What’s Behind Saudi Arabia’s Changed Foreign Aid Approach?

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Saudi Finance Minister Mohammed Al-Jadaan announced a shift in Saudi Arabia’s approach to foreign aid at the annual meeting of the World Economic Forum in Davos in January. He said that the Kingdom is changing the way it provides assistance to allies, moving away from giving direct grants and deposits without conditions. “We used to give direct grants and deposits without strings attached and we are changing that. We are working with multilateral institutions to actually say we need to see reforms,” the minister said.

Although he did not specify the new conditions, Saudi Arabia is currently supporting its old allies Egypt and Pakistan. It seems that Riyadh has not received satisfactory results and feedback from its foreign aid in recent years. For years, foreign aid has been a tool of foreign policy for Riyadh, and it does not intend to halt it. However, it will modify its approach according to circumstances, which can be explained in three areas: economic, political, and social areas.

Economic obligations

After King Salman took office and Crown Prince Mohammed bin Salman was introduced, Saudi Arabia entered a new and ambitious period that aimed to transform both social and economic conditions. The country set ambitious targets, including increasing women’s workforce participation from 22 percent to 30 percent, moving from the world’s nineteenth to fifteenth largest economy, and raising one trillion Saudi Riyals for non-oil government revenue. The Kingdom also hopes to raise non-oil exports in GDP from 16 percent to 50 percent, increase foreign direct investment from 3.8 percent to 5.7 percent, and cut unemployment from 11.6 percent to 7 percent by 2030.

However, financing these projects is challenging. In addition to the Public Investment Fund (PIF), Saudi Arabia needs to attract foreign investment to complete its projects. Only the mega-project Neom costs $500 billion, which will likely be added to its construction budget in the future. Saudi Arabia’s budget has been in constant deficit for ten years, especially after the collapse of oil prices in 2014. In the fiscal year 2021, the budget deficit was 2.30 percent of the country’s Gross Domestic Product (GDP) and 11.2 percent the year before. Economists estimate Saudi Arabia needs the price of oil to be between $75 and $80 a barrel to balance its budget, which is a risky gamble.

Saudi Arabia is behind schedule in attracting Foreign Direct Investment (FDI). Riyadh’s goal is to attract $100 billion FDI by 2030. According to World Bank data, the amount of FDI to GDP went from 8.5 percent in 2009 to 0.2 percent in 2017. Although this amount has been growing in recent years and reached $19.2 billion in 2022, it has only reached almost one fifth of the target, and only seven years remain. In addition, the six-member Gulf Cooperation Council (GCC) economies will grow this year at half the rate of 2022 as oil revenues take a hit from an expected mild global slowdown, according to a Reuters poll of economists.

These results have forced Saudi Arabia to reconsider its approach to foreign aid and think of alternative ways to meet its financial needs through foreign investment. For this reason, the Saudi authorities have turned from granting aid to investing in different countries to guarantee their national interests and receive returns on multiple capitals. An example of this is Saudi Arabia’s sovereign wealth fund, PIF, which plans to invest 90 billion Saudi riyals ($24 billion) in the broader Middle East and North Africa region to expand its asset portfolio and boost regional economies.

The Saudis have realized that investment is more profitable than foreign aid. When providing financial aid to a country, lack of transparency in recipient governments often results in inaccurate information for citizens or aid being distributed only to certain groups. However, when Saudi Arabia invests in establishing a factory in a country, it creates job opportunities for local workers and helps to increase soft power by producing high-quality products that can last indefinitely, becoming a source of pride for the local community.

Practical achievements

In light of this, Saudi officials have come to realize that financial aid does not necessarily translate to political influence. Although Saudi Arabia has given approximately $85 billion in aid, this amount has not translated into political support for Saudi policies. Despite Saudi Arabia providing financial support to Lebanon, Pakistan, Syria, Egypt, and Yemen (with Lebanon receiving approximately $2.6 billion, Pakistan and Syria receiving $7 billion, Egypt receiving $14 billion, and Yemen receiving $20 billion), Iran has been successful in strengthening its influence in these countries. For instance, Hezbollah openly challenges Saudi Arabia’s influence in Lebanon, and after the 2005 assassination of Rafik al-Hariri, a Sunni politician who symbolized Saudi influence against Iran, Hezbollah gradually lost its political power. Iran’s influence in these countries has only grown after the 2011 Syrian civil war, and Pakistan refused to send its military forces into the war with the Riyadh-led coalition, leading to disappointment of Saudi Arabia. Additionally, Egypt delayed the transfer of Sanafir and Tiran islands, which further frustrated Riyadh. Jordan is also not aligned with Saudi Arabia to the extent that it is suspected of participating in a coup against King Abdullah of Jordan by Prince Hamzah, the King’s half-brother.

Although Saudi Arabia has attempted to use financial aid as leverage to change the behavior of some countries, the outcomes have been mixed. For example, of the aid promised to Egypt, only $1.3 billion have been realized, and it appears that Riyadh, along with the United Arab Emirates (UAE), has more demands to change the behavior of Egyptian President Al-Sisi. To ensure that the aid allocated to Egypt is spent wisely, the UAE has deployed a cabinet-level official to Cairo to closely monitor the reforms. In 2019, Saudi Arabian officials used financial leverage to convince Pakistan’s prime minister not to attend the Islamic Summit in Malaysia, which was billed as a successor to the Organization of Islamic Cooperation. In August 2020, during Pakistan’s disputes with New Delhi over Indian-administered Kashmir, Riyadh asked Pakistan to repay part of a $3 billion loan early, and it froze a $3.2 billion oil credit facility due to disputes.

Finally, there is social pressure to reconsider the policies of financial aid to other countries. Some Saudi citizens are reluctant to see their country’s wealth, which is provided by oil, being used as an ATM for other countries. When they face problems, they do not want their national wealth to go to the pockets of other countries.  “Saudi people see their resources going abroad, while they’re being asked to pay taxes, have their benefits cut, and so on. So, I think this Saudi first stance really serves as a way to both court and contain populism.” said Persian Gulf scholar Kristin Smith Diwan.

Despite having spent billions of dollars in aid to various countries, including its Arab allies, Saudi Arabia has not seen significant returns from its aid. With a new approach, Riyadh plans to turn its aid into political and economic gains through investment return.

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