Throwing money at the street

Governments throughout the Middle East are trying to buy off trouble.They may be storing up more

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 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.