State spending needs to be curtailed
The Saudi economy seems to be doing fine, but with challenges ahead. This can be inferred from a recent report from the International Monetary Fund (IMF) on the performance of the economy following the visit of a delegation to the kingdom.
Among other things, the IMF called on the authorities to resist any temptation to again expand public spending on the back of the current stronger oil prices. Brent prices are hovering around $77.50 a barrel, but had reached $80.50 per barrel in between and the highest in some time.
The IMF’s warning is that higher government spending could widen budgetary shortages and become a source of inflationary pressures. The budget deficit stood at $98 billion in 2015, the first full year after the plunge in oil prices before declining to $79 billion in 2016.
The 2018 budget was prepared with expenditures and revenues of $261 billion and $209 billion, respectively. It is estimated that the deficit for fiscal year 2017 ended up higher than planned on the back of stronger than expected spending.
The IMF prefers a balanced budget by 2023 and not 2020, as originally envisaged by officials. This way the authorities can avoid a possible decline in economic growth via a rapid fall in spending.
In fiscal year 2018, oil income is expected to account for 63 per cent of total revenues with the balance from diverse sources including taxes, fees for government services and investment returns. The kingdom’s Vision 2030 stressed the need to diversify from oil and strengthen the private sector’s role.
Tax culture
The IMF is pleased with the proliferation of the tax culture in the kingdom, describing it as a milestone.
Saudi Arabia was the first country in the Gulf to introduce an excise tax on certain products from June 2017.
The UAE followed with similar measures on carbonated and energy drinks and tobacco products. And from the start of this year, Saudi Arabia and the UAE introduced a value added tax.
The IMF emphasises the importance of avoiding any crowding out of private sector investors. Officials may feel the urge to assume leadership in developing critical industries in the non-oil sector like tourism. However, the involvement of the public sector in critical projects is not sustainable in the long run and no substitute for private sector investors.
The sort of economic challenges encountering the Saudi economy is displayed in global rankings. For instance, Saudi Arabia saws its ranking plummet in the recentlyreleased IMD World Competitiveness Yearbook 2018, being placed 39th among the 63 economies.
The same report rated the UAE seventh best just behind the US, Hong Kong, Singapore, Netherlands, Switzerland and Denmark.
The index takes into account matters like levels of trade and investments. The slide of Saudi Arabia’s ranking underscores the need to entice foreign investments as part of Vision 2030.