Saudi Arabia's ongoing transformation should not be underestimated. Its success or failure could affect stability not only in the Middle East, but also the world
In 2017, Saudi Arabia will continue to pursue the two key goals that King Salman set when he acceded to the throne in January 2015: to reduce the economy’s dependence on oil revenues and government spending; and to position the Kingdom as a regional hegemon that can meet any threat, especially from Iran.
Salman’s 31-year-old son, Deputy Crown Prince Mohammed bin Salman—who is also the defence minister and chairman of the Council for Economic and Development Affairs, is overseeing the country’s reforms. The prince is a charismatic and energetic figure, whose apparent commitment to meaningful reform has impressed the country’s youthful population (70% of Saudis are under 30), as well as many foreign observers. He has promised to make the government more accountable and transparent, and to deliver more economic opportunities for the Kingdom’s citizens.
But reform will be a Sisyphean struggle, because the state employs two-thirds of the population, and its decades-old entitlements system has created a culture of dependence. It will be exceedingly difficult to wean Saudis off of government handouts and benefits, and acclimate them to an economy in which the state is not the dominant player.
To achieve its objectives, the government will have to cut spending on healthcare, education, and energy and utilities subsidies; institute new forms of taxation, such as value-added, “sin," and land taxes; and create a competitive environment for private-sector firms to create most future jobs. Thus, the ruling Al Saud family will have to reinvent the social contract with its subjects. And, judging by social media—the principal space where Saudis express themselves openly—the Kingdom’s people will be demanding more of a formal say in governance.
Saudi Arabia’s reforms have become more urgent, owing to sustained low oil prices, budget deficits—which amounted to 16% of GDP in 2015—and declining Saudi foreign reserves, which have fallen to $545 billion, from $745 billion in 2014. Prince Mohammed’s plan is outlined in two documents: Vision 2030, released in April 2016, and the National Transformational Plan (NTP), announced two months later and listing the policies he intends to pursue until 2020.
Both documents are aspirational—meant to project dynamism and a willingness to break with certain taboos. The NTP sets fiscal targets, lists new administrative responsibilities, and proposes various initiatives and methods for measuring performance; but it does not specify how its proposals will be realized. While proper execution will be paramount to the plan’s success, many observers have expressed doubts that the current Saudi administration is equipped to implement it effectively.
What is not in doubt, however, is that Saudi Arabia’s current economic system is unsustainable. Its primary revenue source is oil, a finite resource for which there are now alternative supplies, such as shale reserves, and alternative energy technologies, such as wind and solar; and its budgetary outlays—50% of which go to government salaries and benefits—are unmanageable.
To be sure, Prince Mohammed has already implemented unprecedented reforms. He has reduced energy subsidies, cut state employees’ salaries by 16%, and is discussing plans to privatize various economic sectors such as healthcare, water, and electricity. Most important, the Saudi government is considering an initial public offering of up to 5% of the giant state-owned oil company, Saudi Aramco.
The government hopes to generate around $100 billion from the sale—proceeds that, combined with other resources, will fund the creation of the world’s largest sovereign wealth fund, which it would then invest in assets to diversify its revenue sources. Of course, this plan comes with its own risks, because Saudi Aramco’s balance sheet and proven oil reserves will have to be audited, and it will no longer enjoy its sovereign status.
Such an audit would reveal the extent to which revenues are currently being channelled to the royal family and the religious elites who bolster its legitimacy. This, in turn, would underscore the need for political reform, which neither Vision 2030 nor the NTP mentions. But the political system will undoubtedly have to change, because Saudis will not respond well to losing government entitlements if they see the royal family still benefiting from the state’s largesse.
Although political reform is an extremely sensitive issue for the royal family, King Salman has taken several encouraging steps. For example, he has stripped the religious police of their right to harass and arrest people in public for violating Islamic norms; and he has sent a message that royals are not above the law, by allowing a prince to be sentenced and executed for murder, and another to be lashed for an undisclosed offence.
Prince Mohammed, for his part, has indicated that women could be allowed to drive in the near future, not least because his economic reforms will require their increased participation in the workforce. But his reforms will surely encounter resistance. While transforming a large rentier state is hard enough, reforming an absolutist monarchy is harder still. Not surprisingly, many members of the Saudi bureaucracy are unhappy about the reforms, not only because change is difficult, but also because foreign management consultancies such as McKinsey & Co. and the Boston Consulting Group have been brought in to help formulate the new policies.
But, regardless of who is in charge, Saudi Arabia must diversify its economy and reform its political system, or the existing arrangements will eventually collapse. The coming year may be a better time than ever—oil prices are already low, the region is becoming increasingly unstable, and relations with Iran remain hostile—for the Saudi leadership to impose disruptive changes.
The Saudi population will likely remain loyal to the House of Saud, because there is no leadership alternative. But the stakes of Saudi Arabia’s ongoing transformation should not be underestimated, given its major role in global oil production. Its success or failure could affect not only regional, but also global stability.
Bernard Haykel is professor of Near Eastern Studies at Princeton University and the co-editor (with Thomas Hegghammer) of Saudi Arabia in Transition.