Saudis mull slower subsidy, spending cuts to support economy
Washington, US - Saudi Arabia may cut energy subsidies more gradually and take longer to balance its budget, Finance Minister Mohammed al Jadaan said, as the kingdom seeks to soften the impact of its drive to repair public finances.
The prices of some subsidised domestic energy products will rise to international levels later than previously envisaged, Jadaan said in an interview in Washington on Thursday, where he was attending the International Monetary Fund’s (IMF) annual meeting. He also said authorities will refrain from rushing to meet a target to balance the budget by 2019 as they assess how the economy is reacting to fiscal policy.
“We will move with our schedule, but areas where we think actually we can adjust the reforms so that they’re not as aggressive, we will,” he said.
A balanced budget and the subsidy cuts are central to the kingdom’s long-term plan to wean the economy off oil, after the plunge in crude prices caused the shortfall to reach more than 16 per cent of gross domestic product (GDP) in 2016. But the government’s austerity drive, which included slashing spending and curtailing state largess, caused non-oil economic growth, the engine of job creation, to stagnate.
Jadaan’s remarks come after an assessment by IMF staff, in which they said the kingdom could afford a slower pace of austerity to avoid crippling the economy. “This is possibly the first time for the IMF to tell a country to slow down,” Jadaan said. “We are taking IMF advice very seriously.”
Jihad Azour, director of the IMF’s Middle East and Central Asia department, said on Friday the kingdom is on the right track with fiscal reforms that would allow it to ultimately balance its budget. A gradual approach would enable Saudi Arabia to have more flexibility going forward, he said.
Under the latest subsidy plans, the prices of some energy products might fall short of international levels this year, but would be gradually increased ‘over a longer period of time’, Jadaan said. The government will also press ahead with a cash transfer programme to ensure that Saudi nationals in need are shielded from the impact of the increase in prices he said, without setting a date for the launch of the transfers.
And while the government is on track to reduce the budget deficit to below ten per cent of GDP this year, authorities don’t see the need ‘to go from ten per cent to zero in two years’, he said.
Even before that IMF advice, the government had already abandoned some of its attempts to save money, when salary and benefit cuts for state employees were reversed.
The government will accelerate its SAR200bn stimulus programme to boost growth, Jadaan said. About SAR40bn have been committed so far on housing and an industrial development fund, he said. A ‘significantly’ higher amount will be announced before the end of this year and then spent as needed, he said.
The programme aims to cushion the impact of reform on Saudi businesses. “We’re focusing on distressed companies that are viable and add value to the economy and to employment, but are running into difficulties,” Jadaan said.
The government has a separate programme called the national transformation plan, with a budget of SAR370bn. Spending under that programme will rise to SAR72bn next year, from SAR60bn, Jadaan said.