Saudi budget and prospects for reform: King Salman approved the government’s $295bn budget for next year on December 18, which he said was “the largest budget in the history of the kingdom of Saudi Arabia”.
Government revenues are forecast to be SR975bn ($260 billion) next year, 9% higher than the figure for this year, but still leaving a deficit of SR131bn (4.2% of GDP). That is slightly lower than the shortfall of SR136bn (4.6% of GDP) for this year, according to Ministry of Finance figures.
Budget deficits have been falling in recent years. In 2017 the deficit was SR238bn or 9.3% of GDP. The government was helped in its efforts to keep its deficit under control this year by a 39% rise in oil revenues and a 12% rise in non-oil revenues to SR287bn. Next year’s non-oil revenues are predicted to rise further to SR313bn ($ 83.5 billion), but that is still far short of the target the government has set itself of SR530bn ($ 141 billion) in non-oil revenues by 2020.
While approving the budget, King Salman said the aim “was to support economic growth in line with the objectives of the Vision 2030 economic reform strategy”. The first stage of the plan was spelt out in greater detail in a National Transformation Plan which set several targets for 2020. However, according to analyst Dominic Dudley, the reality of the Saudi economy these days is that “its reform efforts are being pursued in word more than in deed”.
In 2016 when the government unveiled Vision 2030 it was with the intention of re-modelling its economy and moving it away from its historical reliance on oil revenues and state-funded activity. The aim was for the private sector to step in and be the engine of growth and create jobs for locals, helped along by high inward investment
These days foreign capital is looking elsewhere, with international investors withdrawing money from the stock market. While there was a rise in inward investment in the first half of 2018 compared to the dire performance in 2017, it still remains very low. Other economic indicators are also troubling for Riyadh. Unemployment, for example, has been creeping up and is now at 12.9%, with no clear path to reducing it to the government’s previously stated target of 9% by 2020.
Overall economic activity seems as reliant as ever on government spending, the vast majority of which comes from oil revenues. Oxford Economics points out that the purchasing managers index – an indicator of activity in the non-oil economy – for January to October posted its worse performance in almost eight years.
All that helps to explain why the government is planning to boost spending next year. Expenditure of SR1.1 trillion ($295bn) has been pencilled in for the coming year, some 7% higher than the projected total for this year.
The government is also extending for another year the SR1,000-a-month “cost of living” allowance for public sector employees, alongside smaller monthly payments for pensioners and students. Al Rajhi Capital estimates this programme will cost the government SR22bn ($5.9 billion) next year.
Riyadh has been broadening its income base away from oil, with measures such as a value-added tax (VAT) on some goods and levies on expat workers and their employers. It also collected SR 50bn ($13.3 billion) in settlements from people accused of corruption this year.
The authorities have forecast oil revenues of SR662bn ($ 177 billion) for next year (up from SR608bn in 2018), which suggests an average oil price of around $80 a barrel. However, oil prices are currently below $60 a barrel and few expect a sustained rise over the coming year. Oxford Economics thinks Saudi Arabia’s oil revenues will in fact fall next year to SR580bn ($155 billion). If oil prices drop to $55 a barrel by the end of 2019, which is Capital Economics’ prediction, the deficit could end up closer to 10% of GDP.
January 1, 2019