfalls for the government at a time of austerity.

Privatising assets in oil and other sectors could also help boost efficiency and productivity; the lack of which blights much of the kingdom’s unwieldy public sector.

The kingdom’s planned 14 per cent reduction in spending in 2016 is likely to have a disproportionate impact on awards on new projects. It is not yet clear which sectors will bear the brunt of these cut-backs.

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