The IMF and Saudi Arabia’s Money Issues

The IMF and Saudi Arabia’s Money Issues

On Sunday, October 25th, 2015, it was reported that the International Monetary Fund, in their World Economic and Financial Surveys Regional Economic Outlook report on the Middle East said that Saudi Arabia was within five years of going through all of their existing money if the price of oil continued to sit at the current rate. With the current rate of oil per barrel hovering at about 49 dollars, the Saudi Government is spending more than they are bringing in from oil, and thus, according to the IMF, they would have spent their existing finances shortly, if the price of oil is not increased. According to reports, “”For the region’s oil exporters, the fall in prices has led to large export revenue losses, amounting to a staggering $360bn this year alone,” Masood Ahmed, the IMF’s Middle East director, told reporters in Dubai” (Yahoo, 2015).

This story may come as a surprise to many, particularly given the high level of oil reserves and oil production that Saudi Arabia has, along with the multi- billions that they currently have in their accounts. However, what is important to note is that while Saudi Arabia continues to make billions off of oil, and while OPEC states have made the oil production process quite streamlined (and very profitable for the various countries in the international organization), Saudi Arabia’s high expenditures on social services, development, and the military are the reasons why they would need additional revenue (or higher oil prices) in order to alter the financial situation that they are currently facing.

However, this actually might be unlikely in the near future. OPEC can rather easily decide to decrease the supply of oil in the international community, which in turn would lead to greater demand, and thus a reflection in higher prices. To many, this would be a simple solution to Saudi Arabia’s financial situation. But for Saudi Arabia, this option might actually do more harm than good in the long term. The reasons have to do with their overall interest in ensuring a market for the oil, as well as their international relations with neighboring states.

With regards to oil as it relates to the international market, if the price of oil increases, then companies within non-OPEC states may invest more in their own oil exploration and production (i.e. the United States and Canada), and this in turn could reduce the need for OPEC oil in the future. In addition, if prices are to increase, then there could be a greater demand for alternative energies, which would also hurt the oil market in upcoming decades. So, for countries such as Saudi Arabia, they may view it as best to keep supply high, at least for the time being.

One also has to look at the global relations that Saudi Arabia has with other countries. One of their most hostile relations in the region is with Iran, who is also reliant on oil sales. With the current sanctions on Iran, as well as a hurting domestic economy, Iran would prefer higher prices for oil. But with Saudi Arabia pushing for increased oil supply, this is reducing the profits that Iran can make in oil. In addition, Saudi Arabia want to remove Bashar Al-Asad from power in Syria, and one way to put pressure on him is through reducing the amount of money that he can make on oil. For example, “The International Monetary Fund’s regional report  also found that: Syria’s economy has contract as much as 60 percent since the start of the conflict.”

So, Saudi Arabia is keeping oil supplies at high levels on purpose. Now, they can also cut social services in the country, something that is costly, but because they are an authoritarian regime, providing social services is a strategy to ensure that citizens remain happy with their current living standards. It will be interesting to see the approach that the Saudi government takes with regards to this financial situation, although there may still be some time before they cut oil production, given the need for the government to ensure long term interest in their oil, as well as the effects of lower oil prices on particular states in the region.

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