Saudi Arabia’s Cash Crunch

Saudi Arabia’s Precarious Position

Saudi Arabia is believed to be one of the richest countries in the world. This desert country has a vast oil-rich landmass. This has led Saudi Arabia to have connections to some very powerful allies. The United States and almost all western countries may be ideologically opposed to the Saudi empire. However, economic benefits unite them. The western powers are hugely dependent on Saudi Arabia’s oil. On the other hand, the Saudi Arabia royal family has massive investments in financial assets in these western countries. This quid pro quo arrangement has raised many eyebrows but never enough to destabilize the transactions.

Hence, this desert country is a financial superpower of sorts. However, this financial powerhouse has come under increasing attack. Saudi Arabia is running out of cash at an accelerated pace. From having a budget surplus of 12% to a budget deficit of 18%, Saudi’s fortunes have turned rather quickly.

The speed at which, Saudi is burning cash could cause it to become bankrupt within the next decade or so. World institutions like International Monetary Fund and the World Bank have warned the Saudi government and the world about the deteriorating cash position. It is not long before the rating agencies start having a negative outlook on the finances of Saudi Arabia. If the situation is not managed immediately, Saudi Arabia may end up becoming another Europe.

In this article, we will discuss the causes that led Saudi Arabia to this precarious position as well as the changes that have been made to undo the problem.

Causes that Led to this Precarious Position

• Over Dependence on Oil: The Saudi Arabian government has been excessively reliant on oil for its daily operations. About 95% of the exports from Saudi Arabia are related to oil. Close to 70% of the revenues of this giant state are derived solely from oil. Also, the state owned Oil Company called Aramco has a net worth which is 5 times greater than Apple Inc!

  Apart from the government, even the average person in Saudi Arabia is overly dependent on oil. Car ownership is a norm. Given the rock-bottom gas prices, fuel efficiency is considered to be an absurd idea. Saudis drive some of the most expensive and flamboyant cars which give the worst mileage possible.

  The problem is that the price of oil is heavily subsidized for the local people. Hence, for every car that is being driven, the state is paying a huge cost. This is burning a hole in public finances. Any kind of commercial activity in Saudi Arabia is also powered by fossil fuels. Once again, this is heavily subsidized by the government.

  To sum it up, it is likely that Saudi Arabia may end up being a net importer of oil in the next few years. This idea may seem absurd at face value but has definite mathematical plausibility. Since the domestic consumption of fossil fuels is highly subsidized, it is wreaking havoc on the finances especially now when the oil prices are at an all-time low.

• Generous Subsidies: The Saudi population also enjoys a lot of other generous subsidies. Everything from medical care to electricity is provided at highly subsidized rates. This has led to the creation of a population that has an entitled mindset and do not like to work. The current Sultan is already unpopular because of the many financial woes facing the country. He, therefore, faces a big challenge in implementing unpopular austerity policies. Even though Saudi Arabia is a monarchy, reducing the subsidies would create a public backlash. Not reducing the subsidies would lead to bankruptcy! Either of the choices does not seem very lucrative for Saudi Arabia.

• Funding Radical Islam: There have been several reports that prove that the Saudi government is a sponsor for radical Islamic groups such as ISIS. Saudi has embezzled huge amounts of cash from its vault and provided it to the fighters to buy weapons and execute people. Not only is this making Saudi bankrupt but also unpopular. Western countries will have a very difficult time justifying why they want to bail out a nation that has been covertly funding terrorism!

Changes that Have Been Made to Undo the Problem

The Sultan has proposed the following changes to avoid the Saudi financial catastrophe.

• Reduced Subsidies: Firstly, the subsidies have been cut. The prices of everything from electricity to schooling have gone up in Saudi Arabia because of this. Although unpopular, this is the only way forward. This policy has had a huge effect on immigrants as well. 33% of the migrant workforce is heading back to their home countries because of the lack of jobs caused by the recession.

• Diversification from Oil: Saudi has started diversifying from oil. They have realized that it is dangerous to run an entire country from the proceeds of an extremely volatile commodity. They want to follow the Dubai model and eradicate dependence on oil. For this reason, they have liquidated a small portion of Aramco, the public sector oil company. They have then infused the money to create a $2 trillion sovereign wealth fund. This fund is being used to make investments which will grow and enable Saudi Arabia to get out of the financial mess it finds itself in.

To sum it up, Saudi Arabia is in deep trouble. Unless severe changes are made to its public finance, their economy is looking at a very bleak future.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.