After years of spending its massive oil wealth to bolster the local economy and provide subsidized energy and other utilities to its 30 million people, a steep decline in oil prices has forced the kingdom to reassess these plans.
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Revenue is forecast at 514 billion riyals in 2016, down from 608 billion riyals in 2015.
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Saudi officials said the government ran a record deficit of almost 367B Saudi riyals ($98B) this year, or about 15% of gross domestic product.
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Its 2016 budget plan aims to cut the deficit to 326 billion riyals, reducing pressure on Riyadh to pay its bills by liquidating assets held overseas.
Spending, which reached 975 billion riyals ($259.94 billion) this year, is projected to drop to 840 billion ($223.95 billion).
To help make up the shortfall, the country’s finance ministry said it would cut subsidies for fuel. State revenue from oil will be 73 percent in 2015, compared with 89 percent in the previous year, according to a statement posted on the finance ministry website on Monday. The Brent oil price averaged about $US54 ($A74) a barrel this year but is now around $US37. “So far, Saudi policy of gaining market share has worked, with lower prices undercutting both OPEC and non -OPEC competitors in key markets”, wrote analysts at Jadwa Investment, a leading Saudi financial firm, in a note on Tuesday.
As the deficit has swelled, the riyal has dropped in the forwards market to its lowest since 1999 because of fears it may eventually be unpegged from the USA dollar.
Petrol (LSE: 0IMR.L – news) prices in the kingdom have been the cheapest in the Gulf and some of the lowest in the world.
The ministry of finance said that it will revise “energy, water, and electricity prices gradually over the next five years, in order to achieve efficiency in energy use, conserve natural resources, stop waste and irrational use, and minimise negative effects on low and mid-income citizens and the competitiveness of the business sector”.
In a speech, Saudi Arabia’s King Salman bin Abdulaziz Al Saud, said: “Our economy has the potential to meet challenges”.
Economy Minister Adel Fakeih said yesterday that 20 billion riyals of this year’s spending overshoot was due to increased military and security spending related to the military operation against Shiite Houthi rebels in Yemen. “This signals that the Saudis are ready for the new market reality in 2016”, Sfakianakis said.
The economist Dr John Sfakianakis told Asharq Al-Awsat that this is the most cautious budget in recent years as it is the first time in more than ten years that the oil price has been calculated as less than $50 per barrel in a budget. The figure is an accounting device and does not necessarily mean Riyadh expects oil at that level.
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The majority of the increase in overall spending was on salaries to Saudi civil and military employees.
