Tackling subsidies
The old issue of government subsidies in the Kingdom has come out for public debate. It did not prevail in a passing by statement or in an answer to a reporter’s question, but was an integral part of prepared remarks by Planning and Economy Minister Muhammad Al-Jasser.
To drive the point to the audience, his remarks on subsidies were echoed by Saudi Electricity Company CEO Ali Al-Barrak.
The venue was of remarkable interest. The two senior officials made use of the Euromoney annual conference on the Saudi economy, sponsored by Jadwa Investment company. The event brought together officials, businessmen and professionals gathered for two days in Riyadh to discuss issues related to the Saudi economy.
Al-Jasser’s words were direct and blunt in identifying the problem and how to go about it.
“The subsidies have become exorbitantly expensive and causing enormous damage to the economic system. Therefore, the Kingdom is seeking to address this problem in a careful and balanced way with extra keenness and caution.”
Al-Barrak continued on the same line adding that the Kingdom’s system of electricity subsidies should be revised.
“Subsidies are becoming a big part of the government budget,” he said at the conference.
“Subsidies should be revised and done in a different way. They should be smarter and support the low-income people,” Al-Barrak said.
No details were given on the size and types of subsidies, nor what steps to be taken to face up to the problem.
A number of analysts have however pointed to certain areas where subsidies are believed to be accumulating.
For instance, subsidizing oil consumption is regarded as one of these areas.
Estimates vary from as low as SR 50 billion to more than three times that figure if everything is included in terms of consumption from individual consumers to truck drivers in nearby neighboring countries, who make use of their trips to the Kingdom to fill their tanks before going back home.
Electricity generation using crude oil has been one of the main areas causing worry to some Saudi Aramco officials who voiced their concern that if current consumption trends are to continue they will have direct impact on the Kingdom’s crude oil export abilities in not very distant future. Industry, which is using electricity at the subsidized price is one area in addition to others.
In his remarks, Al-Jasser mentioned the government’s initiative to develop the public transport system as one of the ways to address this problem.
If history is any guide, then the the government may opt to repeat its experience with wheat subsidies.
Those helped the Kingdom attain self-sufficiency in this strategic commodity back in the 1980s, but with that peak they started to have a negative impact on the more strategic groundwater resource, which prompted the government to start a gradual program to lift subsidies and even encourage wheat plantation with the aim of going back to be net importer of wheat in 2016.
Subsidies are usually a very sensitive issue. Nobody likes to pay more to get a commodity or a service, but to ensure availability of that commodity and service it has to be sold at cost price in addition to a profit margin to ensure having enough motive to get the provider continue his business. But that has to be done in a gradual and smarter way to avoid rocking the boat.
Moreover, the best time to engage in such policy is when economic conditions are stable and people have enough margin to bear additional cost. The basic figures of the Saudi economy continue to be solid despite slowing down and that is basically because of external developments to do with the world economy problems as well as regional and international geopolitical, economic and social uncertainties.
A quick look at the three-year period of last year, the current one and next year, show a shining picture when compared with other economies.
The national economy continues to grow in nominal terms and is expected to reach this year SR 2.8 trillion from SR 2.7 trillion last year and up to SR 2.9 trillion next year.
More significant is the per capita income, which is slated to increase slightly from $ 24,859 in 2012 to $ 24,926 this year and $ 24, 916 next year.
Also, national debt as percentage of the GDP is showing remarkable decline over the years from 23.5 percent back in 2006 to 3.6 percent last year and a better percentage of 3.2 percent this year and most likely 2.9 percent next year.
These forecasts are based on the performance of the oil sector, where production that averaged 9.8 million barrels per day (bpd) is expected to hover around 9.6 million bpd this year and 9.4 million bpd in 2014.
The most interesting figure is of the population growth, which is forecast to grow from 29.3 million in 2012 to 30.2 million this year and 31.1 million in 2014.
This could be an opportunity in terms of expanding the market and needing sound policies to utilize.
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