Dubai: Recent increase in oil prices will give more fiscal space for Saudi Arabia to achieve its budget targets in a phased manner with lesser impact on economic growth according Bank of America (BofA Merrill Lynch) analysts.

“Higher oil prices support government efforts to lengthen the timeline for fiscal consolidation. Still, they may breed complacency and have brought uncertainty on the pace of reforms going forward. Key will be the 2018 budget to be released in late December; we see modest loosening but acknowledge risks to this view,” said Jean-Michel Saliba Mena economist, BofA Merrill Lynch.

While the recent anti-corruption drive may dampen near-term sentiment but is likely to provide further impetus to ensuring success of reforms and stable energy policy. Medium-term growth potential could increase by 2 percentage points on the back of structural reforms, but fiscal reforms have weakened the cyclical outlook.

In the context of the recent oil price gains, analysts said while some amount of increase in government spending can’t be ruled out, it will help improved sequencing of fiscal reforms.

The extension of the Fiscal Balance target date by three years to 2023 could allow more spacing in between reforms, which could allow a more muted impact on economic activity versus the previous plans.

“In regards to 2018 reforms, we expect the VAT to be introduced in early 2018, the expatriate worker levy to be introduced in January 2018 and the fees on dependents of expatriate workers to be hiked in July 2018,” said Saliba.

Analysts expect the introduction of tariffs on luxury products could be delayed beyond the first quarter of 2018 to allow authorities to focus on the introduction of the VAT. The hike in household electricity prices coupled with VAT introduction in the same year will likely raise consumer prices much more than in the original fiscal balance plans. Given the delay in the introduction of the hike of electricity prices to households, the hike of electricity prices to non-households is likely to be pushed back to 2019.

Focus on 2018 budget

All eyes are on 2018 Saudi budget to be announced in December 2017 that will hint the direction of fiscal reforms.

“The fiscal stance for 2018 is likely to signal more clearly the intention of authorities and the extent of potential loosening. We anticipate that the government may decide not to announce a fully fleshed out revised Fiscal Balance Programme so as to allow itself maximum discretion and room to manoeuvre according to the prevailing economic conditions. However, we expect the government to provide more clarity on future fiscal reforms as part of the 2018 budget,” said Saliba.

Analysts said the recent comments by Mohammad al-Jadaan, Saudi Finance Minister about an expansionary budget for 2018 may have to be introduced through higher spending. Ideally, this could take place through higher capital expenditures rather than potentially sticky current expenditures.

The minister projected spending could rise to 928 billion riyals (Dh908 billion) in 2018, from a budgeted figure of 890 billion riyals in 2017. This would be equivalent to about 4 per cent increase in nominal terms. Given the VAT introduction, spending would remain flat in real terms and not represent a major increase in spending.

World Bank says it agrees with Saudi slowing fiscal reforms

The World Bank agrees with the decision by Saudi Arabia’s finance ministry to slow the pace of its fiscal reforms, given the need to protect the private sector, a senior World Bank official said on Thursday.

The World Bank’s country director for the Gulf Cooperation Council, Nadir Mohammad, also told a news conference that he expected economic activity in Saudi Arabia to accelerate next year, a view widely held by economists.

Sources briefed by Saudi Arabia’s finance ministry said early this month that the government planned to push back the target date for eliminating its budget deficit to 2023 from 2020.