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Saudi budget reveals realism now guides the way

The price of oil remains fundamental to the government’s financial health

Workers at the Saudi Aramco oil facility in Abqaiq. The kingdom's economy is still largely oil-based but the budget does not reveal the prices used in its calculations Reuters
Workers at the Saudi Aramco oil facility in Abqaiq. The kingdom's economy is still largely oil-based but the budget does not reveal the prices used in its calculations

Saudi Arabia’s Ministry of Finance is predicting that the kingdom will continue to record budget deficits in the years ahead as a result of increased spending on giga-projects and infrastructure development. 

The Saudi ministry’s budget statement for 2024, published earlier this month, takes a more realistic approach than in previous years.

Gone are the ambitions to balance the budget through implausibly rapid increases in non-oil income. Instead, we see a recognition that moderate deficits will be necessary if the kingdom is to fulfill its ambitions to transform both its economy and social structure. 

The 2024 budget statement estimates that the deficit for 2023 will be $22 billion, rather than the surplus of $4 billion that was being predicted this time last year.

The difference lies in expenditure that was 17 percent ahead of budget, far exceeding the increase in revenues, which was also ahead of budget, but by a smaller amount.

Looking ahead, the ministry is predicting annual deficits of between $20 billion and $30 billion over the next three years. Shortfalls at that level represent about 2 percent of Saudi GDP and are well within the kingdom’s debt-financing capacity. 

Saudi Arabia’s debt-to-GDP ratio is around 25 percent, and its international credit ratings, all at the higher end of the single-A range, are on an upward trend. The government’s reserves at the Saudi Central Bank are nearly $400 billion. 

This picture is very different from the one presented a few years ago, when the government was posting annual deficits of between $50 billion and $100 billion, amounts that were clearly not sustainable over the medium term.

Furthermore, the current, more modest deficits are being achieved despite the huge expenditure on mega-projects and public infrastructure, such as parks and leisure facilities, which has been steadily rising in recent years.

Remaining realistic

Today’s fiscal projections, more realistic, more modest, and more sustainable than in years past, do, of course, come with important caveats. 

Most importantly, the kingdom is still an oil-based economy, and the price of oil remains fundamental to the government’s financial health.

The Ministry of Finance does not disclose the price of oil on which its revenue forecasts are based, but a review of budget outcomes over the past 15 years shows that, in practice, the government only posts a surplus when the price of oil is around $95 per barrel or higher. 

The price is currently around $75 per barrel and the outlook for 2024 is uncertain. Oil markets were unimpressed by the announcement by Opec and its partners on November 30 that members would make further cuts to production from January 1, going beyond the cuts that were announced in June. Prices during December have slipped, rather than risen. 

Non-oil revenues in the budget have increased at a compound average growth rate of 14 percent over the past 10 years and now account for 30 to 40% of total government revenues.

This is a remarkable achievement that reflects the gradual imposition of taxes, and in particular the 15 percent value added tax.

Yet it is the price of oil, and the accompanying level of oil exports, that will determine the size of deficits and surpluses for years to come. 

The second important caveat relates to the integrity of the budget itself. Although the budget statement states clearly that giga-projects and infrastructural development are the key drivers of increased expenditure, it is also evident that much of the investment in these projects is not financed from the government coffers. 

The Public Investment Fund will inject an average of $40 billion into the local economy next year and the year after, the budget statement says, and the National Development Fund will inject a total of $152 billion between now and the end of the decade. 

So, the figures we see in the Saudi budget present only a partial picture of government financial activity, and it is reasonable to assume that the resources of state-owned bodies such as the PIF add considerably to the government’s financial flexibility.

Of course, the PIF does not only spend: it receives income from its various investments, both at home and abroad.

But that, in turn, bring us to the third and final major caveat arising from the budget statement: when will spending on giga-projects and infrastructure start to decline, and be replaced by revenues? 

The Saudi government is rushing headlong to diversify its economy and transform its society. Hardly a week goes by without the announcement of an ambitious new initiative, trailed as being world-leading.

At what point will the building stop, and revenue collection, in the form of business taxes and VAT on expenditure, begin? 

We should welcome the increasing realism of the Saudi Ministry of Finance’s budget statements, but recognise that they only present a part of the kingdom’s financial position.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems

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