Saudi economic power might be more fragile than it looks

Saudi
Arabia’s economic power is more fragile that it looks. High energy inefficiency
and public sector spending are two trends which, left unchecked, will start
eating into the kingdom’s petrodollar reserves within a decade.

But
while the Saudi government doesn’t have its head stuck in the sand, it isn’t
clear that it is doing enough to tackle the country’s foreseeable financial
problems.

The
surprising sums have been laid out by Jadwa Investment, a firm founded by Saudi
royalty.

Based
on past spending patterns, and assuming no significant ramp up in oil
production which accounts for 85 percent of government revenues, it reckons the
country’s net foreign reserves would shrink by around 45 percent - to around
$267 billion by the end of 2021 and to $100 billion in 2024.

How
does it happen? The kingdom’s own energy consumption is forecast to grow at an
annual rate between 8-10 percent for the next decade.

That
means less of the black stuff will be available to export at international
prices.

Saudi
consumers and businesses pay as little as three percent of the global price.
And they and use 11 times more oil than the Chinese to generate the same amount
of GDP, according to 2009 numbers.

Government
spending, meanwhile, is forecast by Jadwa to grow at an average annual rate of
seven percent for the next 20 years. That’s half the rate of the previous
decade.

But
spending on infrastructure and other projects to create a knowledge-based
economy and renewable energy sources makes up roughly just 30 percent of the
total.

The
rest is current spending, the largest part of which being public payrolls.
Public sector wages rise too fast, and are already higher on average than those
of the private sector.

The
problem is that the Arab Spring has limited the capacity of Saudi rulers to
reform wages and food subsidies.

But
it hasn’t left the kingdom powerless in other areas. Ambitious projects in
renewable energies are a long way off. So it would make sense to act sooner
rather than later.

There
is scope for action. Corporate electricity tariffs, currently below the cost of
production, could be increased.

Limiting
gas-guzzling cars, enforcing stricter building regulations would also help. Of
course ideally the government could also think about introducing taxes, both on
companies and individuals.

But
what then if Saudis decide there can be no taxation without representation?
Whatever the kingdom decides, spending now, while delaying tough decisions,
will not be part of the answer to its problem.

(Una
Galani is a Reuters Breakingviews columnist. The opinions expressed are her
own.)