Saudi Arabia launches austerity measures

World’s largest oil producer, Saudi Arabia brought several austerity programmes on Monday in its effort to adjust with the continuing oil price slide.

The austerity measures include spending cuts, subsidy reform and call for privatization. Saudi Arabia’s budget deficit is expected to be a staggering 15 per cent of GDP in 2015.

IMF has warned that Saudi Arabia may empty its foreign exchange reserves in five years if it makes deficit like the size of the current year.

After the oil slide, the Saudi Arabian Monetary Agency has withdrawn $70bn in funds managed by overseas financial institutions. The Kingdom’s foreign exchange reserves have fallen by almost $73bn this year. Now the country has $654 bn which is vital to manage the economy in coming years.

A serious picture of the declining oil price impact is that the deficit is coming near to total revenue from oil. The deficit for the year is Sr 367 bn whereas the oil revenue is Sr 445 bn.

As part of the austerity, Saudi has raised petrol prices by 40% at the retail outlets. But more severe measures are expected to be unveiled in the coming year including spending cuts and restriction of employment opportunities for foreigners.

The Kingdom’s austerity measures of any sort will have large impact on economies of the region including India, Bangladesh, Pakistan, Philippines etc. Nearly fifty percent of the residents in Saudi Arabia are workers from these countries.

Oil production strategy

Saudi Arabia is the price leader in the OPEC with tremendous power to set production targets. But it is keeping the output high despite steep fall in prices.

The logic of continuing high output is that the present low price may drive out new entrant- shale producers, from the market. Recently, the US which is the largest shale energy producer, has removed its 40 year old ban on oil exports.

Analysts expect that Saudis may overpower shale producers but only by burning its own fingers. Prolonged low prices may produce adverse impact on its budget.

Still there is one more threat for the Saudis- entry of Iranian crude. When Iran starts to supply significantly by mid 2016, prices may keep downward. This means that Saudi Arabia’s ability to maintain its budget healthy is going to be difficult, at least in the medium term.