Saudi Arabia, the largest exporter of petroleum and one of the richest countries in the world, is facing an unprecedented crisis due to historically low oil prices. Brent crude, the oil that primarily Saudi Arabia sells to the world, is trading at 18 dollars per barrel, against the 82 dollars per barrel rate budgeted by the Saudi government in FY 2020. With this, the story of Saudi Arabia and its petro-dollar funded Wahhabi ideology across the world is all set to take a blow.
In the United States, which purchased almost one-tenth of Saudi’s total oil export, West Texas Intermediate (WTI) crude oil is trading at near-zero or negative prices. Trump has threatened that he would impose a complete ban on the import of Saudi oil to protect the domestic industry and increase the consumption of WTI crude oil.
The 780 billion dollar Saudi economy is completely dependent on oil and the majority of the government revenue comes from Saudi Aramco, the government company which owns the country’s oil reserves.
Presenting the budget for FY 20 in December last year, the de-facto ruler Prince Mohammed Bin Salman announced spending of 272 billion dollars- around 28 percent of GDP- and revenue of 225 billion dollars; GDP growth at 2.3 percent and inflation at 2 percent. The public debt was estimated at 26 percent of, a healthy figure compared to international standards.
But with the outbreak of Coronavirus and the steep fall in oil prices, the whole math is disturbed for Saudi rulers. The fiscal deficit, earlier estimated in the ballpark of 40 to 45 billion dollars, is now expected to touch 61 billion dollars, and despite such huge deficit spending, the economy is projected to shrink by 3 percent. By the year-end, its fiscal deficit is expected to be a touch double-digits in terms of debt to GDP ratio.
The Saudi government announced a 32 billion dollars emergency support package, and in order to do that, it increased the public debt limit to 50 percent of GDP from earlier 20 percent, despite warnings from experts.
“A substantial increase of debt/GDP from the low 20s to 50 percent could create considerable long term financial stability issues especially if debt requirements rise as oil revenues fall,” said John Sfakianakis, a Gulf expert at the University of Cambridge.
Saudi Arabia is set to hold G20 summit in November this year, but with the dwindling economy and Coronavirus pandemic, the country will face major problems in making the even successful, instead of gaining big, as expected earlier. The Economist, the globally respected magazine (at least on economy and finance) read by the top executives of the world, did a story titled- A lost year in Saudi Arabia, and argued, “The oil crash and the pandemic have roiled plans to focus on diplomacy and growth.”
“This (oil slump) has changed everything,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “So much of the recent recovery was based on the fact that the oil price had been above $50-$60, providing support to economic activity, and that’s just been decimated.”
The fall in WTI crude prices will have major psychological impact and weaken the investor’s faith in oil and gas sector.
“Yesterday’s price slump was psychologically very important,” said Eugen Weinberg, Commerzbank AG’s head of commodity research. “There is a possibility it will change perceptions forever.”
For decades, Saudi was the leader of the Islamic world despite a small population of around 3.4 crore. The economy of 780 billion dollars was the reason behind that other Islamic nations such as Indonesia, Pakistan, Bangladesh, and Malaysia accepted Saudi’s leadership despite having a larger Muslim population.
Saudi Arabia gave billions of dollars to Islamic countries around the world, and this money was being transferred primarily to Madrasa where Maulvis propagated Wahhabi interpretation of Islam. Saudi funded Masjids and Madrasas even in European countries, and urged the Maulvis out there to teach a radical Wahhabi version of Islam.
With the oil prices at historic low and no signs of recovery in the future, Saudi will cut billions of petrodollars it used to spend to finance Islamic seminaries. Prince MBS has already ordered the branches of the government to cut ‘non-essential spending’ and therefore, unless the country sees spending on Islamic seminaries as ‘essential’, the financing of Islamic seminaries in countries like Pakistan and Bangladesh would register a steep decline.
The closing down of holy sites of Islam shows that the Saudi government is too rational to see funding of Islamic seminaries as essential, and therefore, funding is bound to decline.
However, this would also weaken Saudi’s status as the leader of the Islamic world, given the fact, its economy, dependent on the export of petroleum, has no bright future ahead.