Saudi Arabia Begins to Imagine Life Without Oil
Saudi Arabia appears to be making plans for life beyond oil.
Saudi Arabia appears to be making plans for life beyond oil. Following hints from Prince Mohammed bin Salman, the country on April 25 released its “Vision 2030,” a blueprint to diversify its economy and reduce dependence on oil revenue. While the plan is long on ideas and thus far short on implementation, the proposals, if enacted, could bring unprecedented reforms to the Saudi economy — and profound change in the kingdom. The blueprint signifies first and foremost that at least some in the Saudi royal family recognize that the kingdom’s current trajectory is unsustainable, and that change, or at least the appearance of it, is needed.
First, the announcement to open Saudi Aramco, the world’s largest oil-producing company, to outside investment, could help both modernize the oil giant and increase the transparency of the company’s books, and the scrutiny to which they are subject. Saudi Arabia has never publicized its financial records. To open up the state-owned oil producer to outside investment would require the release of financial documents and would necessitate accountability to shareholders. While less than five percent of Aramco is anticipated to be open for bidding, this may be the first step toward a more forward-looking Saudi Arabia.
Second, the Saudi government plans to transfer part of its public investment fund into a sovereign wealth fund. The transition will include shifting ownership of Saudi Aramco to the investment fund, making it the largest such fund in the world. The Saudis are aiming to attract investment and diversify the kingdom’s economy by opening a portion of the fund to local and international investors. The restructuring is also intended to prepare Saudi Arabia for a life less reliant on oil revenue, a shift Prince Mohammed said could occur by 2020. While it would likely take much longer for such reforms to begin, much less come to fruition, public acknowledgement of and commitment to diversification strikes a new tone, and suggests recognition of a new reality.
Saudi Arabia’s proposals come on the heels of similarly significant domestic energy subsidy reform. Last December, the government initiated a five-year plan to raise the price of domestic fuels, including electricity, a move formerly considered off limits in the kingdom, where the population has long been accustomed to subsidized energy. While the government intends to ease the pain of rising energy prices with direct cash transfers to low- and middle-income families, the change will still expose the Saudi public to fluctuating energy prices.
As consumer prices for energy gradually increase, the government also plans to introduce a call added tax on luxury goods by 2018. The tax would alter the existing balance of (no) taxation for (no) representation, as the Saudi government has never taxed its citizens, with the exception of the Islamic charity tax. Such a change could spark public demands for greater accountability, or ire from a population unaccustomed to taxation. Either way, it promises a change in the status quo, if not the social contract.
Shifts at the social level mirror these economic changes. Saudi courts recently stripped the morality police of their authority to arrest Saudis for inappropriate moral conduct, including dress, another first indicative of a fundamental restructuring of the relationship between the government and the governed. No longer are the rulers providing goods and services to the public at no cost, and perhaps no longer will the Saudi populace be willing to tolerate limited political expression.
While these initial steps are unprecedented, they may also be cosmetic. The Saudi government’s strategic dispersal of cash to lessen the blow of reduced subsidies could dilute the significance of these changes, while their potency could be tempered in the absence of significant government follow-through. On the other hand, it is possible that these proposals could amount to nothing less than a renegotiation of the social contract, leading some to wonder if the changes will end the rentier state. If the royal family can navigate this transition, it may indeed be the first time in history that a successful rentier state intentionally removed a level of separation from the rulers and the ruled.
Ultimately, the degree of taxation the Saudi populace is willing to bear and the degree of freedom the Saudi government is willing to tolerate remains shrouded in uncertainty. However, if the Saudis can successfully navigate a strategy in which they increase transparency and accountability while locking in more oil revenue now to invest in a diversified future, they just might pave the way for a smooth transition. However, if they keep both feet firmly planted in past policies — resource rents and repression — both might backfire.
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