Saudi Arabia has been synonymous with excessive wealth for decades. However, if the International Monetary Fund (IMF) is to be believed, that’s about to come to a screeching halt.
According to the Daily Mail, the kingdom is expecting a “budget deficit of more than 20 percent of gross domestic product this year,” estimated to be anywhere from “$100 billion to $150 billion.” Within five years, the IMF predicts that Saudi Arabia could completely deplete its financial assets.
So how did the Middle Eastern nation reach this point? Well, much of the impending financial crisis can be blamed on a couple of key factors. First would be slumping oil prices. Al Jazeera reports an explanation of the grim situation came when IMF’s Middle East director, Masood Ahmed, spoke to reporters in Dubai.
“For the region’s oil exporters, the fall in prices has led to large export revenue losses, amounting to a staggering $[$360 billion] this year alone.
Al Jazeera also stated that signs Saudi Arabia might be in trouble were apparent earlier this year. For instance, the kingdom withdrew $70 billion from funds managed overseas. At the same time, Saudi Arabia’s foreign reserves reportedly fell by nearly $73 billion, dropping to approximately $654.5 billion. Despite the roughly 10 percent drop, Al Jazeera notes that because of the nation’s “debt-to-GDP ratio of two percent,” it shouldn’t have too much trouble borrowing money to help fund growth.
The second cause for financial worries is tied to the first: Saudi Arabia generates most of its income — upwards of 90 percent from the oil sector. Oil prices are currently in a slump, one from which they may never recover. Saudi Arabia will not benefit from taking a “wait and see” approach to its ongoing financial situation.
— RT (@RT_com) October 23, 2015
It turns out that Saudi Arabia isn’t the only Gulf nation that needs to make adjustments. Bloomberg wrote that Bahrain and Oman are in the very same boat. Kuwait, Qatar, and the United Arab Emirates could be headed for similar troubles. However, unlike the previous three Gulf nations, these countries have 20 years to get their financial matters in order before their financial assets are drained.
The Daily Mail wrote that the IMF’s Middle East economic outlook report was launched on October 22. The report said that the Gulf nations must all look to diversify their sources of income and cease to rely almost solely on oil for wealth. At the same time, it’s up to these countries to find ways to strengthen their economies with job growth. The nations will also have cut back (way back) on their spending.
“There are difficult decisions that will need to be made in terms of cutting spending,” said Masood Ahmed. “[They] could try to postpone some capital projects [or look into] energy prices, which are still subsidised or below international prices in most of the countries in the region.” In fact, Ahmed claimed that the six oil-exporting Gulf countries could gain as much as $70 billion by raising local energy prices to match international market rates.
The suggested changes will have to take root sooner rather than later as Saudi Arabia is already feeling squeeze brought on by falling oil prices. The country was already forced to delay contractor payments as a result of the oil pricing slump.
— AJE News (@AJENews) October 22, 2015
Five years may seem like a long time, but it often takes as many years — if not longer — to effectively implement relevant policy and spending changes. IMF officials are concerned that Saudi Arabia’s short-term plans for coping with their financial situation will not aid them in the long-term.
It’s not a “kick the can down the road” type of situation: If Saudi Arabia doesn’t heed the IMF’s warning, a nation once known for its “ceaseless wealth” could be become as barren as the desert it sits on within our lifetimes.
[Photo by Bruno Vincent/Getty Images]