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Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge

Public Policy

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security.

Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added-taxation as well as a levy on tobacco.

The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shiite rebels. In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East.

“This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.”

Swift Changes

This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman. In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the cabinet, merging ministries and realigning the royal succession.

The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade. The government recorded a budget deficit of 367 billion riyals ($98 billion) in 2015. That’s about 16 percent of gross domestic product, according to the National Bank of Abu Dhabi, but below the 20 percent forecast by the International Monetary Fund.

For 2016, the government expects the deficit to narrow to 326 billion riyals. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion riyals. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals.

Foreign Reserves

Oil made up 73 percent of this year’s revenue, according to the Finance Ministry. Non-oil income rose 29 percent to 163.5 billion riyals.

Brent crude prices have plunged more than 35 percent over the past year, straining the public finances of producers from Venezuela to Iraq. The foreign reserve assets of the Saudi central bank dropped more than $95 billion in the first 11 months of this year to $627.7 billion.

Significant progress in economic diversification relies largely on policies put in place before the price shock, according to an International Monetary Fund study released in December 2014. It cited Dubai, the business hub of the United Arab Emirates, as the main successful example among Gulf Arab monarchies.

Fiscal Reforms

“Next year will see continued administrative and fiscal reforms,” Economy and Planning Minister Adel Fakeih told reporters in Riyadh. He said that 20 billion riyals of this year’s spending overshoot was due to increased military and security spending related to the military operation in Yemen.

For 2016, the government allocated 213 billion riyals for military and security spending, the largest component of the budget as the kingdom fights a war in Yemen against Shiite rebels.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said she believes “that the actual fall in expenditure will be sharper than implied in the budget.”

“We believe that lower government spending will be the key driver narrowing the fiscal deficit in 2016, though further fiscal reforms are expected,” she wrote in a note, forecasting a shortfall of 10.8 percent of GDP in 2016.

The outlook for 2016 relies on a number of “unknowns,” Nasser Saidi, president of Nasser Saidi & Associates, said by phone, listing the war in Yemen, the direction of oil prices and the scale of subsidy reductions as key factors.


17 Comments on "Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge"

  1. rockman on Tue, 29th Dec 2015 10:28 am 

    “Public Policy
    Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security.

    Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added-taxation as well as a levy on tobacco.”

    Obviously this must all be part of their plan to hurt US oil companies. How clever of them. But soon they push prices back to $100/bbl and everything will return to normal. lol.

  2. HARM on Tue, 29th Dec 2015 11:59 am 

    “Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years.”

    Wake me up if the price of Saudi gas goes above .45¢ a gallon, or popular support for their Wahabbist-Islam promoting monarchy drops below 90%. Unfortunately, these modest subsidy cuts will hardly make a dent in either the country’s domestic finances or it’s hateful, regressive 7th century politics and mindset.

  3. green_achers on Tue, 29th Dec 2015 12:26 pm 

    Headline ought to read: “Saudi ruling regime doing too little, and too late, in futile struggle to survive.”

  4. Apneaman on Tue, 29th Dec 2015 1:13 pm 

    HARM, by and large Islam wasn’t regressive until about the 12th century. Prior to that, they were the most progressive, tolerant and advanced civilization on the planet and their accomplishments in science, culture, mathematics, medicine, architecture, etc made possible the Renaissance, scientific revolution and thus the modern world and the west’s domination. It was corruption the embrace of fundamentalism, intolerance and the rejection reason and the intellect that made them what they are today. Sound familiar? See the historical pattern?

  5. geopressure on Tue, 29th Dec 2015 1:20 pm 

    It’s pretty clear that the Saudi Government made a poor decision when they decided to ramp up their production at the end of 2014… That’s easy for us to say though, we have no idea what kind of pressure they were under from the Obama Administration…

    “Increase your production or there will be a coup next week & you all loose your heads”

  6. Apneaman on Tue, 29th Dec 2015 1:55 pm 

    Beware the regressives – AKA The Corporate State

    The Secret US Prisons You’ve Never Heard of Before | Will Potter | TED Talks

    “Investigative journalist Will Potter is the only reporter who has been inside a Communications Management Unit, or CMU, within a US prison. These units were opened secretly, and radically alter how prisoners are treated — even preventing them from hugging their children. Potter, a TED Fellow, shows us who is imprisoned here, and how the government is trying to keep them hidden. “The message was clear,” he says. “Don’t talk about this place.” Find sources for this talk at”

  7. makati1 on Tue, 29th Dec 2015 6:37 pm 

    I see the next five years as being very exciting in a world changing way. The KSA may not exist when they are over. Nor the Us. At least not as we see them today. The internet may be gone, along with most of what we take for granted.

    Power is shifting East at an ever increasing rate and it is scaring Washington shitless. China is arming the new islands in the South China Sea and projecting power into Africa, central Asia and the Middle East, along with Russia’s countering of every Western move in the ME and Europe and building up it’s own military.

    No more 3rd world countries left for the Empire to overthrow. Only the big boys with nukes. Should be interesting. IF we get to 2020 without a nuke exchange.

  8. Anonymous on Wed, 30th Dec 2015 12:11 am 

    So, how is the effort to undermine Iran, Russia and Venezuela’s economy working out for you there, ‘Saudi’s?. Funny how none of those countries are teetering on the brink of collapse, despite no shortage of effort on the US’s part. Maybe time to let the price rise again? Oh wait, that would benefit Russia and Iran. Guess that idea is off the table…

    Pretty soon, only the low cost, low overhead producers will still be in business. Who would those be again?, Russia and Iran come to mind. Low cost-but super-high overhead ‘Saudi’s, not so much.

  9. theedrich on Wed, 30th Dec 2015 4:45 am 

    It seems that the Saudi war on Yemen civilians is costing more than the royals planned on.  With the consequent decrease in Wahhabist bennies, we can probably expect a new wave of Sharia-loving dune coons from the kingdom of headchoppers into Europe and the U.S.

  10. Davy on Wed, 30th Dec 2015 5:23 am 

    I see overshoot accelerating east. In this respect there will be a power of conflict, destabilized social structures, and failing economies. Overshoot is clearly related to population size and consumption growth. In this world of limits of growth consumption growth is a huge negative.

    Asia is in the wrong dynamics now in relation to limits of growth and economic decay. What is needed is slow economic decline and population reductions.

    Asia will likely be where collapse starts and spreads as a deadly contagion to the rest of the global system. Asia is too big to fail for the status quo.

    China is the reason we have dove into overshoot and at many levels. Our climate has been quickly destabilized by Chinese carbon emissions. Resources have been destabilized by the Chinese. We have huge maladaptions of supply and demand of key resources because of unprecedented Chinese growth. It is true power has shifted East but it is the power of death.

  11. onlooker on Wed, 30th Dec 2015 5:39 am 

    China is also an area that has harbored chicken influenza. One wonder how long before some really nasty variant of that or some other lethal disease becomes a pandemic especially once collapse really gets underway and people are stressed and not eating or eating well.

  12. makati1 on Wed, 30th Dec 2015 6:30 am 

    onlooker, yep, disease will spread and become uncontrollable as most of the West has abused antibiotics to the point where they no longer work. They also feed them to most of their food animals, not to mention various steroids. And, most use so many germ killing cleaners that they have no personal immunity to anything.

    The lucky kids get dirty, skinned knees, cuts and scratches when they are young and build up an immunity. Not so the pampered generation today in the 1st world. No immunity and weak, fat bodies are the norm. They will go first.

    Close the local drug stores and a large percentage of Westerners would be dead in month. Many more the first year. And, yes, the 3rd world will not be immune, but I give them a better chance of survival when it does hit. And it

    I also found this article eye opening.

    “The Same Pill That Costs $1,000 in America Sells for $4 in India”

  13. onlooker on Wed, 30th Dec 2015 6:51 am 

    Good points Mak and all valid. I personally try and stay away from any medication support preferring my natural defenses. My point though was simply that given the huge populations of Asia and the already existing pathogens such as chicken influenza that it seems likely that a Pandemic would start there. Of course barring some almost miraculous vaccine or cure Westerners will be very hard hit by such a Pandemic but then again I could say also that this would probably be dependent on the individual’s state of health and blind luck as per not being exposed to said pathogen.

  14. Davy on Wed, 30th Dec 2015 7:18 am 

    Mak, Chinese food industries are using the same hormones, antibiotics, and chemicals. What is worse in China is the lack of regulations.

    You are very correct on the decay of the western medical system. Your boomer generation is heading for a nasty awakening to shortages and economic abandonment. Many have life now through managed long term care. This care is intensive at times but more often than not it relies on prescription drugs with regular doctor visits. If you interrupt these dynamics many boomers are going to have deteriorating lives.

    The best thing you can do is live healthy now and avoid needing life giving drugs. Prescription drugs are just as problematic as other high tech resources to disruption.

    The deteriorating healthcare situation and food insecurity will be our first taste of collapse creep. Once we have systematic failures these health issues could become dangerously destabilizing with pandemics.

    Remember that society has critical people who are vitally important for systematic operations. These are the people behind the scenes keeping the ship afloat. If these people get sick or die things stop.

  15. onlooker on Wed, 30th Dec 2015 7:45 am 

    Very good points Davy. This highlights once again how the world is interconnected and so overly reliant on the infrastructure and networking of resources, people and economics.

  16. Kenz300 on Wed, 30th Dec 2015 9:01 am 

    Subsidies for fossil fuels need to end…… the sooner the better……….

  17. onlooker on Wed, 30th Dec 2015 9:06 am 

    If it were that easy. FF run this civilization. To forsake them is to forsake this civilization. Are we prepared to do that? I think not. We will continue with FF until we cannot. Then who knows as their is nothing to replace them with at this time.

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