The smoke from the Middle Eastern firestorm ignited by Saudi Arabia’s execution of a prominent Shia cleric has served to obscure the Kingdom’s economic crisis. On Wednesday, the US Secretary of State John Kerry launched a frenetic round of telephone diplomacy to attempt to persuade leaders in Saudi Arabia and Iran to step back from edge. But in the medium term, it might well be the economic crisis that matters more.
The collapse of the global oil price since the summer of 2014 has destroyed the Kingdom’s public finances – hardly surprising given it relies on oil sales for 90 per cent of state revenues. The Kingdom’s budget deficit for 2015 ballooned to 15 per cent of its GDP.
The IMF estimated last year that Saudi Arabia needs a global oil price of around $106 (£72) a barrel to balance existing levels of expenditure with revenues. On Wednesday the price dipped below $35 a barrel and shows no signs of recovering – with a glut of Iranian supply expected this year after the sanction-lifting deal between Tehran and Western powers.
To cover its deficit, the Kingdom has been selling its stock of foreign exchange. Reserves worth $746bn in August 2014 have now fallen to $646bn. The IMF predicted last year that it would run out of foreign exchange reserves in just five years.
The Kingdom has finally taken corrective action. Last year it issued debt for first time and in December it unveiled an “austerity” budget. But austerity is a relative concept; Saudi citizens pay no income tax. Petrol and energy are dirt cheap, thanks to state subsidies. The Saudi government’s savings were dominated by cuts in planned building projects.
Many argue high welfare spending is needed to keep a lid on tribal dissent. Saudi also has a potential generational powder keg to worry about. Youth unemployment is high, with almost a third of 15 to 24-year-olds out of work. And with almost half of Saudi’s 31 million population under 24, the potential for unrest if living standards are squeezed is obvious.
10 examples of Saudi Arabia's human rights abuses
10 examples of Saudi Arabia's human rights abuses
In October 2014, three lawyers, Dr Abdulrahman al-Subaihi, Bander al-Nogaithan and Abdulrahman al-Rumaih , were sentenced to up to eight years in prison for using Twitter to criticize the Ministry of Justice.
In March 2015, Yemen’s Sunni President Abd-Rabbu Mansour Hadi was forced into exile after a Shia-led insurgency. A Saudi Arabia-led coalition has responded with air strikes in order to reinstate Mr Hadi. It has since been accused of committing war crimes in the country.
Women who supported the Women2Drive campaign, launched in 2011 to challenge the ban on women driving vehicles, faced harassment and intimidation by the authorities. The government warned that women drivers would face arrest.
Members of the Kingdom’s Shia minority, most of whom live in the oil-rich Eastern Province, continue to face discrimination that limits their access to government services and employment. Activists have received death sentences or long prison terms for their alleged participation in protests in 2011 and 2012.
All public gatherings are prohibited under an order issued by the Interior Ministry in 2011. Those defy the ban face arrest, prosecution and imprisonment on charges such as “inciting people against the authorities”.
In March 2014, the Interior Ministry stated that authorities had deported over 370,000 foreign migrants and that 18,000 others were in detention. Thousands of workers were returned to Somalia and other states where they were at risk of human rights abuses, with large numbers also returned to Yemen, in order to open more jobs to Saudi Arabians. Many migrants reported that prior to their deportation they had been packed into overcrowded makeshift detention facilities where they received little food and water and were abused by guards.
The Saudi Arabian authorities continue to deny access to independent human rights organisations like Amnesty International, and they have been known to take punitive action, including through the courts, against activists and family members of victims who contact Amnesty.
Raif Badawi was sentenced to 1000 lashes and 10 years in prison for using his liberal blog to criticise Saudi Arabia’s clerics. He has already received 50 lashes, which have reportedly left him in poor health.
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Dawood al-Marhoon was arrested aged 17 for participating in an anti-government protest. After refusing to spy on his fellow protestors, he was tortured and forced to sign a blank document that would later contain his ‘confession’. At Dawood’s trial, the prosecution requested death by crucifixion while refusing him a lawyer.
Ali Mohammed al-Nimr was arrested in 2012 aged either 16 or 17 for participating in protests during the Arab spring. His sentence includes beheading and crucifixion. The international community has spoken out against the punishment and has called on Saudi Arabia to stop. He is the nephew of a prominent government dissident.
Amid the cuts, defence spending been protected. It has been growing strongly ever since the 2011 Arab uprisings as Saudi anxiety over rising Iranian influence in Syria, Lebanon, Iraq and Yemen has grown.
The currency is the most exposed financial pressure point. Some warn that the Saudi riyal’s three-decade-old peg with the US dollar will come under unbearable pressure if it continues to lose foreign exchange reserves at the current rate. Other oil producers such as Azerbaijan and Russia have had to abandon their pegs since the oil price collapse. Traders have been selling the Saudi currency short in expectation of a rupture.
There are doubts over economic strategy too, with rumours of a government rift over the long-standing policy of maintaining the Kingdom’s oil production to keep the oil price low and to push high-cost American shale oil producers out of business. The policy is unpopular with Sunni allies in Oman, Bahrain, Kuwait and the UAE.
There is uncertainty about who is calling the shots – and where things are going. The veteran head of the oil ministry, Ali Al-Naimi, is due to retire. He is a technocrat, not a Saudi royal family member. But there is chatter that he could be succeeded by Abdulaziz bin Salman, one of King Salman’s sons – whose brother, Mohamed bin Salman, 30, is already seen as the real power in the Kingdom.
“You might see oil markets getting worried that ruling family politics could start to impinge on oil decisions,” argues Jane Kinninmont of the Chatham House think tank. “What is it that keeps their relations with the US on such a harmonious basis? It’s the perception that they are responsible players in the international oil market – that they’re not going to go back to the 1970s and use oil as a weapon.”
Losing US support would be an economic catastrophe – one that could consume the House of Saud.Reuse content