Saudi elites humbled by pay cuts, told to buy their own cars, as oil prices drop

by WorldTribune Staff, September 28, 2016

The unwritten rule in Saudi Arabia’s labor force has long been that private sector employees, in return for lifetime employment, would look the other way as public sector elites collected massive salaries and huge bonuses and enjoyed lavish perks.

As the price of crude oil continues to plunge, however, that era may be coming to an end.

Riyadh skyline
Riyadh skyline

In a royal decree, the Saudi government for the first time announced ministers’ salaries would be cut by 20 percent and bonus payments for state employees would be canceled. The salaries of Shura Council members, a legislative body that advises the monarchy, were cut by 15 percent.

“The ministers’ wage cut is symbolic in nature, but overall it demonstrates to the world – because this is prior to the bond issuance program – that Saudi Arabia is quite serious to tackle things that were once quite taboo issues,” said John Sfakianakis, director of economic research at the Gulf Research Centre.

Wage increases for lower-ranking civil servants will be suspended, and overtime payments and annual leave capped.

The government has also stopped providing cars to senior state officials for their next financial year and announced that ministers will pay fees for their fixed and mobile phones at the start of the next Islamic year.

“Spending on wages soared as oil prices boomed,” said Simon Williams, HSBC Holdings Plc’s London-based chief economist for central and eastern Europe, the Middle East and north Africa. With the deficit set to run above 10 percent of GDP for a second year in succession, “that era is over; wage spending has to be cut.”

About two-thirds of working Saudis are employed in the public sector. Their salaries and allowances accounted for 45 percent of government spending in 2015 and contributed to a record budget deficit of $98 billion.

The measures are signaling “that the public sector will not be the first and last employer so people cannot resort to the public sector as before,” Sfakianakis said. “They’re telling people that the incentive to go there is going to be reduced, so that’s important as well.”

Public debt is forecast to climb to 30 percent of economic output from 7.7 percent currently.

The public sector cuts are part of a plan spearheaded by Prince Mohammed, the king’s son and second-in-line to the throne. Mohammed’s Vision 2030 plan seeks to reduce the public-sector wage bill to 40 percent of spending by 2020.

Canceling bonuses may also affect Saudis “psychologically,” according to Saleh Al Qarni, a government school teacher who also works as a driver to earn extra cash.

“For me as a teacher, it might affect me in school, honestly,” he said on Sept. 26 as he drove his white Lexus through the crowded streets of Riyadh.

Under Deputy Crown Prince Mohammed bin Salman, Saudi has already delayed payments owed to contractors and started cutting fuel subsidies as it tries to manage lower oil prices.

Some analysts say the royal decree may only add to the kingdom’s economic slowdown by damaging consumer confidence. Saudi stocks plummeted in early trading on Sept. 27.

Saudi economic growth is forecast to slow to 1.1 percent this year, the lowest level since 2009, according to a Bloomberg survey.