Saudi budget deficit may be lower than expected

Saudi Arabia is expected to reduce its actual budget deficit this year as revenues will likely be higher, and the kingdom will try to avert overshooting spending because of its swelling domestic debt, experts said.

Riyadh had forecast a mammoth deficit of SR45 billion, the highest budget gap in nearly 14 years.

"We have deduced that the government has based the 2002 budget on a price for North Sea Brent crude of $16.5-17.5 and oil production of 7.3 to 7.4 million barrels per day," said Dr. Said Al Shaikh, chief economist at Saudi National Commercial Bank.

"It was a conservative estimate as prices are expected to be higher...I think the Kingdom's revenues will very likely be higher than expected and the deficit will be lower than was assumed."

Saudi Arabia forecast revenues at around SR157 billion this year and expenditure was estimated at SR202 billion. Oil export earnings alone were projected at around SR112 billion, far lower then last year's SR185 billion.

Saudi Arabia assumed a zero deficit last year but the actual gap swelled to around $6.6 billion after it overshot targetted spending.

The deficit, which occured despite an increase in revenues, accounted for around 4 per cent while this year it is forecast at around 7 per cent.

"Last year, everybody believed that it will be a balanced budget but they failed to achieve that target because they spent more than they had expected," Shaikh said.

"It is difficult now to speculate on what will happen this year but what we know is that the actual deficit in the budget could be cut. Domestic debt is too high to allow for large increases in spending and there is a tendency here that the debt should not be allowed to rise as its servicing is consuming up a large part of the expenditure every year."

The Gulf state is reeling under a public debt of nearly SR630 billion because of heavy borrowing from local banks to finance budget deficits that have piled up since the end of the oil boom.

The bond-dominated debt could grow this year to a level equivalent to GDP, but the increase will depend on the size of the real deficit.

"I don't think Saudi Arabia can afford a bigger deficit. Our expectation is that the actual deficit will be lower this year," said Bushr Bakhit, director of Riyadh-based Bakhit Financial Consulting Centre.

"The reason is that it was a conservative outlook for the price of oil this year and there is no need to go beyond the spending level because it is relatively high."

Experts said Riyadh risked a large deficit to keep spending above what they described as the SR200 billion psychological barrier to maintain growth.

They noted that despite the rapid growth in the private sector, public spending has remained a key factor in economic activity in the kingdom.

High public spending combined with expansions in non-oil sectors to boost real GDP by around 2.2 per cent last year and 4.5 per cent in 2000.

But it is expected to slow down to 1.8 per cent this year as oil prices could slide by around $6-18 and Saudi Arabia's crude output will be nearly half a million bpd lower than the 2001 production of 7.9 million bpd.