Saudi Arabia is pushing ahead with a costly decision to pay more to public servants and cut government fees – but is keeping its fingers crossed as such measures could have damaging effects if oil prices fall steeply.
Over the next three years, the world’s oil powerhouse is expected to allocate at least SR60 billion (Dh58bn) for the pay rise for nearly 1.3 million government employees.
At the same time, it will endure a drop in revenue from a 50 per cent cut in import tariffs and fees for passports, driving licences, transfers of vehicle ownership and renewal of residence permits for expatriates.
Although the funds appear low compared to the Kingdom’s massive earnings from petroleum exports, they could put pressure on the budget of a country that is heavily reliant on unpredictable oil export earnings and is considered one of the largest military spenders in the world.
The decision, which is intended to counter soaring inflation rates, illustrated the cautious approach the government is taking in this field as it will be enforced only for three years and the pay rise is only the second in more than two decades.
In a statement on Thursday, the Saudi Ministry of Finance said the pay rise, which took effect from the start of 2008, benefited both national and expatriate employees, starting from five per cent of the basic salary this year and rising to 10 per cent in 2009 and 15 per cent in 2010.
Reacting to calls from Shoura Council members for a higher pay rise this week, Saudi Finance Minister Ibrahim Al Assaf defended the decision as a calculated measure based on a prolonged study on inflation rates. But his response also showed the Kingdom is really keeping its options open.
“The current situation is a result of a temporary economic boom as we do not know what the future is hiding for us,” he said.
“We could be faced with new developments that could prevent us from fulfilling our commitments and meet salary targets as was the case in previous years.”
Assaf was referring to the period during the 1990s, when Saudi reeled under painful fiscal deficits because of low oil prices and had to cancel or reduce most of the subsidies.
The crisis also prompted a short-lived decision to impose income taxes and late King Fahd to make a public address to the citizens telling them the boom days were over and they had to accept some sacrifices.
Although the latest measures followed a sharp increase in Saudi Arabia’s income and a swelling budget surplus, they could be another burden on the Kingdom’s coffers, which are already under pressure from rapid population growth and a massive defence budget.
Official figures showed Saudi Arabia spent SR95bn on defence and security in 2006 and allocated a record SR105bn for the sector in 2007. Although no budget figures were provided for 2008, analysts expect military spending to hit another record this year.
“High defence expenditure had been one of the main factors for Saudi fiscal woes in the past as it accounted for more than a quarter of the total budget,” a Riyadh-based Western economist said. “It is still a burden on the budget despite the large increase in revenues because oil prices are not expected to stay high and allocations for defence have been steadily rising,” he said.
According to a Saudi bank, the port fee cuts and the latest pay rise, the second after the 15 per cent increase in 2005, would not have an immediate significant impact on Saudi Arabia’s finances.
On the ground they are temporary measures and Riyadh had assumed relatively low crude prices in its 2008 budget, the bank said.
“Two key reasons lead us to believe that the additional costs will not be an onerous burden on the state… first, Saudi Arabia continues to enjoy a fiscal surplus – estimated at SR175bn for 2008 – which can easily support additional or extra-budgetary spending,” the Saudi British Bank said.
“Secondly, the new measures are not permanent and could very well be revoked after the three-year period – although the social dissatisfaction this might cause could be reason enough to make them permanent.”
It said the only risk on the fiscal side over the next three years would be a severe fall in oil prices, which would run counter to expectations for future oil prices.
“The Kingdom’s 2008 budget is calculated on just $45 per barrel for Saudi crude and while we expect the price of oil to subside this year – especially during Q2, due to seasonal variations and the global economic slowdown – this will not be sufficient to trouble the Saudi economy,” it said.
“Prices could reach a low of $75 per barrel, but will tend to spike upward in the event of a geopolitical event or crisis. We estimate that the oil price (WTI) will average $78 per barrel, bringing the Saudi Government revenues of SR715bn for 2008.
“Saudi Arabia’s total oil revenues for the year, it is estimated, will reach SR866bn. Looking ahead, we do not expect oil prices in 2009 to drop below an average of $66 per barrel, reflecting continued strong demand, slow supply growth and a narrow margin of spare capacity... With this in mind, we expect the Kingdom to maintain a healthy budget surplus for some years to come,” the bank said.
The surge in oil prices over the past few years has sharply boosted Saudi Arabia’s budget surplus and slashed its public debt to only 19 per cent at the end of 2007 from a record 105 per cent in 1999.
The budget surplus soared to as high as SR178bn last year, far higher than the forecast surplus of SR20bn.
Brad Bourland, chief economist at the Saudi Jadwa Investment Company, said: “The budget appears to be based on a conservative oil revenue assumption. We think that oil production of 9.1 million barrels per day at a price for Saudi oil of $45 per barrel ($49 per barrel for WTI) is consistent with the oil revenue projection in the budget. As we expect Saudi oil to average $72 per barrel during 2008, we forecast a budget surplus of SR187bn, well in excess of the budgeted figure, even though spending is likely to exceed its target.”
Saudi financial plans rely on high oil prices