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Can Saudi Arabia’s Young Prince Wean the Welfare State?

Can Saudi Arabia’s Young Prince Wean the Welfare State?

RIYADH, Saudi Arabia — In his decade-long career in commercial banking, Mohammed Murfat has never seen the Saudi economy like this. “Our market is down. Almost everything is moving very slowly,” says the 36-year-old bank employee. “All the customers are angry and not interested in taking any loan.”

But there’s good news coming, Murfat allows. He expects business to bounce back from the months-long downturn any day now. A week before Murfat spoke to Foreign Policy, the Saudi Royal Court reinstated salary benefits to the two-thirds of Saudi workers who saw their incomes cut in 2016. All public sector wages were trimmed as part of a sweeping “Vision 2030” to restructure the economy away from oil and gently reduce subsidies to a coddled population.

With Saudis’ pocket cash replenished, “I’m expecting now business will return to how it was before,” he says.

The remarkable drop in confidence dates to last September, when the Saudi government announced it was reducing ministers’ salaries by 20 percent and cutting benefits and allowances for all public employees. Since two-thirds of employed Saudis hold government jobs, salary cuts had long been a third rail of reform. Wages in the public sector are on average about 1.7 times higher than in the private sector, and by 2016, the wage bill had ballooned to 45 percent of all government spending.

When the reversal came in April, many analysts abroad saw it as a confirmation of their fears that Saudi Arabia wouldn’t be willing or able to impose real change on the population. But many Saudis here, including economists and businessmen, have taken a different lesson away from the episode. They say the reversal was a promising indicator — a sign that the leadership is willing to change course when reforms aren’t going as intended.

The cuts led to a precipitous drop in consumer spending, and citizens had started grumbling. The retail sector, for example, contracted by 1.2 percent in 2016 after growing 2.8 percent in 2015, thanks largely to the salary cuts. As Murfat heard in his bank kiosk, many Saudis postponed the sort of spending that keeps the non-oil economy here afloat — buying news cars, upgrading their homes, and even getting married.

Saudi reformers led by Deputy Crown Prince Mohammed bin Salman have adjusted their plans accordingly. Since joining the line of succession in 2015, the 30-something prince has championed steps to move the Saudi economy away from oil, instituting policies that, in the words of London School of Economics associate professor Steffen Hertog, “slaughter many holy cows of the Saudi distributive state.”

The prince’s Vision 2030 is a slick policy blueprint for how to move the country away from oil, boost the private sector, and reduce unemployment, which hovers above 30 percent for youth. Drafted with the advice of Western consulting firms like McKinsey & Company, the program aims to privatize about 5 percent of the state oil company Saudi Aramco through an initial public offering analysts expect will draw in about $100 billion. It calls for a massive government reorganization, known as the National Transformation Program, and a host of smaller initiatives surrounding themes such as youth empowerment, education, and even entertainment.

But just how far and how quickly Mohammed bin Salman will be able to push depends on a society more accustomed to stasis than change. Saudi analysts now say the salary cuts came too quickly, were too blunt a measure, and didn’t offer enough tangible indicators of progress in return. Reinstating them may not have been the ideal fiscal move — but it was the only political option.

Going forward, the government will need to think hard about how it can “mitigate the duration and intensity of pain,” Tariq al-Sudairy, the managing director and chief executive officer of the Riyadh-based Jadwa Investment, told an audience at the Euromoney Saudi Arabia conference on May 3. Society will need “safety nets and cushions to absorb some of that impact,” he added.

Building an image of the people’s prince

It falls to Mohammed bin Salman to win public trust for the reforms he describes as vital for Saudi Arabia’s economic future. His team is betting that visible “wins” in tackling corruption, improving bureaucratic efficiency, and boosting transparency will help convince Saudis it’s worth stomaching any future austerity.

The young prince has taken pains to show that he is willing to listen to the public. Standing before several hundred key policymakers, professionals, businessmen, and public intellectuals in December 2015 to introduce his reform vision, he peeled off his traditional bisht, a cloak worn by princes and other elite, and watched as his ministers followed suit, two attendees recalled. Then, in his everyday thobe, the white-robe uniform of Saudi men, he launched into a discussion of his plans to transform the kingdom.

The young prince had been named to the line of succession just months before, but his impact on Saudi policymaking was already manifest. Past government economic plans almost always came from the top down; consultation was behind the scenes and limited to key players. This plan, too, was written by a small group of technocrats and Western consultants close to the prince. But the rollout has been more inclusive, including at least nominal public input.

On that day in 2015, the government had gathered Saudi professionals from a broad range of sectors for a workshop. After Mohammed bin Salman’s presentation, each minister sat down to speak directly with attendees. It wasn’t a town hall meeting, but many of the attendees — who included doctors, schoolteachers, media representatives, and students — had never had such a close view of policy before.

The ministers were told to “take off their bisht and sit with us at the table like anyone else,” said attendee Selwa al-Hazzaa, an ophthalmologist and former member of Saudi Arabia’s advisory parliament, the Shura Council. “That was beautiful.”

The style Mohammed bin Salman works to project mirrors how he hopes Saudis will think about the reforms. He has sought to portray himself as a youthful, down-to-earth technocrat. He has dispensed with pomp and circumstance and glossed over traditional family hierarchies in appointing ministers. He is also betting that this image will be enough to bolster support for a wholesale rewrite of Saudi economic policy.

Citizens here increasingly accept the need for some change. After the global price of oil dropped in 2014, the Saudi budget slipped into double-digit deficits. The Saudi Arabian Monetary Authority, the country’s central bank, burned through nearly $200 billion in reserves and went to the international bond market to raise more cash. Though it still has the lowest debt-to-GDP ratio of any country in the G-20, the long-term outlook foresees growing deficits.

“Some states do these reforms when the economy is doing fine, and some states do them when [the] economy is not doing that well. We fall in the second category,” said Hesham Alghannam, a Saudi political economist. “If we cannot make structural change in these circumstances, we will never make change.”

Behind the fiscal policies and investments, the question is whether Mohammed bin Salman can change the fundamental equation of Saudi politics. Saudis have always been taken care of, and they’ve been generous to their rulers as a result. The population is not permitted to directly question the royal family and rarely do they try. Occasional pockets of resistance — whether from the conservative religious establishment, the Shiite minority, or the liberal human rights community — have been put down through a mix of co-optation and coercion.

Economic reform stands to make that arrangement less comfortable, though few think the kingdom’s fundamental stability is in question. If the government wants to trim the social safety net, it will have to offer something in return — likely something other than political rights.

Reforming the reforms

Vision 2030’s answer is to promise a government that works. Many of the program’s reforms are aimed at boosting the quality of services by fixing a creaky bureaucracy, expanding infrastructure, and rooting out corruption. But these are years-long endeavors — and when the salary cuts took effect last fall, most Saudis were yet to see any tangible gains.

The cuts reverberated through the Saudi economy. In practice, Riyadh inadvertently gave many low- and middle-class Saudis a massive pay cut.

Rather than raising base salaries in recent decades, some government offices had just increased the extras — meaning that the majority of some workers’ incomes was technically a “bonus.” When those bonuses were axed, they saw more than half their take-home pay disappear. Families across the economic strata felt the pinch.

“Sometimes you feel like you’re tight,” said Siath, a 46-year-old stay-at-home mother of three who was shopping on a recent evening in Riyadh. With a rising cost of living, she explained how her family has started visiting lower-cost shopping outlets and restaurants.

The pain has been even more wrenching because many Saudis are pushed toward the private sector by the poor quality of free government services. Siath and her husband spend the equivalent of one month’s income to send their youngest son, a seventh-grader, to private school. “The cost isn’t reasonable. It should be less, particularly for middle-class people,” she said. “Not everyone can afford this.”

Transportation is another front where many Saudis feel the government hasn’t delivered. Riyadh’s aging streets are clogged with traffic; public transport is nonexistent. Women, who cannot legally drive, must rely on family members, hired drivers, or taxis to accomplish everyday tasks. Private chauffeurs can cost more than half the salary earned by women in retail and administrative jobs, negating the economic benefit of employment. A metro is now under construction in the capital, but until it opens, the resulting gridlock from torn-up city blocks is just a reminder of limited options.

Shrinking incomes began to sour public opinion toward Vision 2030, though most kept the grumbling to themselves and well out of the view of the local press. Bureaucrats and undersecretaries complained about the cuts and slogged through implementing them. Families stopped spending and traveling, implementing their own form of austerity.

Then, days before the salaries were reinstated, calls for protest surfaced on social media. Accounts on Twitter called for the benefits to be restored, though it is unclear how much support they had and no demonstrations materialized.

Hours later, the royal decrees filtered out the good news over state media.

Everything is proceeding as foreseen

In the short term, the new track for Saudi reform may be less focused on cuts and more focused on creating tangible results — sign posts of progress that citizens can look toward if and when austerity returns to the kingdom.

On May 3, Mohammed bin Salman told Saudi cable channel Al Arabiya that the benefits were reinstated not because cutting them was an error — but because things had gone according to plan. Oil and non-oil revenues were up, and the deficit was down. With the positive indicators, “why would we carry on the austerity measures?” he asked.

Mohammed bin Salman’s technocratic explanation, accurate or not, seemed aimed at reassuring Saudis that they are in competent hands. “I don’t fear that social cohesion will be fractured from such a plan, if it’s taken step by step and people get updates and feedbacks,” Alghannam said. “I think what Prince Mohammed bin Salman did — talking to the people directly — I think this was very important.”

Across the government, messaging has subtly shifted, emphasizing the state’s role in first getting its own house in order. The government will look to increase the efficiency of existing channels for raising revenues, Saudi Finance Minister Mohammed al-Jadaan told the Euromoney conference just days after the benefits were returned. The Saudi government also recently approved a regionwide Gulf Cooperation Council framework for value-added tax that could take effect in 2018.

Similarly, ministries are taking steps to reduce costs. The Finance Ministry, for example, has pledged to pay all invoices far faster than in the past, when contractors could go months or years without seeing payment. Now, all invoices will be settled within 60 days; most are now being paid within 30 days, Jadaan said. Across the Gulf, contractors often factor in the risk of going unpaid for months into the costs of their bids for infrastructure and other projects, raising overall project costs.

Ministers have also been adamant that they are keen to protect Saudis’ economic well-being. Policymakers have to “make sure that our people do not suffer from these reforms, particularly the lower-income segments,” Jadaan said.

Meanwhile, the Royal Court has made an example of several officials accused of corruption. In the same set of decrees that reinstated salary benefits, the government sacked and promised to investigate a minister of state of civil service who had been accused of using his position to get a cushy job for his son. Until recently, such nepotism wouldn’t raise an eyebrow.

“Now we have a situation where [ministers] are being asked to be responsible — they have to answer for what they did,” said Thuraya al-Arrayed, a former member of the Shura Council. “This is an example [meant to show] that once you are appointed now to these high positions, you don’t think only about what you can get out of it for yourself and your family and your tribe.”

All this is skillful window dressing, and those details matter in a kingdom where official disclosures are few and final. But reformers know the real work will be in remaking the depths of the Saudi state, not the style of those who sit atop it. There are 13 long years before 2030, and each will be harder than the one before it. If the first 12 months are any indication, Saudis may want to buckle their seat belts — if not, for now, too tightly.

Jonathan Ernst – Pool/Getty Images