We have a chance, former US President Bill Clinton once said, “to fix the roof while the sun is still shining.” The roof was the American Social Security system, which suffered chronic imbalances. Clinton wanted to fix it immediately, while the economy was growing and the federal budget was balanced.
It is a good analogy for all economic problems. In Saudi Arabia the sun is still shining, for now. It may be an exaggeration to say that we are going through an economic crisis, but we may get there soon if we do not move fast to resolve the most troubling challenges and distortions affecting the economy.
I will address today the three most important of those problems: Unemployment, diversification and the increasing levels of waste in domestic oil consumption.
The time is appropriate to review our policies in those areas, after the recent royal decree establishing the Economic and Development Council, where all top officials in charge of economic matters are represented, making it possible to coordinate policy between all relevant government agencies at once.
It is also opportune because Saudi Arabia has sizable financial resources, close to a trillion dollars, making it possible to structure workable solutions without severely reducing prospects for economic growth or affecting citizens’ welfare.
The first challenge is the high unemployment rate among nationals, which has continued to be in the double digits for nearly a decade. According to a recent report by the Central Department of Statistics and Information, unemployment in the fourth quarter of 2014 reached 11.6 percent, practically unchanged from the fourth quarter of 2013’s rate of 11.5 percent.
It is an alarming phenomenon, indicating various initiatives taken over the last several years have yet to succeed in reducing unemployment rates, which have remained unchanged over the past decade. Some of those initiatives are extremely costly and thus would be difficult to justify during the current period of high budget deficits.
Nationals’ high unemployment is especially problematic because it is inconsistent with the economic boom Saudi Arabia has experienced and with the high number of new jobs that the economy actually creates every year.
I know from taking part in drafting the official (Saudi Employment Strategy) that reducing unemployment is not simple, as it requires reforms or changes in almost all government sectors, most importantly education, training and recruitment systems. But there are possible solutions, which the strategy lists in some detail.
The second challenge is economic diversification. Ours is still, directly and indirectly, an oil-based economy. Over the past 10 years, oil exports represented around 87 percent of all exports.
This near total reliance on oil subjects the Saudi economy to the wild fluctuations of international oil markets and economic health of oil consumers. The growing prospects of shale oil and gas, as well as nonoil alternatives, make such reliance risky.
A related problem is the need to diversify government revenues. During the past decade, oil revenue represented about 91 percent of overall government revenues. As such government budget is held hostage to the same turbulent oil markets. Since last summer, oil prices have dropped by 60 percent, leading to a severe reduction in expected revenue in 2015. The official budget estimated 2015 revenues at $191 billion, a reduction of 32 percent from 2014 actual revenue of $279 billion. Budget deficit for 2015 is estimated at $39 billion i.e. 17 percent of expenditure and 5 percent of the GDP.
There is no problem with temporary fiscal deficits and they may be even advisable at times. Saudi Arabia can of course sustain those deficits by tapping into its sizable reserves, but if that continues the reserves will soon run dry.
The third challenge is the ever-increasing waste in domestic oil consumption. Saudi Arabia consumes over three million barrels of oil equivalents every day. That translates into 40 barrels per capita every year, nearly four times the US rate and eight times Japan’s.
What is especially alarming is that local consumption is increasing by about 8 percent annually — 4 times the population growth rate and twice the rate of economic growth.
Currently, local consumption accounts for about a third of total oil production, but it could soon be half. Of course such rates are not sustainable. If we do not stem the increase, our ability to export oil would be at risk and in the end that could spell economic collapse and the end of oil itself.
