26 February 2017


Saudi Arabia has launched a programme to help low-to-middle income Saudis cope with tough austerity measures, a move seen as seeking to deflect public discontent and to ensure a more equitable distribution of wealth.

The kingdom, the world’s largest oil exporter, has come under severe fiscal pressure following the sharp drop in oil prices that started in mid-2014. In response, it has begun reforming its once lavish subsidies system and is gearing up to introduce new taxes to diversify revenue streams.

The measures, which include raising domestic fuel and utility prices and cuts to public sector benefits, is likely to prove unpopular with Saudis used to generous state salaries and subsidies.

The government has pledged to provide financial assistance to ease the impact of the reforms, allocating 25 billion riyals ($6.66 billion) of its 2017 budget for an initiative known as The Citizen Account, according to the Arabic-language daily Okaz. It said the allocated amount will rise annually to reach up to 60 billion riyals by 2020.

This money will ease the impact of higher energy and water prices on low-to-middle income Saudi families as well as encourage lower consumption of utilities and provide a saving of $38 billion in the 2017 budget, said Salem Al-Zammam, founder of economic consultancy Saudi Scope.

He forecasts these budget savings will hit $56 billion by 2020, also estimating that energy subsidies, based on 2015 oil prices, cost the government $80 billion a year.

By directing financial help to those that most need it rather than providing unnecessary energy subsidies to wealthy citizens, the government can reallocate the money saved to help develop the kingdom’s non-oil sectors, as per the National Transformation Program, which aims to reduce reliance on the hydrocarbon sector and expand the private sector.

Who is eligible?

Authorities plan to raise energy prices again in July 2017 to bring them more in line with market rates, and the first cash payout for eligible beneficiaries in the Citizen Account will start in June ahead of that increase.

Registration in the new scheme began on February 1 through an online portal that received more than 1.4 million applications in the first two days. Those applications were in addition to social security beneficiaries who were automatically registered, according to local media.

Applications will be assessed based on five wage categories. The first category includes people with a maximum monthly income of 8,699 riyals ($2,320), the second is for those with monthly wages between 8,700 and 11,999 riyals, the third bracket is between 12,000 and 15,299 riyals, while the fourth covers those with wages between 15,300 and 20,159 riyals. Citizens who earn more than 20,160 riyals per month will not be eligible, according to the Saudi Gazette newspaper.

Eligible beneficiaries of the programme include Saudi mothers married to foreigners and stateless people residing in the kingdom who have been granted identity cards.

“The Citizen Account programme will lead to positive social, economic and political gains in line with the kingdom’s strategic goals in its 2030 vision,” said Basem Hashad, economic analyst and consultant at International Trade Centre.

“That includes targeting better social welfare and support for Saudi families in need, a more efficient management of the government’s funds, and paving the way for investing in long-term programs that will enable a successful implementation of the vision.”

The programme has elicited mixed responses on social media. One caricature making the rounds on Twitter showed Saudis receiving pacifiers from a basket held by a man with “The Citizen Account” written on his sleeve. Another illustrated the difference between equality and equity – one panel shows three people of varying heights each standing on a wooden crate to watch a sports event over a fence; the other shows the same scene but this time with the shortest person given two crates so he can actually see over the fence.

The state has acted to reassure citizens that everyone will shoulder the burden of reforms.

When the public sector, which employs around two-thirds of Saudi nationals, slashed benefits along with bonuses starting last October, the government also cut the salaries of ministers and members of the country’s advisory council by 20 and 15 percent respectively.

King Salman, speaking to the Shura Council last year, said he recognized the impact of reforms.

"The state has sought to deal with these changes ... through a variety of measures to restructure the economy, some of which may be painful in the short run but ultimately aim to protect the economy of your country from worse problems," he said.

Inflation fears

The government aims to balance its budget in about five years, and has reduced its budget deficit to $79 billion in 2016 from a record $98 billion a year earlier. The International Monetary Fund has said the pace of reforms in the kingdom is appropriate to reach its goal.

Inflation, which has been mostly stable at around 2 percent in Saudi Arabia, surged to 4.3 percent in January 2016 after the first round of subsidies cuts took effect, but an economic slowdown has brought inflation levels back to near previous levels.

In January 2017, consumer price deflation hit Saudi Arabia for the first time in over a decade, according to a Reuters report citing data from the Central Department of Statistics that showed prices falling 0.4 percent from a year earlier and 0.2 percent from December.

The report said the declines were due to several factors including last year’s economic slowdown which led some firms to discount products, and a drop in food and beverage prices partly due to a strong Saudi riyal, which is pegged to the U.S. dollar.

Expected increases in state revenues should mean prices are unlikely to continue falling for more than a few months, the report said.

In February, the Saudi cabinet authorised the finance minister to set a date for imposing a 50 percent tax on soft drinks and a 100 percent levy on tobacco and energy drinks in the second quarter. In January, the cabinet approved an agreement between Gulf Cooperation Council (GCC) states to introduce a 5 percent value added tax (VAT) in early 2018.

Authorities are also expected to further increase some government service fees.

“Negative effects that we expect are a big leap of inflation leading to weaker consumer spending which could affect aggregate demand and economic growth especially in the private sector,” said Saudi Scope’s Al-Zammam. “This negatively affects job creation, wages and per capita income.”

But Mohamad Alangari, a Saudi writer and economic analyst, said he expects the Citizen Account scheme to factor in inflation.

“The program will also create an information database on Saudi society and its different economic segments and wealth estimates, which will improve spending efficiency on social programs in general and raise efficiency in putting strategic economic plans for any sector,” he told Zawya.

The budget allocated for the Citizen Account scheme may increase as more data is collected from various government entities as well as banks. Saudi banks on average lend $93 billion to Saudis annually, Al-Zammam estimates.

(Additional reporting by Amany Shaheen in Saudi Arabia)

© Zawya 2017