Dubai: Saudi Arabia’s 2016 budget marks a clear departure from the past and the beginning of a new era in the Kingdom’s public finances both in term of revenue and expenditure outlook.

According to research by the McKinsey Global Institute, Saudi Arabia has the potential to double its GDP and create 6 million additional jobs by 2030. To accomplish this however, the kingdom will have to dramatically reduce its unhealthy dependence on oil.

Economists and analysts say, the structural reforms envisaged in the budget points to a series of policy reforms that will chart the way forward for sustainable management of public finance, beginning of a new wave of economic diversification of the economy and private sector led job creation.

“We believe the 2016 budget announcement is a significant one for the Saudi Arabian economy. We think this is due to three main factors. First, it likely marks the end of material overspending practices given tighter controls. Second, it starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue- and expenditure-side measures, the first round of which saw sweeping energy, water and electricity administered price changes. Last, it likely signals no near term changes to energy or foreign exchange policy,” said Jean-Michel Saliba Middle East and North Africa (Mena) Economist, Bank of America Merrill Lynch.

The 2016 budget focuses on spending rationalisation and restraint. Analysts say this year’s budget and a change in the policy direction marks an end of an era of overspending. Spending controls have been introduced through the set-up of medium-term budget ceilings and of the National Project Management Agency to optimise and review capex.

Overspending

A royal order was recently passed to prevent the issuing of an order of commitment or disbursement that exceeds the allocated budget. Also, the main source of overspending in the last decade has been supplemental budgets passed during the fiscal year when the oil price turned above the internally budgeted oil price assumption. This is unlikely to be the case in 2016.

Saudi Arabia’s 2016 budget sees planned expenditure being reduced by 2.3 per cent from the 2015 budget. “We had expected a pullback in spending with oil prices remaining weak and the marked widening in the 2015 fiscal deficit. We believe that the actual fall in expenditure will be sharper than implied in the budget,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.

While the fiscal deficit estimated at 15.9 per cent of GDP in 2015 was large, it is much lower than what the market expected. This is explained by the sharp decline in actual spending (about 13 per cent as compared to the actual spending in the previous year) despite the one-off sharp increase in the wage bill.

“The fiscal reforms [both on the revenue and expenditure side] highlighted in the 2016 budget are welcome and if implemented would improve the medium term fiscal outlook despite continued low oil prices. The envisaged fiscal adjustment in 2016 is significant. Although the budgeted spending is only 2 per cent lower than last year’s budget, we expect spending in 2016 to decline by another 15 per cent as compared with the actual spending in 2015 as the one-off spending [mostly in the form of two-month salary bonus to government employees and retirees] ends and non-priority projects are postponed,” said Garbis Iradian, chief economist, Mena, Institute of International Finance (IIF).