Global Policy Forum

Summary

Saudi Arabia expects a $12 billion budget shortfall for fiscal 2002. Unwilling or unable to turn to outside creditors, the government is considering a path of economic and social reform that could fuel public frustration and lead to upheaval. An embattled Riyadh will impact the stability of the entire Arabian Peninsula and strain relations with Washington.

Analysis

Saudi Arabia's government has announced a $12 billion budget shortfall for fiscal 2002 but says it won't borrow from foreign lenders to make up the deficit. Instead, the government hopes to combine the issuance of bonds, limited borrowing from domestic banks and economic reform -- including privatization of public utilities, reduction of state subsidies and taxation -- to fill the gap.

But the kingdom's ability to borrow is becoming more constrained due to almost two decades' worth of deficits. And efforts at reform could be dangerous: Social spending is the oil that greases Saudi tribal politics and keeps the House of Saud in power. A spending decline will weaken the regime's domestic support. No longer able to buy the public's support, the royal family will be forced to step forward as a champion of the Islamic world in attempts to win hearts and minds.

Striking such a staunchly Islamic pose when the world is reeling from the events of Sept. 11 could impact the stability of the entire Arabian Peninsula. It would also worsen Saudi-U.S. relations, already strained by the negative press the kingdom has received in the past three months. Riyadh still relies on U.S. forces stationed in Saudi Arabia as a bulwark against potentially aggressive neighbors, but the kingdom will try to distance itself from Washington in the short term.

Measures such as the review of the American military presence and harsher restrictions on U.S. military operations -- though contradictory to the kingdom's strategic needs -- will be the necessary first steps toward appeasing an anti-American public.

The plunge in global oil prices has hit Saudi Arabia hard. The nation, which produces about 8.4 million barrels per day, suffered significant revenue loss when crude prices dropped from an average of nearly $25 per barrel in August to $17.10, the current OPEC basket price. The government has not only projected a severe budget shortfall for 2002 but also has revised its initial expectation for this year. Instead of a balanced budget, Riyadh now expects a $6.7 billion deficit, according to Middle East Online, a London-based Arabic news site.

Oil prices are not likely to rise in the short- to mid-term. A glut in global supply and plans by some countries, including Russia and Angola, to bring new fields onstream will raise global production by several hundred thousand barrels per day. Riyadh has failed to win support for additional production cuts, its preferred method to restrict supply and raise prices.

Riyadh has ruled out the option of borrowing from foreign creditors to make up for the revenue gap. Saudi Arabia has a massive public debt, expected to reach $168 billion by the end of 2001, and has run a budget deficit all but one year since 1982. Foreign borrowing would open the kingdom up to review and make it even more vulnerable to foreign creditors.

Instead, the government has pitched the idea of speeding planned reforms, issuing bonds and tapping foreign reserves. This might bring in stopgap funds but won't solve Riyadh's economic problems, which are structural in nature.

Through the government, the royal family provides extensive social services as a means of maintaining the loyalty and support of Saudi Arabia's 16.2 million citizens. For example, the government plans to create 86,000 new jobs next year to address unemployment. Unofficial estimates place unemployment rates for Saudi males at between 15 percent and 30 percent. The government scheme would lead to jobs for more than 817,000 Saudi citizens by 2005, according to Arab News, Saudi Arabia's largest English-language daily.

Riyadh intends to reduce the number of foreign workers -- about 65 percent of the workforce -- living in the kingdom, the BBC reports. Even so, the expansion of government jobs is unsupportable. The massive roster of public employees already eats up the majority of government expenditures, accounting for 55 percent of budget allocations.

The planned privatization of public utilities and reform of government expenditures could bring a revenue windfall while tightening the budget. But such plans remain more a dream than potential reality. For years Riyadh has wanted to privatize the electric, telecommunications, airlines, sewage and desalination sectors, but laws continue to discourage foreign investment. Moreover, social factors may play into the cost of public services, making many of the industries up for sale unprofitable.

All of these considerations are no doubt playing through the minds of the members of the House of Saud. For more than 50 years, the royal family has weathered numerous storms -- making Saudi Arabia appear an island of calm while much of the Middle East has experienced Islamist insurgencies, revolutions, civil wars, invasions and severe political and economic isolation.

The kingdom's stability, though, is slowly being chipped away. Saudi Arabia retains the lion's share of the world's oil market, but barely. Chaos isn't likely to break out soon, but as economic stagnation, declining oil revenue and reduced government spending fuel social frustration, dissatisfaction could quickly give way to upheaval.

For decades, the government has relied on borrowed resources to meet public needs. Its financial credit is running out, and the royal family is living on borrowed time.

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