Saudi Arabia, its finances hit by low oil prices, announced plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation.
The 2016 budget, released by the finance ministry on Monday (December 28), marked the biggest shake-up to economic policy in the world’s top crude exporter for over a decade, and includes politically sensitive reforms from which authorities previously shied away.
The plan suggests the kingdom is not counting on a major recovery of oil prices any time soon but is instead preparing for a multi-year period of cheap oil. The International Monetary Fund warned in October that Riyadh would run out of money within five years if it did not tighten its belt.
“Today we announce the budget for the fiscal year 1437/1438 AH, which comes in light of the decrease in oil prices, the economic and regional and international financial challenges – where global economic growth has declined from its previous level – and the lack of stability in some of the neighboring states,” King Salman said in a speech, adding that the 2016 budget launched a phase in which his kingdom would diversify its revenues.
The government ran a deficit of 367 billion riyals ($97.9 billion) in 2015, or 15 percent of gross domestic product, officials said. The 2016 budget plan aims to cut that to 326 billion riyals, reducing pressure on Riyadh to pay its bills by liquidating assets held abroad.
“This budget represents the beginning of an integrated and comprehensive programme: To build a strong economy based on solid foundations which has multiple sources of income and where savings are growing and jobs are many; and where cooperation between the public and private sectors is strengthened with continuing the implementation of development and service projects and the development of various government services and raising the efficiency of public spending, and reviewing the government’s support system,” said King Salman.
Next year’s budget projects spending of 840 billion riyals, down from 975 billion riyals actually spent this year. The finance ministry said it would review government projects to make them more efficient and ensure they were necessary and affordable.
Revenues next year are forecast at 514 billion riyals, down from 608 billion riyals in 2015. The Brent oil price averaged about $54 a barrel this year but is now about $37.
The success or failure of the budget plan will be key to maintaining the confidence of financial markets in Riyadh.
As the deficit has swelled, the riyal has dropped in the forwards market to its lowest since 1999 because of fears that Riyadh may eventually have to abandon its peg to the U.S. dollar.
In its budget statement, the finance ministry said it would adjust subsidies for water, electricity and petroleum products over the next five years.
That is a politically sensitive step, since the kingdom has traditionally kept domestic prices at some of the lowest levels in the world as a social welfare measure.
Any changes will aim to make energy use more efficient and conserve natural resources, while minimizing the negative effects on lower- and middle-income Saudis, the ministry said.
It also outlined other reforms including “privatising a range of sectors and economic activities”, although it did not give details.
The government plans to introduce a value-added tax in coordination with other countries in the region, and raise taxes on soft drinks and tobacco, the ministry said without giving a timeline.
Source: Reuters
