Four Years after Massive War Expenses Saudi Arabia Gets Its Second Wind

By Curtiss, Richard H. | Washington Report on Middle East Affairs, September 1995 | Go to article overview

Four Years after Massive War Expenses Saudi Arabia Gets Its Second Wind


Curtiss, Richard H., Washington Report on Middle East Affairs


Four Years After Massive War Expenses Saudi Arabia Gets Its Second Wind

By Richard H. Curtiss

The year 1995 will go down in Middle East history as the year that Saudi Arabia got its second wind. On Aug. 2 King Fahd Bin Abdul Aziz Al Saud announced the formation of a new 22-member cabinet consisting of five members of the royal family and 17 technocrats. Of the latter, 14 hold Ph.D.s and 3 hold master's degrees. Fifteen of the cabinet members, including Foreign Minister Prince Saud Bin Faisal Al Saud, received one or more of their degrees from American universities.

Of greater interest to the people of Saudi Arabia, and to more than half a million Americans whose jobs depend upon U.S. trade with that country, was King Fahd's statement, first published in Kuwait on Aug. 7, that Saudi Arabia's financial crisis is over. After slashing the national budget by some 20 percent since the end of the Gulf war, Saudi Arabia will balance its budget in 1995.

This is partly because the price of petroleum, which had dipped to as low as $13 a barrel after the war, stabilized at midyear at between $17 and $18 a barrel. More important, the Saudi government was able to make deep cuts because a large part of its budget consists of extraordinarily generous cradle-to-grave social benefits for every Saudi national.

These include free medical care for all citizens and free education through the university level, neither of which was touched. Not only can every Saudi citizen who qualifies attend the country's network of universities at no charge, but students are given a $270 monthly allowance for living expenses and those from rural areas are provided free housing as well.

In making its "Draconian" budget cuts, the Saudi government did not touch such "basic benefits" as these, but instead focused on privileges that had accrued over the years that in fact were subsidizing waste. Cuts were made in the wheat subsidies that had encouraged farmers to produce larger crops than the country could absorb and than the water table could sustain. Subsidized gasoline and electricity costs were doubled. Saudis who have paid a flat rate for telephone service now will be charged for the long-distance telephone calls they have been making at no additional cost for years. Similarly, subsidized domestic airfares were raised.

When the cuts were announced, pessimistic government officials braced themselves for a public backlash. In fact, the opposite occurred. Saudis who had worried about the subsidized waste, and whether the government would be able to pay its bills, breathed a sigh of relief. Private savings that had been reposing in foreign banks or had been invested in foreign securities or foreign real estate began finding their way back to Saudi Arabia. Total shares of privately owned stocks in Saudi companies rose to $6.6 billion, and the government's foreign exchange reserves climbed from $5.7 billion at the end of 1993 to $6 billion at the end of 1994.

By mid-1995 the government had gained enough confidence to make its cabinet shuffle, replacing some ministers who had been in office for nearly a generation. King Fahd also was emboldened to issue his confident financial assessment, and invite foreign bankers to come see for themselves.

The actions ended a strange crisis of confidence in the always remarkable Saudi history. It was a crisis that should never have occurred in a country sitting on one-quarter of the world's proven oil reserves and which, up to that time, had done everything right in bringing its people from illiteracy and underdevelopment to one of the highest per capita GDPs in the world.

The story began in the early 1930s when, on the recommendation of H. St. John Philby, a British adviser, King Abdel Aziz Ibn Saud, founder of the modern kingdom of Saudi Arabia, turned his back on Britain, France and the other European countries contending for power and influence in the Middle East and placed his bets on the United States.

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