The fall in oil prices has forced Saudi Arabia to act more decisively in the part of fundamental changes in the economy. Low price effect much better than statements by any organizations, such as, for example, the IMF.
According to experts of the Atlantic Council, fiscal pressure makes “the leadership of the Kingdom to modernize the economy”.
In 2015 the budget deficit in Saudi Arabia amounted to about $98 billion, and this figure will decrease only marginally this year, to about $87 billion When the total deficit could reach $120 billion, as official data does not include spending on the war in Yemen.
Financial constraints are forcing Riyadh to changes. First, the government is considering the introduction of new taxes, including 5% value added tax. This measure may seem ordinary, but not for Saudi Arabia, where VAT can be the first taxes paid in the country.
More specifically, the VAT is a graphic illustration of where to move Saudi Arabia. Now the Kingdom is beginning to reform its economy, increasing its efficiency and reducing dependence on oil sales. The only way to reduce this dependence is to rely on increasing taxes.
For a long time the Kingdom did not see the need for the creation of most economic institutions, as the income from the sale of energy allowed to ignore it. Such States often suffer from severe inefficiency, corruption and lack of response to the needs of the population, because the government simply does not have the population to generate income.
Privatization Of Saudi Aramco
Another landmark event for Saudi Arabia can be a partial privatization of Saudi Aramco. This was stated by Prince Mohammed bin Salman in the beginning of January.
Despite the attractiveness of the asset, the transparency, or rather lack of it, remains a major problem.
Aramco regularly publish operational data, detailed production data, etc., but almost nothing about their finances.
“The most likely explanation of the lack of financial transparency between Saudi Aramco is the desire to hide how much money goes to the Royal family,” says the Atlantic Council.
Given the privatisation and publication of data, which previously not many people have seen the government of the Kingdom, apparently, did acknowledge the need for change in public relations.
Of course, the Royal family is unlikely to give up oil revenues, but probably unlikely she will now gain access to the oil funds as easily as before.
The necessity of modernization
It is obvious that the decline in oil prices is not pleased with the government of Saudi Arabia. Although now the amount of reserves is us $616 billion, enough to Finance the deficit for many years, these reserves are burned very quickly. In 2014, their size was estimated at $746 billion.
In addition, another main concern of the government is social stability. The need to introduce new austerity measures, the reduction of subsidies, increase in the tax burden – all this means new risks, including in the social sphere.
And any instability in the country which provides 10% of world oil production, will be felt across the globe.
However, these reforms are long overdue, and without them, things can be much worse. In recent years Saudi Arabia has managed to create a more diversified industrial economy: it was possible to improve the production of chemicals, fertilizers, aluminum, cement and other industrial products.
But this diversification was limited. One of the reasons was the liberation of production from taxation, so that Riyadh had little incentive to contribute to the growth of the sector.
Although Saudi Arabia’s economy can turn into something resembling a modern economy, to which we are accustomed, to ensure implementation of reforms, nobody can.
If oil prices grow, the need for reform and modernization will disappear by itself.