Saudi Arabia budget 2016: domestic and regional effects

Saudi Arabia budget 2016: domestic and regional effects

The Kingdom of Saudi Arabia has released their budget forecasts for the next financial year, and the numbers are worrying. The oil-dependent economy has run a record deficit of around 367 billion riyals  (US$98billion) this year alone as oil prices have plummeted globally. Saudi Arabian officials have announced plans to cut government spending and reform their finances, but how will this shortfall affect both its domestic stability and regional security?

This has not been a good year for Saudi Arabiaas its new leadership deals with a downward spiralling economy, questions about its custodianship of the two holy cities, a resurgent Iran, and a protracted conflict in Yemen. 2016 marks the first budget under the reign of King Salman bin Abdulaziz Al Saud. The economic forecast from the 2016 budget that was released on Monday has many an analyst querying about what is to happen next in the Gulf’s biggest exporter of crude oil.

The deficit that the Saudi economy has run up amounts to around 16 percent of GDP in 2015 and projected earnings are forecast at 513.8 billion riyals, down from 608 billion riyals in 2015. Saudi Arabia is still maintaining its levels of oil production to 1.5 million barrels a day and is accused of destabilizing the international market. With oil prices looking to hit a record 11 year low of $29 a barrel, Saudi officials are now aiming to bring the deficit down to 326 billion riyals through cuts to expenditures and raising domestic fuel prices.

With the IMF projecting that Saudi Arabia could burn through its financial assets in the next five years, it is imperative that Saudi Arabian technocrats work magic to stop a possible credit downgrade and reinvigorate confidence in the Saudi Arabian economy in the global market.

Domestic implications

The cutting of spending has huge consequences domestically for the Saudi royal family. Oil revenue equates to 80 percent of the Gulf State’s total income. The house of Al-Saud maintains its political legitimacy through its use of its massive oil revenues to implement state welfare programs and substantial subsidies for its citizens in items like fuel, food, gas and water. The IMF estimated that the cost of these subsidies equated to around $83 billion in 2014.

Cutting these subsidies is sensible, but with projected changes looking to see an increase in the price of essential items, the reforms to the economy will hit its citizens first and foremost. Domestic fuel prices have risen by 80 percent in the last week, with projected increases to come in the new year on other subsidies. It is yet to be known how citizens will take the changes. Socio-economic factors already have the potential to destabilize the current status quo. With a large, educated population and a massive youth unemployment rate of 30 percent, there is the potential that budget cuts in the economy will cause growing discontent with the ruling family amongst the citizenry.

If the Saudi government cannot find a balance in cutting spending and increasing employment opportunities for its citizens, there is a chance that this section of society may find expression in other ways such as through radical Islamist groups. There is also a need for domestic political reform to combat this growing discontent, but paying lip service to necessary reforms may further undermine the ruling elite as the economy becomes increasingly more fragile.

Regional implications

This new economic forecast presents big challenges to Saudi Arabia’s standing regionally. Its sponsorship of rebel groups in Syria and its military adventurism in Yemen have seen massive increases in its military budget, which has risen by 19 percent a year since 2011.

The conflict in Yemen has moved from a rapid response by the Gulf States to a protracted conflict that seems like there is no political or military solution in sight. As Saudi Arabia becomes further bogged down in the conflict, the economic and social costs will likely increase, placing more pressure on the House of Al-Saud. While the Syrian situation has the possibility of stabilizing, a decrease in Saudi funding might jeopardize the interests of rebel groups they are supporting. This may limit the Kingdom’s efforts to shape a new Syria and Iran to make further gains.

As Iran opens up its economy to further foreign investment and oil production increases, this could put further strain on oil prices. Iran’s resurgence into the international community and market also has the possibility of further undermining Saudi prestige in the region.

It is still very early in the year, and Saudi Arabia may be able to pull itself out of the current economic crisis it is facing. The Kingdom has already made efforts to diversify its reliance on oil and energy sectors. It has promised to construct 16 nuclear power stations in the next 20 years and has pushed for a search of gas reserves in the country’s eastern quarter.

However, Saudi Arabia still faces both regional and domestic challenges that, if not addressed, may cause further internal and external disturbances to the region. It is apparent that Saudi Arabia must push ahead with a positive economic, political and social agenda, or the House of Al-Saud risks losing its already tenuous economic and political legitimacy.

About Author

Iain MacGillivray

Iain MacGillivray is a GRI Commissioning Editor and an Independent Political Risk Analyst who focuses on Australian, European, and Middle Eastern Politics. He has worked as a Senior Academic Tutor in Middle Eastern Politics at the University of Melbourne and has been a freelance journalist for many years. Iain currently holds a Masters of International Relations from the Melbourne School of Government, University of Melbourne and is currently undertaking a Masters of Middle East Studies at Middle East Technical University (ODTÜ) in Ankara, Turkey.