Riyadh: Saudi Arabia vision to wean itself off of oil is promising to show green shoots.
In the most detailed budget in its history, the kingdom outlined on Thursday a strategy to balance its books by 2020 by bolstering revenues from non-oil industries to 50 per cent and containing growth in spending. The plans are a culmination of a year that saw the biggest overhaul Saudi history, as the world’s biggest oil exporter pledged to boost the role of private businesses and reduce some state safety nets.
Austerity measures including cutting fuel subsidies and lowering wages of public employees helped the kingdom narrow its budget deficit in 2016 to 297 billion riyals ($79 billion), below official forecasts, the Finance Ministry said in a statement on its website. Next year, the shortfall will drop another 33 per cent to 198 billion riyals ($53 billion) even as government spending increases by a projected 8 per cent, to 890 billion riyals.
“The 2017 budget shows a shift from deep retrenchment and austerity to one that is focused on supporting critical areas of growth in the economy,” said Monica Malik, the chief economist at Abu Dhabi Commercial Bank. “The expansionary stance would give the economy a breather but in the long term there will be a need for further fiscal reforms to reduce the deficit.”
The budget statement includes Saudi Arabia’s military spending for the first time, which show plans to lower expenditures to 191 billion riyals in 2017 from 205 billion this year even as the kingdom continues to lead a coalition fighting rebels in Yemen.
Unpopular measures
In April, Deputy Crown Prince Mohammad Bin Salman, the son of the monarch King Salman, rolled out the so-called Saudi Vision 2030 plan to end the kingdom’s “addiction” to oil. As the year progressed, the government implemented a series of unpopular measures — including lowering energy and water subsidies, raising visa fees and cutting the take-home pay for civil servants.
Pressure on Saudi Arabia has eased this year as the revival in oil prices alleviated pressure on revenue, more than 60 per cent of which is derived from crude sales. In 2016, the country’s revenue came in at 528 billion riyals, surpassing the 514 billion riyals forecast a year ago. Non-oil revenue accounted for 38 per cent, showing the government is starting to rely less on the commodity that just a few years ago amounted to 90 per cent of state earnings.
Oil revenue
Saudi Arabia expects oil revenue to jump by 46 per cent next year after a deal between the kingdom and other producers to curb output drove up global prices. The kingdom expects to collect 480 billion riyals ($128 billion) from oil sales in 2017, compared with 329 billion this year, the Finance Ministry said.
“Our economy is solid and is strong enough to face current economic and financial challenges,” Saudi King Salman said in a televised speech. “The budget “comes during tough economic conditions in most countries, which included slow economic growth and low oil prices that left an impact on our country. The government sought to tackle these changes in a way that does not impact the plans that we have approved.”
Fiscal prudence
The government said it is planning a “balanced” national budget by 2020, though its main scenario sees a small budget surplus of 20 billion riyals in 2019, state-run Arabiya TV reported. The government expects to spend 890 billion riyals in 2017 — 8 per cent higher than this year, with revenue also rising to 692 billion riyals from 529 billion.
The 2016 shortfall was 9 per cent lower than the official estimate, “which sends a strong message that fiscal discipline is taken seriously and on the path to a balanced budget by 2020,” said John Sfakianakis, director of economic research at the Gulf Research Centre Foundation, adding that the 2017 spending number should also boost growth. “It’s clearly a budget that is intended to bring confidence and growth on all fronts of the economy,” he said.
Major economic policies and targets
Following are major economic policies and targets described in Saudi Arabia’s 2017 state budget:
ENERGY SUBSIDIES: The government plans to gradually phase out subsidies on energy, although needy citizens will receive “direct cash support” to help them manage, the budget statement said without specifying when this would happen.
DEBT: Over the next four years, Saudi Arabia plans to diversify its debt sales, both domestically and internationally, to include sukuk. It will also seek to sell instruments denominated in different currencies, depending on market demand and conditions.
PRIVATISATIONS: The National Center for Privatisation will determine in 2017 the possibility of privatisations in various sectors including public utilities, sports, health, education, transport and municipal services.
SALES TAX: The government will complete arrangements for the introduction of value-added tax, which is to begin at a 5 per cent rate in 2018.
PUBLIC-PRIVATE PARTNERSHIPS: Seventeen government agencies have identified 85 potential projects which could be suitable for cooperation between the public and private sectors. The budget document did not elaborate.
BALANCED BUDGET: The government continues to work towards achieving a balanced national budget in 2020.
EFFICIENCY SAVINGS: A review of the five highest spending government ministries by the Spending Rationalisation Office resulted in savings of around 80 billion riyals ($21.3 billion). It did not identify which ministries were part of the review. Additional initiatives aimed at increasing the efficiency of capital and operational expenditures will be announced in future.
ACCOUNTANCY: All government agencies will change their accounting practices to rely on the accrual principle, with the move expected to be completed before or during 2020. Under the accrual principle, transactions are recorded in accounts during the time period in which they occur, instead of when the cash flows relating to them happen.
EXPENDITURES: The Ministry of Finance will work with other government agencies to prepare a framework for expenditures over the medium term, a period defined as between three and five years. A road map to allow for a full transition to this framework will be developed, the budget statement said, without providing a time frame for when this would happen.
FINANCIAL PLANNING: Plans and models will be established which will help facilitate the preparation of the 2018 and subsequent budgets.
