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Royal Handouts Cheer Saudis But Show Struggle to Revamp Economy

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image Saudi Finance Minister Mohammed Al-Jadaan

Saudi authorities said they’ll spend billions of riyals to help citizens offset the impact of a value-added tax and a surge in gasoline and utility prices, a move that will help ease public discontent while highlighting the kingdom’s struggle to overhaul its economy.

King Salman, in a series of royal orders early on Saturday, restored an annual pay raise for Saudi civil servants, suspended as part of attempts to rein in a hefty public-sector wage bill. He ordered a 5,000-riyal ($1,333) bonus for soldiers fighting in Yemen and granted Saudis working for the state an extra 1,000 riyals a month as a “cost of living” allowance for a year. The government will also pay part of the newly introduced VAT.

The measures will likely be cheered by Saudis who took to social media and television to criticize surging prices and the implementation of a 5 percent VAT on a wide array of products as of Jan. 1. Yet they also show how the kingdom’s rulers are struggling to find a balance between the need to avoid unrest and take the difficult steps needed to reduce what policy makers and economists see as an unsustainable reliance on oil revenue.

“The main story from what’s happened over is not the deterioration to the budget, it’s not the marginal uptick in consumption that’s going to result from the handouts but it’s just the fact that this is a government that is very careful about implementing any measures that might be perceived as painful for the Saudi households,” Jean-Paul Pigat, Dubai-based head of research at Lighthouse Research, told Bloomberg TV.

Finance Minister Mohammed Al-Jadaan, appearing on state television to explain the reasons behind the price increases, struggled to keep up with repeated questions over the impact on citizens. Calls for the return of annual pay increases for public-sector workers were persistently trending on Twitter. Two-thirds of Saudi employees work in the public sector.

Discontent wasn’t limited to average Saudis. Security services on Thursday arrested 11 princes after they staged a palace protest in the capital over the non-payment of their electricity and water bills, the attorney general said in a statement. The princes were moved to al-Ha’er prison pending trial, he said.

What Our Economists Say


“Good for 2018 growth but raises lots of question marks about the overall strategy. In particular, questions about: the seriousness of achieving fiscal targets and avoiding the drain on reserves; the possibility of making private sector jobs more attractive for nationals after the latest measures; and the ability to execute the necessary painful measures despite public outcry.”

-- Ziad Daoud, Bloomberg Economics

It’s not the first time the kingdom has revised plans that form key parts of Crown Prince Mohammed bin Salman’s Vision 2030 plan to prepare the economy for the post-oil era.

Authorities had already announced plans to push the timeline for balancing the budget to 2023, instead of 2019 as originally envisioned, and said they’ll raise fuel prices more gradually. King Salman last year also reversed a decision to cut public-sector salaries after public complaints.

The latest handouts will cost the state more than 50 billion riyals, Saud Al-Qahtani, an adviser to the royal court, said on his Twitter account. Some officials were also urging private-sector companies to follow suit by giving Saudi employees an allowance to offset rising prices.

Saturday’s royal orders also included:

  • 500 riyals extra a month for retirees and social-benefit recipients
  • A 10 percent bump in student allowances
  • The government will bear the cost of VAT for citizens benefiting from private healthcare and education services
  • Government salaries will be paid on the 27th of each month, according to the Gregorian calendar

King Salman said he issued the orders after Prince Mohammed, his son and heir, explained that the recent measures “would increase the burden on some citizens,” according to the royal decree published by the official Saudi Press Agency.

The order may offer a reason for Saudi individual stock investors to pile into the market after being net sellers for more than 80 weeks. The benchmark Tadawul All Share Index rose 0.2 percent in 2017, compared with a 34-percent gain for the MSCI Emerging Market Index.

Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes, estimates that the measures could add as much as 0.5 percentage point to non-oil gross domestic product growth. The payments will “nearly negate 2018’s planned fiscal consolidation” barring an unexpected increase in oil prices, he said.

“The move is definitely positive for 2018 GDP growth outlook but clearly at the expense of fiscal discipline,” he said. “It also confirms worries that authorities will use any fiscal room created by rising oil prices to defer fiscal reforms.”

— With assistance by Nadeem Hamid


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