Updated on April 24, 2017, 12:03 am
Published on April 23, 2017, 7:28 am
(Bloomberg) -- Saudi Arabia’s King Salman restored bonuses and allowances for state employees, scaling back an austerity program that generated criticism among citizens accustomed to generous state handouts.
The government said the perks canceled in September were reinstated because higher-than-expected revenue helped to drive down the budget deficit. Minister of State Mohammed Alsheikh said in a statement to Bloomberg that the injection of more money was expected to stimulate economic growth, but others said the kingdom’s rulers were responding to the discontent the cutbacks created.
The decision “constitutes a step back in terms of forging a new social contract that no longer offers the Saudi public cradle-to-grave welfare,” said James M. Dorsey, a Saudi specialist and senior fellow in international studies at Nanyang Technological University in Singapore. It suggests the government is worried that its economic overhaul plan hasn’t been accepted “by segments of the population who have the most to lose from diversification and streamlining of the economy, including the bureaucracy,” he said.
In his decrees Saturday night, King Salman also pressed on with a government shakeup that has installed his children in key positions. Prince Abdulaziz bin Salman was named Minister of State for Energy Affairs, while Prince Khalid bin Salman was appointed envoy to Washington. Additionally, Ibrahim AlOmar, a former chief executive of National Shipping Co., was appointed governor of the Saudi Arabian General Investment Authority.
Saudi Arabian stocks advanced the most this month on optimism consumer spending will increase after King Salman’s orders. The Tadawul All Share Index climbed as much as 1.7 percent, before paring the gain to 1 percent at the close in Riyadh. The government has not said how much the bonuses were worth, but an estimated two-thirds of all working Saudis are public sector employees.
The bonus cutbacks were announced in September as part of an ambitious plan led by Deputy Crown Prince Mohammed bin Salman to repair public finances and revamp the oil-dependent economy in an age of depressed energy prices. Under his economic blueprint, the government seeks to reduce the public-sector wage bill to 40 percent of spending by 2020, from 45 percent today.
The austerity measures, combined with the drop in oil prices that prompted them, have caused the kingdom’s worst economic slowdown since the global financial crisis. The reinstatement of the bonuses may restore goodwill and help to revive consumer spending and growth. Many citizens of the world’s largest oil exporter have come to expect government largess for backing the absolute monarchy of the Saud family.
“When the cuts were announced last year, it helped the budget deficit,” said John Sfakianakis, director of economic research at the Gulf Research Center. “They can let off the pressure on the salaries part now.”
Within a short period of time, the reduced benefits hurt the economy and consumption, and if the government continues to monitor its spending, this policy change isn’t a step back from diversification, Sfakianakis said. “The impact from the latest decision should be net positive for the economy over time,” he said. “It is a confidence booster for consumption and overall efforts they are trying to achieve.”
The International Monetary Fund expects economic growth to slow to 0.4 percent this year from 1.4 percent in 2016. The Tadawul Consumer Services Index has dropped 15 percent this year, compared with a 4 percent-decline in the benchmark gauge.
Many citizens have groused privately and on social media about their reduced incomes and higher prices for gasoline, water and electricity since subsidies were cut in late 2015. A slew of complaints last week on Twitter included a cartoon shared by Turki Al Shalhoub, a writer with more than 70,000 followers on Twitter, that showed citizens being crushed under taxes. He referred to Mohammed bin Salman’s Vision 2030 plan as “the vision of poverty.”
Some even called for protests, under the Twitter hashtag “mobilize on April 21.” Declared goals were stopping the sale of Aramco shares, solving unemployment and restoring pared-back employee allowances to former levels. Dozens of police cars lined the road this weekend outside one designated -- but empty -- protest site in Riyadh in an unusual show of strength.
The announcement “comes in the wake of the considerably better-than-anticipated budgetary performance in the first quarter, which is driven by strengthened expenditure management and higher revenue inflows,” Minister of State Alsheikh said. “As a result, the actual deficit for 1Q 2017 is about 50 percent of the projected deficit in the budget due to increases on revenue side and decreases on expense side.”
The first quarter budget deficit was about 26 billion riyals ($6.9 billion), about half of the 50 billion riyals forecast, Finance Minister Mohammed Al-Jadaan said in a statement.
It wasn’t immediately clear whether the decision would affect plans to reduce the budget shortfall by 30 percent to about 200 billion riyals for the entire year. Finance Minister Mohammed Al-Jadaan told Bloomberg on Thursday that the government was on track to meet its target. When the bonuses were cut, the gap was equal to 15 percent of gross domestic product.
In addition to a slowing economy, the desert kingdom is also grappling with a war in Yemen that began in 2015 and is trying to reset ties with the U.S. under President Donald Trump after a frosty relationship with the Obama administration. Under the decrees announced Saturday, Saudi forces serving on the front lines with Yemen will receive a two-month salary bonus.