Dubai: The Saudi cabinet on Monday approved plans to move the country away from its excessive reliance on oil by diversifying its economy and cutting the current subsidy regime.
The sweeping reforms known as Vision 2030 focuses on privatisations, further reductions in subsidies, the sale of part of state oil giant Aramco and the creation of a giant $2 trillion Sovereign Wealth Fund.
The vision emphasised a five-year fiscal consolidation framework, coupled with pro-growth structural reforms and a targeted increase in non-oil revenues. These include PPP (Public-private partnerships) projects, privatisation, further review of energy, water, and electricity prices, review of current levels of fees and fines, introduction of new fees, introduction of a VAT and introduction of excise taxes on tobacco and soft drinks.
In 2015, the Kingdom’s budget deficit was approximately 16 per cent of GDP with the state spending reaching 13.4 per cent higher than expected 860 billion riyals. The 2016 budget targets to cut the deficits to 326 billion riyals (13 per cent of GDP) through a combination of spending cuts and augmenting of additional revenue sources other than oil.
“Saudi Arabia is showing strong commitment to fiscal and structural reforms. Under the current economic environment, these efforts are commendable. It is absolutely necessary to have a vision and a set of medium term targets for the economy. We believe Saudi is on the right track,” said Masoud Ahmad, director of the IMF’s Middle East and Central Asia department.
The vision announced yesterday largely focuses on the increased pace of fiscal consolidation and diversification of government revenues. According to plans announced by the Deputy Crown Prince Mohammad Bin Salman, the government is targeting to raise $100 billion in additional non-oil revenue annually by 2020. The bulk of this increase in non-oil revenue would come from the restructuring of subsidies which could generate $30 billion per year. VAT implementation, a Green Card-like programme and a plan to allow corporates to hire foreign workers in excess of their official quotas could bring in $10 billion (1.6 per cent of GDP) a year by 2020.
The government revenue shortfall from decline in oil price has forced Saudi Arabia to tap into its sizeable reserves. Reserves dropped to under $600 billion earlier this year. The Saudi government also resumed long-term domestic debt issuances for the first time since 2007, with total issuances about 100 billion riyals so far while $10 billion was recently borrowed a global consortium of banks.
Analysts said an efficient subsidy management system will make material difference to Saudi government finances but some are doubtful of the implementation in such short span of time.
“The suggestion that the changes could be accompanied by partially offsetting cash transfers to poor households suggests policy-making caution. We do not think such a redistributive system could be technically put in place in a short time span,” said Jean-Michel Saliba, MENA Economist of Bank of America Merrill Lynch.
“The Saudi 2030 vision, as articulated by the deputy crown prince and consequently approved by the cabinet, will probably be viewed positively by market participants. Plans for improved governance, transparency, structural reform, and evolving social contracts should underpin the outlook for many industries. Details are still scarce, but the ambition is evident and the government appears confident in embracing technology and cultural development in the execution of its plans,” said Mohieddine Kronfol, CIO, Global Sukuk & MENA Fixed Income, Franklin Templeton Investments ME (Ltd).
While the ambition behind the vision is widely seen as a giant leap for the conservative state driven Saudi economy, the implementation is likely to remain a huge challenge.
“The real challenge for Saudi Arabia will be the implementation of targets in the Vision. The Kingdom needs to build institutional capacity to achieve these targets,” said IMF’s Ahmad.
