Impact of COVID-19 on Saudi Arabia
Shaking the House of Saud to the core

The economic backlash of the corona pandemic already means dramatic consequences for the Saudi royal family. But what happens when it becomes too expensive for them to fulfil their part of the social contract and the Saudi people rebel? An analysis by Karim El-Gawhary

Saudi Arabia has a problem that can simply be expressed in the difference between two numbers. The International Monetary Fund says that for a balanced budget, the country needs an oil price of 76 dollars per barrel. But that price is currently less than half at around 30 dollars.

And that’s only the half of it. To stabilise even this low price, Saudi Arabia must reduce its supply of black gold to the global market and has cut oil production back to its lowest level for 18 years. The result is a rapidly increasing budget deficit that some estimate could rise to a record 112 billion dollars.

This is why Saudi Finance Minister Mohammed Al-Jadaan pulled the emergency brake this week. A sales tax introduced just two years ago is being tripled from five to 15 percent. Cost-of-living allowances for members of the military and state officials will be discontinued as early as June. Large-scale infrastructure projects are being shelved.

A double whammy

Saudi Arabia is dealing with two crises at once. Even before the corona-related economic downturn, the nation was locked in an oil price war with Russia – probably at the worst possible time as worldwide lockdowns led to a slump in global oil consumption. The outcome? A total price collapse.

Then there are Saudi Arabia’s own attempts to maintain a flat corona curve at home. To date, lockdowns have only been imposed on a local level. But now, as the end of Ramadan is marked with the short Feast of the Sacrifice, the government has announced a national lockdown.

Mecca's Grand Mosque with the Kaaba has been deserted since the beginning of the corona pandemic (photo: Getty Images/AFP)
Crisis on two fronts: according to official figures, Saudi Arabia has – with more than 41,000 infections – been heavily affected by the pandemic. It is also possible that the great Hajj pilgrimage, which is scheduled to start at the end of July, could be cancelled. The last time this happened was between 1798 and 1801, when Napoleon's campaign in Egypt made the usual pilgrimage routes to Mecca unsafe. At the same time Saudi Arabia is currently going through one of its worst economic crises in decades. Riyadh's reaction to the unprecedented drop in oil prices as a result of the corona crisis has been to introduce austerity measures and a drastic tax increase

The Mecca pilgrimage sites have been shut for weeks. Although not officially announced as yet, this year’s hajj is likely to be cancelled. Annual income from pilgrimages and religious tourism runs to 20 billion dollars, which amounts to about 20 percent of the nation’s revenues beyond the oil sector.

There were even plans in place to make the pilgrimage into Saudi Arabia’s new oil and further develop revenue possibilities, for example with luxury hotels in Mecca for wealthy pilgrims offering a suite overlooking the Kaaba for more than 5,000 dollars a night.

But it’s not that easy to de-rail Saudi Arabia economically. After all, it’s sitting on a sovereign wealth fund worth almost 300 billion euros. Nevertheless, the current economic crisis is proving bothersome. The IMF expects Saudi economic output to decline by 2.3 percent this year.

"Vision 2030" built on sand?

This means the new austerity measures are inevitable. These are also likely to affect the “Vision 2030” programme announced by Crown Prince Muhammad Bin Salaman – a major infrastructure package he hopes will lessen his country’s dependence on oil and introduce some social fluidity.

Mohammed bin Salman on a hoarding advertising the Saudi "Vision 2030" project in Jeddah (photo: picture-alliance/AP)
Perhaps not quite so ostentatious? Against the backdrop of the corona crisis in Saudi Arabia, there is no way around the new austerity measures, which will also affect the "Vision 2030" launched by Crown Prince Muhammad bin Salman. By investing in major infrastructure projects. the aim is to make the Kingdom less dependent on oil and more open socially

A centrepiece of this vision is the futuristic luxury megacity NEOM, currently being raised from the desert sands on the Red Sea at a cost of 500 billion dollars, which aims to attract tourists and international investment.

The Saudi budget crisis is not only likely to delay the project, but also strike a few zeros off the overall outlay. The nation will be stuck in a vicious circle: with a collapse in oil prices meaning there’s not enough cash to develop an economy less dependent on crude.

Yemen – a strain on the budget

Financial limits are also now likely to be imposed on Bin Salman’s plans to re-order the region as a regional power. The war in neighbouring Yemen, which he began five years ago, is straining the budget. The opponents of the Saudi military coalition in Yemen, the Houthi rebels, say this war is costing Saudi Arabia 60 billion every year.

This is probably an overinflated sum, but the Saudis have provided no details on what it costs to purchase and deploy the weapons required for this conflict, to pay mercenaries on the ground and to prolong the life of the Saudi-sponsored Al-Hadi government in Aden.

Sanaa following an air strike carried out by the Saudi-led military alliance that is fighting against the Houthi rebels in Yemen (photo: AFP/Getty Images)
Sanaa following an air strike carried out by the Saudi-led military alliance that is fighting against the Houthi rebels in Yemen (photo: AFP/Getty Images)

In partnership with the United Nations, Saudi Arabia will be hosting a virtual international donor conference in early June aimed at encouraging other nations to help alleviate the impact of a war it is partly responsible for. And the sums in question are far from modest. The International Red Cross recently warned that should the military engagement last another five years, this war could cost the international community a further 29 billion dollars in aid shipments.

Cracks in the social contract

But in this economic crisis, there is something else that is probably giving the rulers of Saudi Arabia sleepless nights. Just as in other oil-rich Gulf states, Saudi Arabia has a tacit social contract that goes as follows: you, as subjects of the House of Saud, have no political co-determination rights. In return, we as rulers will support you and make the state an all-round provider. For example, the state will pay for children to study abroad; Saudis can seek medical treatment abroad with the help of state aid; they receive subsidies to build their houses and interest-free loans.

Before the introduction of a five percent sales tax in 2018, taxes were practically an alien concept for Saudi citizens. To partake of all these benefits, all they have to do is fulfil a single state duty: they must not question the political legitimacy of their rulers or demand political rights.

It’s a social contract that has worked for decades and even seen the Saudi royals through the turbulent times of the Arabellion and the Arab Spring. But the previously sturdy beams holding it up are beginning to creak.

Plans to triple sales tax and cut civil servant allowances are the first cracks in the system. They show that the House of Saud is no longer easily able to fulfil its obligations under the contract. How long will their subjects keep their side of the bargain?

Karim El-Gawhary

© 2020

Translated from the German by Nina Coon

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