Saudi Arabia cuts subsidies, raises fees to generate revenue
Saudi leadership approved the moves in August, with a 90 day window for implementation, according to a Sept. 18 press release.
Items that will cease to be subsidized include passports, driver’s licenses and some renewals of residence permits, according to a released list, which also notes “cessation of protection” for 193 commodities (listed as a single point of subsidy by the government), which dramatically widens the scope of the changes.
Government officials also note that the Saudi system will raise the fees for visas and traffic violations and that all of this will be done in order to raise revenue.
“Typically, subsidies are intended to support public interest, but they provide misallocation of resources and inefficiency in production.” Hossein Varamini, professor of business at Elizabethtown College in Elizabethtown, Pennsylvania, told the Gulf News Journal. “Due to lower oil prices, the government in Saudi Arabia has been trying to reduce its reliance on the oil/energy industry and reform its institutions by gradually restructuring its economic incentives to diversify the overall economy. Raising fees and tariffs for public services and increasing the tax base as well as higher visa fees from visitors are means of increasing government revenues.”
Varamini also discussed the potential impact of the change in subsidization.
“Subsidizing a product or a service by the government lowers the price of the product or service below its actual cost.” Varamini said. “It is typically done for societal benefits or to protect certain businesses. The impact of removing such subsidies depend on elasticity of demand for these products and services. In the case of Saudi Arabia, these services have a fairly inelastic demand (if prices go up by 50 percent after the removal of subsidies, demand will not decrease by the same amount - demand may go down by, say, 10 or 20 percent). Subsequently, the impact is higher prices for the consumers and higher revenue for the government.”
The idea of subsidizing services is not unusual, Varamini said, but the Saudi efforts play a specific role in moving the country away from a dependence on oil as oil prices slump.
“Subsidies are more common in developing countries, but most industrialized countries use subsidies as well.” Varamini said. “Subsidies for agricultural products and fisheries, for instance, are very common in the U.S. as well as in many European countries and Japan. These subsidies are to help farmers and fisheries to maintain their livelihoods.”
However, in the case of the Saudi price assistance, Varamini suggested that, under pressure from historically low crude oil prices, the Saudi leadership is seeing these subsidies as having outlasted their usefulness.
“Removing subsidies is a response to a tight budget with lower oil prices.” Varamini said.
The current round of subsidy cuts is by no means the first of its kind. Reports from 2015 and 2016 show the government working to soften the blow of subsidy decreases and other financial changes impacting Saudi citizens. More correction, experts imply, may be necessary for turning Saudi from an oil-rich country into one that stands on its own without huge oil revenues.