Throwing money at the street

[Arain007]

Throwing money at the street

The Economist


IF YOU don’t own your citizens’ loyalty, perhaps you can rent it for a while. That seems to be the mantra of Arab regimes at the moment. Throughout the Middle East and north Africa, they are showering their citizens with money and gifts, like Hosni Mubarak’s policemen hosing down protesters with water cannon in Tahrir Square.

Governments in the region have long controlled prices of food and fuel. If you fix domestic prices and world prices rise, subsidies will increase even if the regime does nothing. Egypt keeps bread prices at a few cents a loaf. With wheat prices soaring, Mr Mubarak promised that bread would stay cheap, raising subsidies which now run at over $2 billion a year. The new government can hardly break his promise.

Fuel subsidies are bigger. In 2009 they amounted to roughly $150 billion in the Middle East and north Africa. Oil then cost just over $60 a barrel. It is now almost double that, so if prices were to stay at the same level regional fuel subsidies would rise to almost $300 billion this year. That is 7.5% of the area’s GDP, a vast amount. The only way to prevent such a jump would be to increase domestic fuel prices. But no countries have been brave enough to risk that except Qatar and Iran.



Governments are not merely sitting by, watching existing subsidies shoot up. To buy off economic discontent, they are introducing new handouts (see table). The commonest is the old-fashioned wage rise. Saudi Arabia is boosting public-sector pay by 15% as part of a $36 billion spending splurge. Egypt, Jordan, Libya, Oman and Syria are all raising wages or benefits for public employees, though whether the 150% pay rise for Libyan civil servants will actually be paid is another matter. The wage increases in Jordan and Syria are worth 0.4-0.8% of GDP, which is not trivial. In addition Muammar Qaddafi of Libya, the king of Bahrain and the emir of Kuwait are offering one-off handouts to stop people demonstrating. These are princely, worth $4,000 per person in Kuwait and $2,500 per family in Bahrain.

Some governments have added shiny new subsidies. Kuwait, for example, is offering free food to everyone for 14 months. Bahrain says it will dish out up to $100m to help families hit by food inflation.

Many more are boosting social-welfare schemes. Jordan, Syria, Tunisia and Yemen have each increased the budgets of national programmes that give cash and benefits to the poor by just under 0.5% of GDP. Such programmes typically account for 2% of GDP, so the extra spending increases the size of the schemes by a quarter. A few countries have cut taxes on food or fuel to offset price rises. Lebanon, for example, has cut fuel excise tax by over 1% of GDP.

But far and away the most lavish sums are being spent or proposed by oil and gas exporters on infrastructure. Inevitably, the grand-daddy of such proposals is Saudi Arabia’s. The government is talking about increasing investment by half a trillion dollars, on top of the $36 billion stimulus plan. Algeria is proposing to spend $156 billion on new infrastructure projects between now and 2014, plus $130 billion on projects already under way. Oil-flush Abu Dhabi says it will finance more infrastructure projects in the poorer princedoms that make up the United Arab Emirates. The speaker of the UAE’s parliament says the state’s sovereign-wealth fund should disburse a further $40 billion to stimulate the economy and cut interest rates.

Let’s worry later

It is too early to gauge the effect of all these measures. To the regimes implementing them, the political results matter most. These look modest. Wage and subsidy rises did not save Mr Mubarak. First reactions to Saudi Arabia’s spending splurge have also been dismissive, to judge by social-media sites. “They are still stuck with the old mentality: giving away money!” said one. On the other hand, the measures may have bought time for the regimes there, and in Bahrain, Jordan and Syria.

The economic effects look clearer. Most governments probably have enough money to spend. Saudi Arabia certainly does. Each $1-a-barrel increase in the price of oil adds about $3 billion to the Saudi treasury, implying that the increase in oil prices this year could add roughly $100 billion to revenues. Saudi Arabia is also increasing oil production, so it could spend even more.

The position of oil importers is more precarious. They came through the global financial crisis with reasonable foreign-exchange reserves, falling debt-to-GDP ratios but rising budget deficits. If nothing else goes wrong, Egypt and Tunisia should be able to finance some extra spending. But their economies are suffering from an external shock from lost tourist revenues and are vulnerable to a downturn in demand: GDP growth in Egypt is forecast to fall from over 5% in 2010 to below 4% this year. Their fiscal position could deteriorate fast.

Everywhere the changes will increase the role of the state in the economy, which was too large already. They are already reversing the modest economic reforms of the mid-2000s. Then, Egypt lowered import tariffs, opened up its foreign-exchange market and cut taxes and red tape, so that by 2007 it was the top reformer in the World Bank’s “Doing Business Report”. Now it is 94th. Saudi Arabia also opened up, more cautiously. The massive stimulus measures will do nothing to loosen the economic grip of the House of Saud.

Most Arab regimes are fighting for their lives, in some cases literally. They have more pressing things to worry about than the economic consequences of their actions. But consequences there will be. And they may not be good ones.