Saudi Arabia Faces Possible Backlash over Cuts to Water Subsidies

11 May 2016 Somya Rajawat, Research Assistant, Global Food and Water Crises Research Programme

Background

The Kingdom of Saudi Arabia (KSA) is characterised by an arid, desert-like climate with an annual rainfall of less than 100 millimetres a year, but maintains one of the highest average rates of water consumption in the world. The high level of water consumption can partly be attributed to government subsidies that make water virtually free; consumers pay US$0.03 per cubic metre of water, thanks to a 99.76 per cent subsidy. Cuts to subsidies have been introduced, not to reduce water use, but as a financial measure. In general, the KSA is one of the world’s largest spenders on subsidies; over ten per cent of its GDP is spent on the subsidisation of utilities and fossil fuels for the kingdom’s people. This can be dangerous in a country where 70 per cent of government revenue comes from oil; the value of which has decreased from $US100 a barrel in 2014, to $US40 a barrel in 2016. Despite Saudi Arabia’s budget running a record setting deficit, forcing the kingdom to obtain a foreign loan for the first time since 1991, the people did not respond positively to the change, which resulted in up to a 500 per cent increase in some water bills. Accordingly, the Minister for Water and Electricity was dismissed. Plans to reduce subsidies have not been cancelled, however, and have been endorsed in the Vision 2030 Plan. Announced in late April, the plan is designed to diversify the country’s economy and generate more non-oil revenue.

Comment

Saudi Arabia is in a difficult position. If it does not make changes to its economy and expenditure, the country could, eventually face insolvency. In a country surrounded by regional instability and the memories of the Arab Spring, however, tampering with the social contract that allows Saudi Arabians to enjoy a comfortable life is politically dangerous.

The Vision 2030 Plan is ambitious, and is heavily influenced by Western economic thought. It envisions an economy going beyond oil, opening itself up to tourism and foreign investment. Given that the majority of the population can be considered “young” (half the population is under 25 and 64 per cent are under the age of 30), this may appeal to the progressive attitudes typical of younger generations, particularly as Saudi Arabia now has more access to the internet than ever, despite heavy censorship. The public response to the Vision 2030 Plan has been openly optimistic; yet there seems to be a degree of inconsistency. Saudi Arabians are keen for change and economic prosperity that is not oil dependent, but they do not wish to give up the generous utility subsidies that an oil-based economy can provide. According to Caryle Murphy, while younger Saudi Arabians possess more critical thought and tolerance of Western culture than previous generations, the younger generation will remain largely apathetic towards government issues as long as the ‘money remains’. The young population is unlikely to question the authority of the kingdom as long as there are jobs, the cost of living remains low and a generally good quality of life is easily achievable. From this perspective, it can be argued that cuts to subsidies are likely to contribute to social unrest.

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Source: CNN Money

Ideally, the kingdom’s best option would be to phase subsidy cuts in at a slower rate, introducing them first to expatriates and then to the general population over time. This has been the path taken by a number of other Gulf states. These states, however, have not yet run budget deficits and still have large financial reserves that can sustain them (Kuwait, for instance, can last up to 20 years on the current oil price before running a budget deficit).

State subsidies have encouraged the creation of future security risks for energy and water. Cheap prices have led to wasteful practises and resource inefficiency. For instance, in 2013, utility demand grew by approximately seven to nine per cent while population growth remained steady at two per cent. The majority of water in the KSA is obtained from desalination plants, which are extremely costly. In this way, water security is directly linked to the economy. If consumers covered the costs of their usage, the capacity of the government to continue to run desalination plants is maintained and possibly even enlarged. Cutting back utility subsidies will force consumers to rationalise their usage, which will help to prevent and counteract future issues with national resources.

Ultimately, Saudi Arabia has to face the reality that subsidy cuts, while unpopular, are necessary to protect the country’s economy. While social stability may be compromised in the short-term, removing the country’s resource curse will undoubtedly create long-term stability within the country.

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