Saudi Arabia is on course to attain fiscal discipline targets

BALANCED BUDGET BY 2023 LOOKS ACHIEVABLE AS RIYADH CUTS DEFICIT

Saudi Arabia, which overhauled its public finances and embarked on major economic reforms a few years ago, is on track to achieve major milestones in fiscal management over the next few years according to economists at the Institute of International Finance (IIF).

“We are encouraged by the improvement made in expenditure management, including major reduction in fuel subsidies and streamlining of inefficient capital expenditures,” said Garbis Iradian, chief economist for Middle East and North Africa at IIF.

“Gasoline prices are now being adjusted quarterly in line with international benchmark prices.

“The recent reforms to strengthen government procurement have helped to improve the efficiency of public spending.”

Balancing budget

According to the IIF, the fiscal trajectory is much more secure than a few months ago given the efforts underway to rein in spending, and assuming that oil prices remain slightly above $60 per barrel. However, significantly lower oil prices than assumed in our baseline scenario would lead to large deficits, causing the government debt-to-GDP to exceed 40 per cent by 2023.

Preliminary estimates by the authorities put actual spending in 2019 at 1.048 trillion riyals (Dh1.02 trillion), well below the budgeted 1.106 trillion. While defence spending exceeded slightly the budgeted amount due to the ongoing Yemen war, this was more than offset by lower capital expenditures.

The IIF has revised fiscal deficit estimates downward for 2019 from 6.2 per cent to 4.7 per cent of GDP.

“We have also lowered our forecast for the fiscal deficit for 2020 from 7.5 per cent of GDP to 6.6 per cent in 2020. This still represents a widening compared with 2019 due to lower oil revenues. The 2020 budget announced on December 9, sets expenditures at 1.02 trillion Saudi riyal, which is 2.7 per cent lower than the preliminary estimates for 2019,” said Iradian.

The IIF estimates Brent oil price of $77 per barrel to balance the budget for 2020, compared to $80 per barrel in 2019. While the government is expected to continue tapping foreign debt sources at very competitive rates to finance the fiscal deficits, authorities are committed to keeping the public debt-to-GDP ratio below 30 per cent over the medium-term, but this could

be challenging, particularly if oil prices decline well below $60 per barrel.

The Kingdom’s public debt has risen from 6 per cent of GDP in 2015 to 23 per cent of GDP in 2019. If government expenditure continues to decline modestly through 2023, as highlighted in the kingdom’s medium-term fiscal framework, and if oil prices remain slightly above $60 per barrel, then the debt-to-GDP would stay below 30 per cent by 2023.

To keep public debt below 30 per cent of GDP, additional expenditure cuts and non-oil revenue measures would be required if oil prices fall significantly be-low $60 per barrel in the next few years. An early resolution of the conflict in Yemen could remove some pressure on the budget and bring achievement of fiscal targets closer in reach.