The Kingdom of Saudi Arabia (KSA) could be heading for financial turmoil, potentially posting a deficit in 2015. For the Al Saud monarchy, which depends on its massive cash reserves to quell dissent against the regime, recent warnings from the International Monetary Fund (IMF) are not to be taken lightly.
Reuters reported Friday that a recent IMF report “painted the most ominous picture yet of looming financial pressures on the Kingdom.” According to the IMF, the country could post a deficit as early as 2015, nearly three years earlier than previous estimates. Following years of warnings to cut down on massive state spending, the IMF expected Saudi Arabia to undertake financial consolidations in 2013, but these never materialized. To the contrary, continued domestic dissent and increased military involvement in regional affairs demanded an increase in government spending, and a global rise in oil prices facilitated this. If spending continues at this rate, Saudi Arabia needs an oil price of $89 a barrel to balance its budget, up $13 a barrel from what it required in 2012. Unfortunately for the Al Saud family, oil prices seem to have reached their peak, and are moving in the opposition direction from what an oil-backed monarch would hope.
Saudi Arabia has a history of purchasing stability, (often defined as temporarily quelling dissent) both domestically and abroad. For years, Al Saud has been able to sustain its cash-for-loyalty contract with citizens because oil prices were high and the country was running a surplus. Indeed, citizens of KSA are the only in the world to be called after their leaders: “Saudis.” But even the wealthiest of monarchs should know that “stability” built on social handouts is only as sustainable as the nation’s budget. And Saudi’s massive cash reserves are in jeopardy.
Running a dictatorship is a pricey endeavor. It comes as no surprise then that since 2010, annual spending has risen 52 percent, reaching $265.5 billion in 2013. Among the many costs associated with maintaining a dictatorship, Saudi expenses include subsidized housing and loan disbursements (set to reach SR 25 billion a year in 2014), security deployments to hotbeds of dissent (namely the Shia-dominated Eastern Province), and military aid to allied monarchs across the Gulf (cue iconic image of Saudi tanks rolling across the bridge to crush Bahrain’s peaceful pro-democracy uprising). Not surprisingly, these costs seem to rise sharply during periods of regional and domestic unrest.
In March 2011, at the height of revolutionary tensions across the Middle East – perhaps most notably in neighboring, “brotherly” Bahrain – Saudi King Abdulla returned from a medical hiatus abroad and bequeathed over $100 billion worth of financial handouts to his citizens. The move reaffirmed the existing social contract in Saudi Arabia, where the government trades state handouts for limitless citizen loyalty to the Al Saud monarchy. In 2011, in an attempt to appease citizens calling for a ‘day of rage’ (and in addition to the thousands of troops deployed to quell dissent by force), Saudi Arabia pledged $66.7 billion for new housing developments, a raise in the minimum wage, additional welfare benefits for the unemployed, higher stipends for students, and a 15% salary raise for public sector employees.
If Saudi Arabia posts a deficit in 2014, as the IMF has projected it will, the government’s options are limited. Al Saud seems to have ruled out meaningful political reform, (as reflected by the imprisonment of activists, torture in prisons, a beheading record that rivals ISIS, and the systematic targeting of human rights defenders). As a result, cutting back on government handouts seems less than likely. Scaling down its massive infrastructure projects would also be detrimental, as these projects not only increase the quality of life for citizens, but also are one of the only ways the Kingdom is preparing for a post-oil economy. Where then, is a modern monarchy to find more cash?
The Saudi Arabian Monetary Agency is currently using the country’s surplus to buy United States treasury bills – which means the U.S. government can plan to owe Saudi money in the future. If and when they post a deficit, the Saudis will likely begin to pull from these foreign assets to uphold the massive domestic spending that keeps dissent at bay.
But, the fact that the riyal remains pegged to the dollar pushes against the sale of treasury bills. KSA needs to retain a certain amount of U.S. assets to keep its exchange rate constant. Saudi is not ready to have a floating currency, given the uncertainty about what the riyal is worth. Because Saudi Arabia’s economy is based on oil, it can only forecast a budget based on the price of oil, which is sold in dollars. Ultimately, this puts a cap (albeit a high cap) on Saudi’s third option for freeing up cash – selling some of its foreign investments.
While Saudi Arabia has a host of options for dealing with its current financial pressures, each of them seems plagued with a catch-22. Cut domestic spending? Tricky if you plan to continue crushing dissent. Scale back massive infrastructure projects? Not if you hope to survive the post-oil apocalypse. Sell off foreign assets? Sure, but even this cannot go on indefinitely.
The sustainability of Saudi Arabia’s policy of crushing dissent with cash (among other less pleasant tactics) has long been debated by political economists and human rights activists alike. But the IMF’s most recent projections point to a need for policy change – not in 2018, but today. Political reform is the only sustainable way forward for Saudi Arabia.