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No free riyals

28 May 2012 By Una Galani

Saudi Arabia’s foreign aid bill is mounting. Egypt Jordan, Bahrain, Oman and Yemen – the Arab spring has elicited a string of pledges of loans and grants from the oil-rich kingdom to its troubled, resource-poor neighbours.

Charity is a key tenet of Islam and the kingdom is an established donor. The Saudi Fund for Development supports infrastructure projects, predominantly across the Islamic world. The Saudi central bank reported that foreign aid totalled $3.7 billion or 0.8 percent of GDP in 2010. That’s roughly in line with the United Nations’ target.

The real cost of the foreign aid bill is likely to be much higher. That now includes bilateral pledges related to unrest that will come to more than $12 billion, assuming the Saudis contribute one quarter of the $20 billion package promised by Gulf countries to Oman and Bahrain. Outsiders have little knowledge about the timing and nature of such aid; economists treat Saudi’s helping hand as an off-balance sheet item.

Saudi’s expensive foreign policy probably isn’t too unpopular at home. The aid is a clear expression of Arab solidarity while also shoring up support for the region’s club of kings. And while GDP per capita is lower in Saudi than in other, less populous Gulf countries, the kingdom has pledged massive domestic spending that should be sufficient to deal with its own chronic housing shortage and help tackle high unemployment. At the current oil price, and with low debt, Saudi can afford to be generous with its wealth.

The recipients are more of a worry. Aid funnelled through the International Monetary Fund typically comes with conditions – a fiscal plan that is supposed to lead to financial self-sufficiency. Even if the bilateral aid to Egypt is meant to be temporary and funds for Bahrain and Oman are designed to boost vital capital spending, Saudi’s largesse could easily encourage poor fiscal discipline and, in turn, greater financial dependence.

With the kingdom’s ambitious desire to create a Gulf Union strongly opposed to Iran, Saudi could find that its mounting foreign largesse becomes tomorrow’s permanent liabilities.

 

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