Saudi budget deficit to soar to around $79 billion

The kingdom is tightening its belt and pressing ahead with austerity measures amid low oil prices.
Wednesday 16/12/2020
Saudi Finance Minister Mohammed al-Jadaan gestures as he speaks during a news conference to announce the country’s 2021 budget, in Riyadh, December 15. (Reuters)
Saudi Finance Minister Mohammed al-Jadaan gestures as he speaks during a news conference to announce the country’s 2021 budget, in Riyadh, December 15. (Reuters)

RIYADH – Saudi Arabia on Tuesday projected its 2020 budget deficit will soar to around $79 billion, as the world’s top crude exporter reels from low oil prices and a coronavirus-led economic downturn.

Passing its budget for 2021, the kingdom also announced it was slashing government spending in a bid to reduce the shortfall during the year ahead, as it faces an eighth consecutive annual deficit.

The finance ministry said the budget reflected “the ability to adopt appropriate policies to balance between growth, economic stability and fiscal sustainability in the medium and long term.”

Saudi Finance Minister Mohammed al-Jadaan said in a news conference that most economic sectors had started to recover from the pandemic’s impact in the second half of this year.

“I think that the economic recovery of economic activities in the third and fourth quarters bodes well for economic growth in the coming years,” he said.

Saudi Arabia expects to post a deficit of 298 billion riyals ($79 billion) this year, or 12% of GDP, but expects it to fall next year to 141 billion riyals ($37.6 billion), or 4.9% of GDP, the finance ministry said in its budget statement.

‘A difficult year’

The latest projection for the 2020 deficit dwarfs the $50 billion that the kingdom had originally forecast going into this year, and the estimated $35 billion recorded in 2019.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the deficit target for next year looked ambitious, “but this year we have seen vital support to the budget through strong Aramco dividend and investment returns, and these are likely to be key factors in 2021.”

Saudi Crown Prince Mohammed bin Salman bin Abdulaziz was quoted as saying by state media that “the (economic) crisis has been managed with great care and effectiveness, which led to the mitigation of the negative effects on the Saudi economy.”

“2020 was a difficult year for the whole world due to the outbreak of the coronavirus pandemic, but the kingdom’s economy has proven its ability to withstand its impact.”

The kingdom projects its economy — the largest in the Arab world — will grow by 3.2% next year, largely recovering from a projected 3.7% contraction this year, the budget statement said.

The International Monetary Fund (IMF) expects the kingdom’s economy to shrink by 5.4% this year.

Saudi Arabia has failed to balance its books since the oil price rout of 2014, prompting the petro-state to borrow heavily and draw from its reserves to plug the shortfall.

The fiscal plans passed on Tuesday indicate a hard road to recovery for the kingdom — before the pandemic, it had bullishly predicted that the annual budget would be balanced by 2023.

General view of Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia. (Reuters)
General view of Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia. (Reuters)

Saudi central bank reserves are expected to drop to 280 billion riyals ($74.6 billion) next year from a projected 346 billion riyals ($92 billion) this year, the finance ministry said.

Austerity measures

The kingdom is tightening its belt and pressing ahead with austerity measures amid low oil prices.

Saudi Arabia plans to spend 990 billion riyals ($263.91 billion) in 2021, according to the budget statement, a drop of about 7% compared to this year.

Oil income generates more than two-thirds of Saudi public revenues.

In November, energy giant Aramco posted a 44.6% slump in profits for the third quarter, as the coronavirus pandemic weighs heavily on the global demand for crude oil.

Saudi Arabia needs a crude price of about $80 a barrel to balance its budget, economic experts say, higher than the current price of around $50.

“In view of the uncertainty surrounding the pace of the global economic recovery and the potential persistence of the crisis, predicting the state of the oil market becomes increasingly challenging,” the finance ministry said in the budget statement.

A drop in state revenues is expected to hinder Crown Prince Mohammed bin Salman bin Abdulaziz’s ambitious “Vision 2030” reform programme to overhaul the kingdom’s energy-reliant economy.

The austerity measures so far announced are expected to only partially rein in the yawning budget deficit.

In July, Saudi Arabia tripled its value added tax (VAT) to 15%, an unpopular measure that has weighed on household income, pushed up inflation and hit consumer spending.

But the government has been careful not to cut public jobs and salaries amid already high youth unemployment.

Nearly two-thirds of all Saudis are employed by the government, and the public sector wage bill accounts for roughly half of all government expenditure.

In recent years, the petro-state has pushed other aggressive campaigns to diversify its income, hiking fees on expatriate workers and raising fuel and electricity prices.