GCC Insights: Saudi budget for 2003 reflects cautious mood

Saudi Arabia's budget for 2003 is conservative on revenue and cautious on spending. This reflects the mood in the kingdom that faces external variables including the possibility of a U.S.-led war against Iraq as well as volatility of oil markets.

Projected figures call for revenue of 170 billion Saudi riyals ($45.3 billion) and expenditure of 209 billion riyals ($55.7 billion), leaving behind a budget deficit of 39 billion riyals ($10.4 billion).

The statistics compare favourably with estimates for 2002 - with revenue and expenditure up by 8.3 per cent and 3.6 per cent, respectively and budget shortfall down by 13.3 per cent.

Revenue is deliberately underestimated due to unpredictability of oil prices, the single most important element of the budget. Actual income stands to be higher on the back of firm oil prices. The revenue is based on an average oil price of $17.5/barrel of Saudi oil or $19.5 on the benchmark Brent oil.

But Brent is expected to average around $23/barrel in 2003. Oil is uniquely significant to the Saudi economy - accounting for about for about 70 per cent of treasury income on the back of production of 7.5 million barrels per day.

The kingdom's seventh Five-year Development Plan covering the period to 2005 calls for diversifying away from oil.

Additional funds will likely come from materialisation of an ambitious privatisation prpgramme. The government has endorsed a plan to open up 20 sectors for local and foreign private investors in a bid to generate funds partly to help pay for a staggering public debt.

Utilities and public services, including certain health and social services will be privatised. Also, the government plans to reduce its stake in banks and companies including industrial giants Saudi Basic Industries Corp (Sabic) and Saudi Electricity Co.

Plans are underway to sell off 30 per cent of shares at Saudi Telecom by year-end, which will raise some $4 billion in revenue.

The slight rise in expenditure demonstrates serious government desire to control spending. But if history is any guide, actual spending will be higher.

For 2002, real expenditure is estimated to be higher by more than 10 per cent than the budgeted figure of 202 billion riyals. For 2001, actual spending was up by 18.6 per cent to 255 billion riyals.

The problem is current expenditure represents nearly 86 per cent of total expenditure with the balance reserved for capital outlay. High share of the current category is mainly attributed to salaries and wages paid to civil and military personnel. Against this backdrop, the government has all but frozen new employment in the public sector.

The projected budget deficit represents 5.6 per cent of Saudi Arabia's GDP of 695 billion riyals ($185 billion). But actual shortfall is expected less than the budgeted figure of 39 billion riyals mainly due to stronger revenue.

For 2002, the treasury estimated deficit of 45 billion but market analysts are expecting half that amount as the year draws to close. The IMF has recommended a fiscal balance by 2005 though the government desires to achieve that before the target date.

Repeated budget since 1982 except for 2000 has expanded the size of public debt. The debt is estimated at $168 billion, constituting 91 per cent of the GDP, certainly high for the world's largest exporting country.

The figure is an improvement compared to 1999 when the debt stock amounted to 119 per cent of the GDP.

To be sure, the kingdom's privatisation programme is partly meant to generate revenue to help settle the debt. True, the debt is domestic but it is not without cost.

Interest rates in Saudi Arabia mirror those in the U.S. market, as the Saudi riyal is pegged to the American dollar. Certainly, the prevailing low interest rates in the U.S. provide a relief to the government.