Dec. 19, 2015 12:44
DUBAI, RIYADH: Saudi Arabia’s deputy crown prince has privately outlined plans to reshape the economy to withstand low oil prices, sources said, in what could be the biggest policy shake-up since the kingdom’s economy was last hurt by cheap oil over a decade ago.
The strategy was presented by Mohammed bin Salman at a meeting this week with senior officials, businessmen and economists. It includes state spending reforms and privatisations in the world’s top oil exporting country, the sources said.
The plans, expected to be made public in the next few weeks and probably in January, represent a shift of authority over economic policy to Mohammed bin Salman, the Council of Economic and Development Affairs which he chairs, and the Ministry of Economy and Planning, the sources added.
The two sources, from the private financial and business sectors, declined to be named because of political sensitivities.
Officials have been talking about some of the reforms discussed at the meeting for years, but they have been blocked by political opposition, bureaucratic inertia and technical challenges.
Under previous administrations, institutions such as the Ministry of Finance dominated policy, but they have now been partially sidelined as pressure on the economy has grown because oil prices have dropped.
The government has been running an annual budget deficit of over $100 billion, forcing it to liquidate over $90 billion of foreign assets in the past 12 months to pay its bills – a pattern that is not sustainable for more than a few years, the International Monetary Fund has warned.
Officials at the Ministry of Economy and Planning could not immediately be reached for comment. The ministry and other state bodies have generally declined to comment on economic policy in recent months.
Under the reforms described by Mohammed bin Salman, the government would become more cautious about spending.
The Ministry of Finance would fund new projects only with the approval of the economic council, a powerful new body created by the deputy crown prince’s father when he ascended the throne in January, and decisions would be closely tied to the government’s financial situation, the sources said.
Some state bodies would be privatised to try to spur growth, create jobs and cut the financial burden on the public sector. Last month, the civil aviation authority said it aimed to start privatising airports and related services in 2016.
In another apparent attempt to reduce the burden on the government, the creation of non-profit organisations would be encouraged, especially in health care and education.
A system of water and electricity subsidies, which cost the government billions of dollars annually, would be restructured so the benefits went to middle- and lower-income people, not the wealthy.
The government would do more to diversify its sources of revenue beyond oil, which the IMF estimates will provide over 80 percent of revenues this year. Taxes, such as a levy on tobacco imports, might be increased.
In principle, the government would try to cover its deficit by issuing bonds rather than by drawing down its reserves, said one of the sources, who attended this week’s meeting.
It is not yet clear whether the new administration will be able to overcome the obstacles that have stood in the way of such reforms in the past.
But Mohammed bin Salman, who is in his early 30s, looks set to bring a more aggressive, performance-oriented approach towards managing the economy.
Ministries and state agencies will regularly be given “key performance indicators”, and officials will be held accountable if they do not meet these targets, the meeting was told.
A range of Western consultants have been brought in to advise on policy. One such consultancy, McKinsey & Co, released a report this month saying Saudi Arabia could double its gross domestic product and create jobs for 6 million Saudis by 2030 if it managed a “productivity- and investment-led transformation”.
Reforms to the labour market, business regulation and management of the state budget would be needed to achieve this. Otherwise, the kingdom could face rapid economic deterioration over the next 15 years, McKinsey said.
This week’s meeting coincided with new signs that Mohammed bin Salman’s council would take on politically sensitive social welfare problems, such as the provision of affordable housing and health care. Past administrations have struggled to solve such problems.
A commentary published on Friday by the Saudi Gazette, a local newspaper, asked whether the Ministry of Housing was necessary and suggested the council should take over its role.
Another commentary in the same newspaper suggested the council should be involved in increasing hospital capacity, rather than leaving it to the Ministry of Health.