Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has a daunting to-do list as the real work begins on his plan to transform the world’s biggest oil exporter into an economy no longer reliant on crude.
"2017 is a reality check," said John Sfakianakis, who is director of economic research at the Gulf Research Centre in Riyadh and also a weekly columnist for The National. "We're done with the announcements. Now it's the teeth that need to show behind the actual plan. The global investor community will be looking at that."
From planning potentially the world’s biggest initial public offering to rolling out taxes and protecting Saudis from the impact of spending cutbacks, here are six developments to watch this year:
1. Shielding the poor
The Citizen’s Account is a programme meant to soften the impact of austerity measures on low and middle-income Saudis. It will start with 20 billion to 25bn Saudi riyals (Dh19.6bn to Dh24.5bn) of disbursements this year and increase to 60bn to 70bn riyals by 2020.
Registration opened on February 1 and more than half of Saudi Arabia’s 20 million citizens have signed up. With the government planning to begin payments later this year, there is confusion over eligibility. Should Uber drivers report their side income? Can ministers sign up? What about professional football players?
The programme goes to the heart of the implied social contract, where the Saud family has traded generous spending on its subjects for absolute loyalty for more than eight decades.
“You have to assume that there will be mistakes,” said Crispin Hawes, the London-based managing director at Teneo Intelligence. “You just have to make sure they’re not so egregious that they dilute the process of political authority.”
Saudi Arabia reviewed other countries’ experiences and developed plans “aimed at hedging against possible errors”, a senior source in the Council of Economic and Development Affairs said in a written statement to Bloomberg.
“In case we detected that the programme did not cover an entitled category, we will adjust it and pay them retroactively to achieve justice in coverage and support,” the source said.
The government plans new taxes as it seeks to balance the budget. In April, it is to impose an excise tax on “harmful products”, doubling the price of tobacco and energy drinks and putting a 50 per cent levy on soda.
This is a prelude to the GCC-wide 5 per cent value added tax in 2018, which will have an even broader effect on the cost of living. Riyadh-based Jadwa Investment expects inflation to rise towards the end of this year as Saudis front-load purchases ahead of the new tax.
3. Subsidy cuts
The government began a multiyear programme of gradual reductions to fuel, water and electricity subsidies with a surprise announcement in late 2015, sending Saudis rushing to petrol stations to fill up.
The energy minister, Khalid Al Falih, said in December that the next round of cuts will happen before the end of 2017.
4. Fees on expats
From July, the government will charge an unprecedented monthly fee for foreign workers with dependents in the kingdom. The levy will increase each year until it reaches 400 riyals per month per dependent by 2020.
While potentially popular among locals – slogans like “Saudi is for Saudis” are spreading on social media as the economy slows – private sector reaction may be more challenging for the government. Large Saudi-owned businesses including the construction conglomerate Saudi Binladin “are massively dependent on low-cost foreign labour”, Mr Hawes said.
Introducing the expatriate fee and other measures in a way that does not “choke the economy” will be difficult, Mr Sfakianakis said. Growth slowed to 1.1 per cent last year from 3.4 per cent in 2015, according to a Bloomberg survey of economists, and is forecast to decelerate, to 0.9 per cent this year.
The government is responding with a stimulus package of 200bn riyals to the end of 2020. The commerce minister, Majid Al Qasabi, said in December that target areas would be announced within three months.
“The financial reforms are expected to cause some slowdown in economic growth,” the Saudi source said.
“However, the state is working to cushion the slowdown” with higher government spending, the settlement of delayed payments to contractors and the easing of export restrictions, among other measures.
“The future of oil should not be taken for granted, so these measures are just necessary,” said Fahad Nazer, a consultant to the Saudi embassy in Washington, who does not speak for the government.
6. Listing Aramco
Much of the groundwork for the 2018 listing of as much as 5 per cent of Saudi Arabian Oil Co, Aramco, must be done this year. There is growing debate about the potential market valuation and a profitable IPO is critical to overhauling the economy; it is the anchor for a sovereign wealth fund meant to generate enough income to dominate state revenue by 2030.
The IPO carries potential political risks – from foreigners buying a stake in the Saudi economy’s crown jewel to a clear picture of Aramco’s financial health becoming visible for the first time.
The IPO “is not so much the elephant in the room as the entire herd of elephants”, said Mr Hawes. The government will also have to win the “internal arguments” on why the listing is necessary, he said.
The IPO will be organised “to maximise the economic benefits of the kingdom”, the government source said. “Saudi Arabia will not give up on its majority ownership of Aramco and will not relinquish the control of it.”
Prince Mohammed’s to-do list “is ambitious but not impossible”, the source said.
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