IMF: Austerity Looming for Saudi Arabia

The International Monetary Fund (IMF) recently issued a warning to Saudi Arabia regarding its spending vis-a-vis its primary source of income. The major oil producer is feeling the pinch of lower global oil prices, and the IMF predicts years of higher taxes and low fuel subsidies for the Middle Eastern nation. Around the world, crude oil prices have fallen more than 70% over the last 18 months. As a result, a number of economically weaker oil-reliant countries will likely soon begin defaulting on national debts.

The International Monetary Fund (IMF) recently issued a warning to Saudi Arabia regarding its spending vis-a-vis its primary source of income. The major oil producer is feeling the pinch of lower global oil prices, and the IMF predicts years of higher taxes and low fuel subsidies for the Middle Eastern nation. Around the world, crude oil prices have fallen more than 70% over the last 18 months. As a result, a number of economically weaker oil-reliant countries will likely soon begin defaulting on national debts.

Though much stronger than some of the most at-risk nations, Saudi Arabia relies too heavily on its oil revenues, the IMF warns. Oil makes up 80% of the government’s wealth according to the IMF Middle East Department head, Masood Ahmed. He argues that Saudi Arabia must change its economic policies now, despite the short-term pains it may cause.

“This will have to be part of a multi-year adjustment process. There will have to be a major transformation of the Saudi economy. It is necessary, and it is going to be difficult, but it is a challenge which I think the authorities have clearly laid out.”

According to estimates made by the IMF, Saudi Arabia appears to be shouldering a $140 billion budget deficit. Official figures put the number at a more optimistic—but still quite significant—$98 billion. To escape this destructive spending, the government must change its overly liberal electricity, water, and oil subsidies to its population of 30 million.

The current depression in oil prices has left some analysts with the uncomfortable feeling of deja vu related to the 1986 oil glut. At that time, oil dropped to about one-third of its peak price. The resulting decline in revenues caused 17 of the world’s 25 major oil-producing countries to default on their debts. These nations became so buried in debt that they rose to an average of 40% of the nations’ GDPs. Gabriel Sterne, head of global research at Oxford Economics said, “The 1980s precedents are alarming; producers that avoided sovereign defaults were the exception rather than the rule.”

Unfortunately, while the situation in the 1980s was troubling, today it could be catastrophic. Saudi Arabia’s population has tripled since the 1980s, and anyone who has seen the news in the last several months knows that the situation in the Middle East is not overly stable politically, socially, or economically. That could make a similar depression all the more catastrophic today.

This is exactly the fate that has already befallen Azerbaijan. Also overly dependent on oil production, Azerbaijan is on the verge of defaulting, and is presently seeking $4 billion in emergency relief from the IMF just to keep its economy afloat.