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Saudi deficit falls on rising non-oil revenues

Introduction of excise tax on harmful products boosts government coffers

Gulf News

Dubai: Saudi Arabia’s fiscal deficit shrunk by 9.4 per cent year-on-year to 48.7 billion Saudi riyals, according to fiscal data for the third quarter of 2017.

While the pace of the fall moderated compared to the first two quarters of the year, the drivers for the narrowing also changed. The main factor behind the deficit decline during the third quarter was higher non-oil revenue, which grew by 80 per cent year-on-year.

“This [growth in government revenue] partly reflected the introduction of an excise tax on harmful products [tobacco, sugary drinks] in June, resulting in a 107 per cent rise in revenue from taxes on goods and services,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.

Taxes on good and services accounted for 24.5 per cent of non-oil revenue in the third quarter, up from 12.8 per cent in the second quarter, though they were still a relatively small share of total revenue at 8.2 per cent. This share is expected to rise more significantly in 2018 with the introduction of value-added tax (VAT).

Third-quarter data showed that other components of non-oil revenue also improved, including customs taxes, which likely reflects a rise in food imports and signs of stabilisation in wider imports.

However, the main factor behind the rise in non-oil revenue was a 150 per cent increase in “other revenues”, which include returns from the Saudi Arabian Monetary Authority (Sama) and Public Investment Fund (PIF).

Non-oil income was up 6.4 per cent year-on-year in the first nine months of 2017, thanks to the third-quarter developments.

Contrary to expectations, the third-quarter budget data showed that oil revenue contracted in the third quarter by 6.6 per cent year-on-year, as well as on a quarterly basis by roughly the same magnitude.

Analysts in general had expected to see positive year-on-year and quarter-on-quarter growth in the third quarter due to a higher average oil price, compensating for lower Saudi crude export levels.

Weaker oil revenues and an increase in government spending are likely to adversely impact the government fiscal deficit target of 198 billion riyals or 7.8 per cent of GDP.

“The contraction in oil revenue could reflect a weaker rate of oil income transfers to the budget in the third quarter, after indications of an increase in the first half of 2017. This could reflect government expectations of a narrower fiscal deficit than envisaged earlier in the year,” said Malik.

Government expenditure rose by 5.3 per cent year on year in the third quarter, led by a 6.9 per cent increase in current expenditure. This was largely due to a 9.3 per cent increase in salaries, likely due to the government retroactively restoring allowances to civil servants announced in June.

Other areas of spending — such as subsidies (with higher energy prices) and higher financing costs — also saw an increase. Capital expenditure continued to contract in the third quarter by 1.3 per cent year-on-year.