Dubai: Some of the measures such as the recent restoration of allowances and bonuses for public employees along with the payments linked to the Household Allowance Programme, expected to start in the second half of this year is expected to apply pressure on Saudi Arabia’s fiscal balances, however analysts say it will have only limited impact on the pace of reforms.
“The impact of the restoration of allowances and bonuses for public employees, which would add about $15 billion to the wage bill, is likely to be compensated by lower spending on infrastructure, further adjustment in fuel and electricity prices and higher oil revenues,” said Garbis Iradian, Chief Economist Middle East & North Africa, Institute of International Finance.
He expects the shift to gradual fiscal adjustment will still ensure fiscal sustainability. According to the IIF forecast fiscal deficit will to narrow to 10.5 per cent of GDP in 2017 and 5 per cent by 2020.
“We expect one-third of the fiscal financing need to be met by tapping official reserves and the rest from external and domestic bank borrowing. While government debt will increase significantly, it will remain below 50 per cent by 2025, well below the peak of 97 per cent of GDP in 2002,” said Iradian.
The fiscal adjustment and the sharp deterioration in consumer confidence have taken a toll on economic activity. Non-oil real GDP growth decelerated from about 5 per cent in 2014 to -0.3 per cent in 2016, and may have contracted again in the first quarter of this year. Several high frequency indicators support such a contraction with the 12-month CPI inflation remaining in negative territory for a third consecutive month in March 2017 despite the modest recovery in global non-fuel commodity prices and manufacturing unit value; and growth in credit to the private sector continued to decelerate.
Analysts say progress with the government’s investment or stimulus programme will remain vital for a sustained strengthening in non-oil activity. This is because household consumption and private investment are set to remain weak given further fiscal reforms, especially those related to the liberalisation of utility and fuel prices and the introduction of value added tax (VAT) in the first quarter of 2018. Given the weak underlying demand in the economy, economists do not expect any significant pickup in private sector investment.
The 2017 budget looks to make progress with critical projects, including in infrastructure, transportation and related to industrial cities. Progress with investments will also be important in meeting the wider objectives of the National Transformation Plan. The government has also proposed a 200 billion Saudi Riyal stimulus package to support GDP growth until 2020, of which 42 billion Saudi Riyal is earmarked for 2017. This was announced in the official Fiscal Balance Programme, published at end-December 2016, which looks to balance the fiscal budget by 2020. So far, limited details of the plan have been released.
The latest Regional Economic Outlook from the International Monetary Fund forecasts Saudi Arabia is projected to see real GDP growth of 0.4 per cent this year, compared to 1.4 per cent last year, before rebounding to 1.3 per cent in 2018.