The era of Saudi Crown Prince Mohammad bin Salman, launched with the promise of largesse, is now likely to go down in history as a period of unprecedented belt-tightening.
The 34-year-old known as MBS, already set on reducing his kingdom’s dependence on oil, has now found the insurance offered by the precious commodity pulled out from under his feet.
Cost-of-living allowances, instituted in 2018 to help shield state employees from the pain of subsidy reductions, will be eliminated starting in June.
The Value Added Tax, already a new phenomenon for Saudis, will be tripled to 15%.
The government has also announced measures that will make it easier for employers to lay off workers and reduce pay in the future.
“It’s very important that we take very tough and strong measures,” Finance Minister Mohammed al-Jadaan told Saudi broadcaster Al-Arabiya earlier this month.
“They might be painful, but they’re necessary.”
The Saudi budget, passed when Brent crude was more than US$60 – the price required to sustain the kingdom’s finances – is now below $30.
Jaadan told Al-Arabiya that a crisis of this severity had not been witnessed by the kingdom in decades.
“Desperate fiscal times calls for desperate measures, to cut spending massively and quickly,” said John Sfakianakis, a Gulf expert at Cambridge University.
Many of the rollbacks in state largesse, he said, will remain in place for the long haul.
“Some were not as sustainable even during high oil prices, such as the high public wage bill in relation to the overall budget,” he told Asia Times.
Sfakianakis says even more austerity measures should be expected in the coming weeks, from cuts to newly-created authorities to hiring freezes.
Saudi authorities have meanwhile stressed they are committed to the local currency peg to the US dollar.
“SAMA remains committed to maintaining the exchange rate at the official rate of SR3.75 to the dollar as an anchor of monetary and financial stability,” the Saudi Arabian Monetary Authority said May 4.
The mention that the peg could be in question reflects the severity of the situation. Saudi foreign reserves dropped by $27 billion in March, a plunge not seen in two decades.
Finance Minister Jadaan has said the kingdom will cap its reliance on reserves this year at $32 billion, and instead ratchet up borrowing.
Moody’s earlier this month downgraded Saudi Arabia’s credit rating to A1 with a negative outlook, citing the kingdom’s exposure to what is likely to be a prolonged period of sluggish oil prices amid a global drop in demand.
The raising of cash through taxes, meanwhile, could scare off investors and harm the crown prince’s dream of bumping off Dubai with his planned city of Neom.
“It is always a challenge to receive foreign direct investment while you increase sales tax,” said Sfakianakis, who does not believe the moves will spark upheaval.
They will, however, force the young crown prince to reckon with a new reality.
The latest round of austerity measures includes billions in cuts to Vision 2030: the blueprint meant to prepare Saudi Arabia for a future without oil revenue.
It’s a future that has come before the crown prince envisioned.