Why transparency must be the watchword for Saudi fiscal policy

Gulf kingdom needs to present clear-cut plans as to how it will address its budget deficit, says Ed Attwood
Why transparency must be the watchword for Saudi fiscal policy
By Ed Attwood
Sat 29 Aug 2015 12:54 AM

“Saudi Arabia is effectively beached” was one of the more catchy lines from a British newspaper article written last month, which claimed that the kingdom’s oil price policy, combined with its heavy budgetary spending, was causing consternation in Riyadh.

The piece, and a series of others like it, drew heavily on a paper written by Khalid Alsweilem, former director of investments at the Saudi Arabian Monetary Agency (SAMA — the central bank), and now a fellow at Harvard’s Belfer Centre. Even the reasons Alsweilem gave for leaving SAMA are instructive. In an interview with Reuters, he said he wanted the freedom to push publicly for reform.

One is unfortunately left to infer that either dissent or discussion is not exactly welcome within the Saudi central bank, which is disappointing given the challenges that lie ahead. Either way, if Alsweilem was seeking a platform, he has certainly found one. It is rare indeed for such a senior member of what is a relatively opaque organisation to break ranks, and as such his thoughts make fascinating reading. 

Alsweilem’s paper, entitled ‘A Stable and Efficient Fiscal Framework for Saudi Arabia’ looks at the impact of any potential budget cuts and considers the launch of two sovereign wealth funds — a low-yield Stabilisation Fund valued at $250bn and a riskier Savings Fund valued at $500bn. The cash to fund these two entities would be drawn from Saudi Arabia’s $750bn worth of foreign reserves as of the end of last year, and government spending would be linked to the performance of the Stabilisation Fund.

It seems unlikely that Saudi Arabia will take up Alsweilem’s suggestion; if the kingdom was planning on taking this route, then it’s probable that he would still be working at SAMA. In any event, the country’s net foreign assets have already dropped to $665bn as of the end of June, as Saudi Arabia draws down on those assets to fund government spending.

But it seems obvious to most outsiders that the kingdom must act quickly if it wants to plug a hole in its deficit, while not completely draining the precious reserves it has built up over a number of years. Some of that gap will be filled by bond issuances, which are mopping up excess liquidity from the kingdom’s banks. Sovereign debt would no doubt be welcomed by investors, given Saudi Arabia’s excellent profile.

A better idea of how Saudi Arabia plans to tackle this will be seen in SAMA’s 2016 budget; Bloomberg reported last week that the government could slice its budget by about 10 percent or roughly $10bn, although it is unclear where those cuts would come from.

As Alsweilem points out in the Belfer paper, there isn’t much in the way of low-hanging fruit in Saudi spending plans. With the ongoing war in Yemen and other threats to the north and east, the kingdom’s huge defence budget is unlikely to be touched. Education and housing are still absolute priorities. Fuel and food subsidy reform should definitely be on the agenda, even though it would be far more divisive in Saudi Arabia than it has in the UAE. Some infrastructure projects should be mothballed (such as a sports stadium programme), and the practice of royal ‘handouts’ (one earlier this year cost the equivalent of 4 percent of GDP) is difficult to sustain at the current time.

But what Saudi Arabia is actually planning is anyone’s guess, which again brings us back to transparency. Public statements are few and far between, although SAMA’s deputy governor for research and international affairs gave a television interview last week in which he committed to maintaining the riyal’s peg to the dollar. While Saudi Arabia generally makes policy decisions behind closed doors, the opening up of the Tadawul to foreign investors earlier this year should, theoretically at least, lead to a slightly more transparent approach to fiscal policy. So far, that has not happened. If the kingdom truly wishes to engage with outside investors, that’s an approach that may need to change.

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