Oil Price Crash Stalls Saudi Reforms
The plans of Saudi Arabia’s ruling prince to wean the country’s economy from oil and modernize some aspects of its society have been blocked by the unprecedented oil price crash this year.
The country is a welfare state with almost half the population receiving a monthly stipend. Electricity, gasoline, and food are subsidized. Post-secondary education is free.
To fund these programs, Saudi Arabia had targeted an oil price of $76 a barrel this year.
Instead, oil prices have cratered to 30-year lows and currently stand at about $30 or less.
The loss of funds is forcing Crown Prince Mohammed bin Salman to shelve the push for greater social liberalization and concentrate resources on ensuring the population’s basic needs are met, including health care as the virus pandemic claims more victims in the country.
The government is paying the wages of workers who now have no work because of economic lockdowns. It has told businesses to stop collecting sales taxes and paying income and excise taxes. It also is flowing money to commercial banks, allowing them to help customers restructure loans or defer payments.
Businesses that opened in anticipation of greater liberalization include theaters, gyms, and travel agencies. Now these same businesses are appealing to the government for bailouts as the customers who were expected have failed to materialize.
The measures led the country to deplete its financial reserves by 24 percent in March to $479 billion.
The country’s GDP will shrink by 2.3 percent this year, according to the International Monetary Fund, still better than the 3 percent contraction forecast for economic performance worldwide.
Moody’s Investors Service, however, has downgraded Saudi Arabia’s credit rating to negative as the country forecast its budget deficit to reach 13 percent of GDP this year.
TREND FORECAST: As oil prices remain near decades low, social unrest in oil-rich nations, both rich and poor, will intensify. Civil unrest will erupt into civil wars and battle line will spill across borders. As the wars escalate, so too will oil prices, thus putting more downward pressure on oil dependent nations, industry, and consumers.
