Saudi Arabia’s state budget for 2019 to be largest ever

Following a 0.9% contraction in 2017, the kingdom’s economy grew 2.3% in 2018 with growth projected at 2.6% in 2019.
Sunday 06/01/2019
Saudi Minister of Finance Mohammed al-Jadaan speaks during a news conference in Riyadh, December 18. (Reuters)
Challenges and high hopes. Saudi Minister of Finance Mohammed al-Jadaan speaks during a news conference in Riyadh, December 18. (Reuters)

WASHINGTON - For a second fiscal year running, Saudi Arabia is ramping up state spending to jump-start a sluggish economy that has been roiled by plunging oil prices as Riyadh faces high Saudi unemployment and an exodus of expatriate workers.

The government of Saudi King Salman bin Abdulaziz Al Saud is also continuing its expensive public assistance programme, put in place early last year to soften the effects of subsidy cuts and new taxes imposed on Saudi citizens over the past two years.

In a brief televised speech to his cabinet December 18, King Salman announced the 2019 state budget — the kingdom’s largest at $295 billion — and said: “We are determined to go ahead with economic reform, achieving fiscal discipline, improving transparency and empowering the private sector.”

Saudi government spending is slated to rise 7% this year, up from $274.6 billion recorded in 2018. State revenues are anticipated at $260 billion for 2019, largely from oil income, leaving a projected deficit of $35 billion, the sixth consecutive year Riyadh would report a budget deficit. The government said it will tackle the deficit as it has done in past years by drawing on state reserves and borrowing.

The Saudi leadership is hoping that the increased spending will stimulate growth in the kingdom’s fledgling private sector, a key component of Riyadh’s ambitious Saudi Vision 2030 programme, which is designed to revamp its economy and steer it away from being oil-centric. The enhanced spending is expected to continue. The Saudi government plans to raise state expenditures in 2020 to nearly $305 billion and in 2021 to $312 billion.

The Saudi Finance Ministry stated that the government reduced its estimated 2018 deficit 31% to $36 billion, which was attributable to a partial recovery in crude prices.

In its 2018 budget, the Saudi government forecast a deficit of $52 billion, based on state revenue of $209 billion and expenditures of $261 billion. However, the leadership indicated that another $30 billion of spending in 2018 would come out of the kingdom’s sovereign wealth fund and national development fund.

The ministry said that, following a 0.9% of GDP contraction in 2017, the kingdom’s economy grew 2.3% in 2018 with 2.6% growth projected in 2019.

The trick, as always, for Riyadh, is to build a budget on what its leadership estimates international oil prices will average for the coming year. One of the reasons that the kingdom’s 2018 deficit was slashed was because it had reportedly based the budget on an average price of UK benchmark crude Brent of $51-$55, which proved to be a conservative estimate as the spot price of Brent averaged $71.40 a barrel for 2018, figures from the US Department of Energy’s Energy Information Administration (EIA) indicate.

Following the recent steep price tumble and eyeing a slowdown in global economic growth, the EIA projected a darker outlook for oil prices in 2019, with its forecast for Brent to average $61 a barrel. The Brent price is currently approximately $56 a barrel.

This could be problematic for Riyadh because some industry analysts say this year’s budget is predicated on the price of Brent averaging as high as $80 a barrel. King Salman’s government clearly had domestic budgetary concerns in mind when it helped coordinate the December 7 agreement between OPEC and independent producer allies to pull 1.2 million barrels per day off the market for six months.

There are signs that Saudi Vision 2030 has been slow to produce the dividends that the government has been promoting in its push to create jobs, stimulate the private sector and reduce public dependence on the state.

Just prior to announcing the 2019 budget, King Salman ordered that the Citizens Account programme be rolled over for another year to continue providing lower- and middle-income families with monthly payments to help offset economic hardships resulting from energy-related subsidy cuts and tax levies. The government had said it expected to pay out $8.5 billion in 2018 but some reports states that figure is closer to $13 billion.

Two major factors affecting the kingdom’s economic health are unemployment among Saudi citizens and large numbers of expatriate workers leaving Saudi Arabia. Saudi unemployment notched up to 12.9% in early 2018 — the highest level reported in ten years — with the number of employed Saudis falling from 3.15 million in the first quarter to 3.13 million in the second.

More than 900,000 expatriates have left the Saudi workforce since early 2017, largely because of government fees that targeted foreign workers. One introduced in July 2017 charges a monthly fee for each dependent of a foreign worker living in the kingdom and a second tax implemented in January 2018 hits private businesses that employ expatriates. The government is reportedly reviewing these fees but they are unlikely to be abolished.