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Saudi Arabia’s $10bn IMF loan and its implications

August 31, 2017 at 2:37 pm

King of Saudi Arabia Salman Bin Abdulaziz Al-Saud on 1 March 2017. [Bandar Al-Galoud/ Saudi Kingdom Council]

The news that Saudi Arabia is applying for a $10 billion loan from the International Monetary Fund (IMF) is shocking. The country is the world’s largest exporter of oil, so why does it need a loan from the IMF? This move is likely to cause the collapse of the Saudi economy slowly but surely.

The past few years have already given an indication that the economy in Saudi Arabia is in trouble, and that there shall soon be a need to shift it toward non-dependence on oil. The price of crude oil has been the biggest contributor to this slowdown, with a fall from $147 per barrel in 2008 to the current $47. The high oil price led the Saudis to believe that they would enjoy massive oil revenues for a very long time.

However, instead of investing in the infrastructure, food technology, information technology and human resources while the going was good, investment was diverted overseas, especially to the West. Saudi Arabia continued to import even basic foodstuffs in order to provide citizens with a comfortable life. Foreign nationals were engaged to carry out specialised as well as menial roles. Not even basic industries were developed, never mind advanced space research, bio-technology, IT and defence.

The Saudis are now panicking about the future of their country. In a state known hitherto for tax-free living, the government has introduced a family tax of 100 Saudi riyals ($26.66) per member per month and is introducing value added tax (VAT) from next January. Subsidies on basics like fuel, water and electricity have been withdrawn.

Why take a loan from the IMF?

We have to wonder why Saudi Arabia needs a $10 billion loan from the IMF when, on paper at least, it is among the richest nations in the world. Its oil exports in 2016 were valued at $136.2 billion, 20.1 per cent of the world market in crude oil. The government also holds an estimated $750 billion in US Treasury securities. With all this wealth at hand, why ask for a loan?

Read: Saudi Arabia seeks Islamic tourism boost

The fact is that the Saudis may not have ready access to their $750 billion. America’s Justice Against Sponsors of Terrorism Act was passed by Congress in 2016. The law now allows families to file a case against Saudi Arabia for “supporting” terrorism. On 20 March, 1,500 survivors and 850 relatives of victims of the 9/11 attacks filed a class action lawsuit against the Kingdom of Saudi Arabia. The plaintiffs allege that the government of Saudi Arabia had prior knowledge that some of its officials and employees were Al-Qaeda operatives or sympathisers. The government in Riyadh has denied any such involvement and asked the court to reject the $100 billion lawsuit. CNBC reported that official data from the US government is suggesting that Saudi does not have immediate access to the Treasury securities, pending the result of the legal action. In short, coupled with the downward trend of its economy, this move has left Saudi Arabia with little choice but to approach the IMF.

The loan and its conditions

The IMF was established after the Second World War to help the European nations rebuild their economies. The IMF then started to fund African countries as well.

Read: IMF lowers economic forecasts for Egypt and Saudi Arabia

Loans from the IMF don’t come cheap. In the long-run, they bleed the local economy to death. Conditions of such loans include the following: the beneficiary government has to remove the subsidies given to basics such as fuel, water and electricity; open its markets to the world by removing trade barriers and allow western corporations free access to raw materials; devalue its currency. Countries are thus opened-up to capitalist vultures who can bleed the economy. It is also suspected that the loans reward politicians’ Swiss bank accounts in return for the transfer of their countries’ fixed assets.

The IMF and the destruction of Africa

The IMF has a record of destroying almost all of the countries which it has financed. Consider the continent of Africa, which has been blessed with natural resources: gold, diamonds and other precious stones and metals; cocoa, vanilla, coffee, tea, oil; you name it, Africa has it.

The IMF approached African countries and promised them help to develop by exploring for resources. The best brains at the IMF ensure that big business gets the best out of Africa and keeps the Africans poor. With so many decades of “helping” African countries, the world can witness who the real beneficiaries are.

The richness of resources under their feet entitled the ordinary Africans better access to education, healthcare, housing and jobs. The continent, though, is seen as a hub of poverty, corruption, civil wars, insurgencies and disease.

The IMF game plan

The IMF identifies a country with resources and approaches the government with offers of huge loans for its economic development. The money doesn’t actually go directly to the country in question, but is paid to the companies building the infrastructure. The latter includes power plants, roads, dams, highways, airports, mega-electricity projects and suchlike. These projects don’t help the poor, they cater for elite businesses.

Read: Saudi Arabia cuts deficit by half in first quarter 

When the government can’t pay its debts, more loans are provided by the IMF with even stricter conditions, such as opening up the economy to large corporations who work like vultures to tear it apart, doing more harm than good. By the time that the government realises that it is killing its own economy, it is too late; it has no option but to be enslaved by the capitalist corporations. If they rebel against the system, they are denounced as terrorists, war is declared and the country is decimated. A country can go from relative stability to Ground Zero in no time at all, and through no fault of its own.

Implications for the future

Even with all its shortcomings, Saudi Arabia is seen as a financial messiah by individuals, organisations and nations. Millions of Muslims from India, Pakistan, Bangladesh and Indonesia depend on the Saudi system to feed their families. The Muslims in India are economically backward, as was highlighted by former Chief Justice Rajinder Sachar’s 2006 report. Getting a passport and leaving for Saudi Arabia was the dream of every individual up until a few years ago. This trend is reversing and workers are now returning from Saudi to their homeland without jobs. This has led to a severe crisis among families in India which have lost their main income source.

Educational organisations in India and other countries have been dependent on charity from Saudi Arabia. Although much of the big donations for charitable projects overseas have already dried up, IMF directives will now mean that regular charity payments will also be reduced, or cut altogether. In a country like India, this will have a significant negative impact on poor Muslim communities.

Read: Saudi Arabia transfers $31m for PA budget

The government in Saudi Arabia has been a generous donor for boosting economies and supporting Muslim countries across the world, especially in Africa. With this IMF loan and its conditions, Riyadh will not be able to continue with such assistance. This will also affect places like Palestine and similar global Islamic causes.

The IMF loan has serious implications for Saudi Arabia and all who rely on the state. The Islamic leadership across the Muslim world should deliberate about the benefits and costs of such “support” from the fund. The economic future of the Muslim Ummah could depend on it.

This article was edited at 14:00 BST on 5 September 2017 to clarify that “Saudi does not have ready access” to Treasury securities.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.