Dubai: Saudi Arabia is likely to bridge its widening fiscal gap by resorting to domestic borrowing in the near future, according to economists and the International Monetary Fund (IMF).

The country is expected to face a larger than estimated budget deficit this year due to the sharp decline in oil prices combined with rising government expenditure on account of increased welfare spending, government handouts to its employees and a jump in defence expenditure on account of the conflict in Yemen.

While Bank of America Merrill Lynch economists estimate Saudi budget deficit to exceed 17 per cent of GDP in 2015, the IMF puts the deficit figure at a slightly higher rate of 20 per cent of GDP.

Analysts expect, although the government has the cushion of substantial external reserves, the rising fiscal gap could warrant domestic borrowings. Despite the visible drop in government deposits with Saudi Arabian Monetary Authority (SAMA), analysts do not anticipate any sharp pullback in government spending.

Surge in fiscal deficit

The IMF in its recent Article IV consultation with Saudi Arabia has concluded that the government spending in 2015 is expected to remain elevated despite a sharp decline in oil prices which could put pressure on government finances resulting in a surge in fiscal deficit.

“Government spending in 2015 is expected to remain strong, partly due to a number of one-off factors, while oil revenues have declined. As a result, IMF staff projects that the government will run a fiscal deficit of around 20 per cent of GDP in 2015,” said Tim Callen, team leader of the IMF Article IV consultation.

The rapid drawdown in reserve assets suggests that sooner than later the government is likely to opt for domestic borrowings. “The possibility of the government resorting to debt to plug the significant fiscal shortfalls can provide a boost to sukuk issuances going forward. On a medium-term note, opening Saudi sukuk to foreign investment similar to the domestic stock market will likely jump-start sukuk trading in the secondary market that is currently negligible,” NCB said in a recent note.