Saudi Arabia braces for austerity amid coronavirus crisis

Riyadh is looking to make budget cuts to counter the impact of the ongoing coronavirus pandemic and falling oil prices.

In December, before the spread of the virus, Saudi planners had produced a budget based on a per barrel oil price of $60.

As of the time of publication, Brent Crude was trading at just under $25 a barrel, a consequence of falling global demand as countries implement lockdowns and their economies contract.

Low oil prices are also a result of the oil price war initiated by Saudi Crown Prince Mohammed bin Salman against Russia. Riyadh had hoped to flood the market with cheap oil in the hope that Moscow would find it unsustainable to maintain its output.

The move has helped contribute to the glut in oil supply, and all but guarantees low oil prices for the coming year, thereby hitting the Saudi bottom line.

Further adding to the woes for Saudi Arabia is the ban on pilgrims introduced to help stem the tide of the coronavirus outbreak.

The combined impact of low oil prices and the absence of cash brought in by pilgrims means Riyadh has no choice but to tighten its purse strings.

While states, like the US and the UK, have been able to temporarily avoid austerity measures and opt for stimulus spending instead, Saudi Arabia does not have the option of propping up its economy in a similar manner.

The country does not want to burn through its foreign currency reserves, which are down to $473 billion from a high of $746 billion in 2014.

High dollar reserves are required by the Saudis to maintain confidence in the peg between its own currency, the riyal, and the US dollar. The current rate is stable at 3.75 riyals per dollar.

Where might the axe fall?

Saudi Finance Minister Mohammed al Jadaan told state media outlets that the crisis facing Saudi finances was the worst the country had experienced in decades, adding “all options” were open to deal with the situation.

Jadaan pressed home the need to reduce expenditures while providing limited stimulus to the private sector and industries providing basic utilities to ensure jobs were not lost.

The country is also trying to alleviate pressures on its private sector by allowing wage cuts in the private sector of up to 40 percent, so long as they correspond to a cut in working hours.

It remains to be seen what could happen to projects that fall under the auspices of the country’s ambitious Vision2030 programme of infrastructure development, which is expected to cost hundreds of billions of dollars.

The planned futuristic city of NEOM, which will span across Jordan and Egypt, is expected to cost in the region of $500 billion.

Intended as a hub for start-ups and as a tourist attraction, the city forms the crux of Saudi Arabia’s attempts to wean itself off oil dependence but critics have described it as a pipe dream.