Guru Gyan
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Guru Gyan

Once There Was A Crash In Oil Markets…

The economy of Saudi Arabia is struggling but the pandemic doesn’t seem to be the only reason behind the battered economy.

The Numbers

Saudi Arabia’s General Authority for Statistics released their country’s gross domestic product (GDP) figures on Wednesday and it did not look good. The data showed that Saudi Arabia’s GDP declined by 7% year over year in the second quarter.

The oil sector plunged by 5.3% while the non-oil sector slumped by 8.2% because of the restrictions and lockdowns to control the pandemic. The statistics authority said that the value of exports of goods and services declined by 55.8% from a year earlier, mostly because of a 61.8% dip in the value of oil exports.

The numbers showed one more shocking thing too — The Kingdom’s unemployment rate surged to 15.4% in Q2, hitting a record high and 3.1 percentage points higher than in the same period of last year. Among the unemployed Saudis, 63.1% belonged to the age group of 20–29 years.

Why The Weak Numbers?

If you think that this is what is happening in most of the countries because of the Covid-19 pandemic, then you are not wrong. The pandemic did do its damage to Saudi Arabia but that alone is not the reason.

The price war initiated by the Kingdom also played a huge role in the downfall of the economy. The price war was initiated by the Kingdom’s facto leader, Crown Prince Mohammed bin Salman (MBS) and this led to the prices of global benchmark crude pluning below $20 a barrel in April.

A quick recap: The oil prices plummeted after Saudi Arabia flooded the market with oil during the worst demand crash in April. When the entire world was under lockdown, people stopped going out and less oil was needed everywhere. When the demand itself was low, Saudi Arabia thought that would be a good time to increase its production. When there is low demand and over supply of a product, price of that product declines. That is exactly what happened.

Can you see where we are going with this? Saudi Arabia derives roughly 80% of its revenues from oil. So, when the price of oil goes down, the revenue earned from selling oil will go down as well. Even though a truce among the world’s top producers made the oil prices go above $40 a barrel, they are still nearly 40% lower than where they started the year. And the current oil price has left the country with a huge budget deficit of 11.4% of GDP.

Looking Ahead

If the economy of Saudi Arabia has to get back on track, it needs to have higher oil prices. The International Monetary Fund (IMF) projected that the Kingdom needs oil prices at $76.10 to achieve fiscal breakeven in the current year.

The decline in oil prices forced the Kingdom to take measures like tripling the value-added tax (VAT), reducing payouts to poorer households and discontinuing cost-of-living allowances for state workers. However, the economists forecast that a rebound in consumer activity after the end of lockdown might not be there for a longer period because of the aforementioned unpopular measures. So, the austerity measures won’t help the economy much in the long run.

The other thing that Saudi has to deal with is the unemployment rate. The country’s unemployment rate was stable for several quarters before spiking to 15.4% in Q2. The unemployment rate shot up in spite of a government stimulus program that covered 60% of salaries for many Saudi workers.

S&P Global Ratings in a statement last week said, as quoted by Bloomberg, A demographic bulge of young people requires about 150,000 new jobs per year, a number “too large to be supported by public-sector employment and petroleum revenue alone.” And this statement explains how the plunge in oil prices has become the reason for everything — from the plunge of the economy to the loss of jobs.

In conclusion, Saudi is highly dependent on oil and the war that the country initiated hasn’t worked well for the country itself. For now, Saudi has to focus on reducing its oil supply and introduce more measures to support the economy and also, focus on other sectors that would make revenue for the Kingdom than only relying on oil reserves.

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