Why Saudi Arabia’s rising economic deficit further fuels oil price pressures

Dubai: Saudi Arabia’s fiscal health faced significant challenges in the first quarter of 2025, with the country’s budget deficit widening to SAR58.7 billion ($15.7 billion).

This widening deficit has sparked renewed conversations about Saudi Arabia's economic prospects, as oil revenues remain crucial to the Kingdom's budget, contributing nearly 60% of the total fiscal income.

Despite efforts to diversify its economy under Vision 2030, the government remains vulnerable to fluctuations in global oil prices, which have a direct impact on its budget. This quarter's deficit reflects the economic pressures stemming from weaker-than-expected oil prices, which are projected to continue influencing the nation’s fiscal balance throughout the year.

The most recent outlook indicates that the Kingdom’s fiscal deficit could exceed 5% of GDP in 2025—double the earlier projections outlined in the 2024 budget. This forecast comes after a detailed analysis by S&P Global Market Intelligence, which had initially estimated a deficit ratio of 2.9% of GDP for 2025. The adjustment, scheduled for an update later this month, now suggests a fiscal gap closer to 4-5% of GDP for the next two years.

Need of spending adjustments

While non-oil revenues have seen some growth, they are still insufficient to offset the loss in oil revenue. The government’s continued fiscal outlays, including planned investments in infrastructure and social programs, remain crucial to the Kingdom’s long-term economic transformation. However, analysts have suggested that some spending adjustments may be necessary to mitigate the deficit.

The Saudi government’s strategy seems focused on balancing fiscal discipline with ongoing investments in Vision 2030, which aims to diversify the economy and reduce the Kingdom’s dependency on oil over the long term. However, the government’s reliance on oil revenues means that significant adjustments may be required in the short to medium term, particularly if oil prices remain volatile.

Despite these fiscal pressures, Saudi Arabia’s financial position is relatively strong, supported by a solid reserve base and manageable levels of public debt. In the near term, it is anticipated that the government may tolerate a larger deficit, especially given its long-term economic plans and the financial flexibility afforded by the Kingdom’s sovereign wealth fund.

Moving forward, the Kingdom will likely need to further explore non-oil revenue avenues, such as taxes and new industries, to reduce its exposure to global oil price swings. Analysts will continue to closely monitor the government's fiscal strategy as it adapts to the evolving global economic environment.