Saudi King Extends Billions in Handouts for Another Year

(Bloomberg) -- Saudi Arabia’s King Salman extended handout payments worth billions of dollars to citizens for another year to to cushion the impact of rising costs, a decision that may raise questions about the government’s commitment to trimming its wage bill.

The monarch, in a royal order carried by the official Saudi Press Agency, ordered the renewal of the cost of living allowance until a study of the kingdom’s “social protection system” is completed. The package will cost around 40 billion riyals ($10.7 billion), according to the Ministry of Finance.

Crown Prince Mohammed Bin Salman told Bloomberg in October that the government was looking into the best ways to compensate Saudis who need support for the increase in domestic energy prices and the introduction of value-added taxation. Those measures were designed to bolster non-oil revenue but have weighed on consumer demand.

“This shows the government is looking to support the national population,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “But in the long term, a key challenge for fiscal sustainability would be reducing the state’s wage bill.’’

The timing of the decision is also likely to be seen as an attempt by the kingdom’s rulers to shore up domestic support following the international outcry over the killing of Jamal Khashoggi in October.

The state-run Al Ekhbariya TV reported that civilian and military employees of the state will again earn 1,000 riyals a month, while student allowances will surge 10 percent. Finance Minister Mohammed Al-Jadaan said the government will complete its study on the kingdom’s social safety net by mid-2019.

The extension of royal handouts was disclosed shortly before Saudi Arabia releases details of its budget later on Tuesday. The kingdom’s benchmark Tadawul All Share Index fell 0.3 percent at the close in Riyadh.

The one-year allowance payments were initially launched in January to blunt the impact of economic reforms, including subsidy cuts and a new value-added tax, championed by the crown prince under his ambitious proposal to wean Saudi Arabia off oil.

The International Monetary Fund forecast in August that the budget deficit will narrow to below 2 percent of gross domestic product next year -- assuming the allowances aren’t renewed.

©2018 Bloomberg L.P.