Daily Management Review

Shrinking Revenue from Crude Oil Forces Saudi Arabia to Plan Cuts to Shrink $98bn Budget Deficit


Shrinking Revenue from Crude Oil Forces Saudi Arabia to Plan Cuts to Shrink $98bn Budget Deficit
After plunging oil prices resulted in a record annual budget deficit of nearly $98bn, Saudi Arabia has announced plans to cut government spending and reform its finances.
Officials said that nearly 15% of the gross domestic product of the country that is equivalent to 367bn riyals ($97.9bn) was the deficit that the country incurred in 2015.
Reducing pressure on Riyadh to pay its bills by liquidating assets held abroad, the 2016 budget plan aims to cut that to 326bn riyals.
Politically sensitive reforms from which authorities previously shied away by the Saudi government were included in the budget for 2016 that was released by the finance ministry f the country and it marked the biggest shake-up to economic policy in the world’s top crude exporter for more than a decade.
The financial plan for the kingdom relies on preparing for a multi-year period of cheap oil as the country is not counting on a major recovery of oil prices any time soon. Riyadh would run out of money within five years if it did not tighten its belt, the International Monetary Fund had issued a warning to the government in October.
The world’s biggest crude exporter was running a budget surplus of 12% of GDP as recently as 2012 as the Saudi Arabia’s public finances benefited from increases in oil prices after 2003.
 “Our economy has the potential to meet challenges,” King Salman said in a speech. The 2016 budget launched a phase in which his kingdom would diversify its revenues, he added.
From a total of 975bn riyals actually spent in 2015, the budget projects spending for 2015 was brought down to 840bn riyals. While ensuring that government projects were necessary and affordable, the finance ministry said it would review government projects to make them more efficient.
The budget also noted that the expected revenues for 2016 would be around 14bn riyals which is lower from 608bn riyals that were generated in 2015. The Brent oil price averaged about $54 a barrel this year but is now about $37.
The key aspect for maintaining the confidence of financial markets in Riyadh would be the success or failure of the budget plan.
Due to fears that Riyadh may eventually have to abandon its peg to the US dollar, the riyal has dropped in the forwards market to its lowest since 1999 even as the budget deficit has swelled.
Subsidies for water, electricity and petroleum products over the next five years would be adjusted said the finance ministry in its budget statement. The kingdom has traditionally kept domestic prices at some of the lowest levels in the world as a social welfare measure and this step is viewed as a politically sensitive step.
While minimising the negative effects on lower- and middle-income Saudis, any future changes will aim to make energy use more efficient and conserve natural resources, the ministry said.
While not divulging the details in te pan, the finance ministry also outlined other reforms including “privatizing a range of sector and economic activities.