Saudi Arabia has claimed early success in its 2020 National Transformation Program, designed to end its economy’s reliance on oil, with the announcement of a lower-than-expected budget deficit for this year and a forecast of an even lower figure for next year.
The government plans to increase public spending in the new year amid higher oil revenue, according to its budget announcement yesterday.
But the country’s austerity drive is also set to continue, with the further phasing out of energy subsidies and new taxes on tobacco and soft drinks.
The Ministry of Finance said the government would post a deficit of 297 billion Saudi riyals (Dh290bn) for this year, 9 per cent lower than its initial estimate for the year and an 19 per cent reduction on 2015’s record shortfall.
That deficit is forecast to shrink by a third by the end of next year to 198bn riyals, or 7.7 per cent of GDP, with the government aiming to post a “balanced” national budget by 2020.
GDP growth in Saudi Arabia slowed to 1.4 per cent in 2016 on lower oil revenue, compared with an average of 4 per cent for the previous decade.
“Our economy, thank God, is sturdy and it has enough strength to cope with the current economic and financial challenges,” King Salman said in a nationally televised address to introduce the budget for next year.
Government spending, which fell 13 per cent in 2016, is set to increase 8 per cent to 890bn riyals next year, the ministry announced.
“The 2016 budget numbers are very positive given that the deficit is below 300bn riyals and below what the market was expecting,” said John Sfakianakis, the director of economic research at the Gulf Research Centre in Riyadh.
“Spending for 2017 is showing an uptick, which is translated in additional investments as well as confidence for the private sector.” Lower oil prices caused Saudi government revenue to plunge by nearly 60 per cent in 2015, resulting in a record deficit of 367bn riyals.
In response, the government launched in April an ambitious 270bn riyal National Transformation Program, with the aim of weaning the economy off its reliance on energy revenue.
Saudi Arabia has already reduced subsidies on fuel, electricity and water, and announced salary cuts for high ranking officials.
The government will continue to phase out subsidies on energy in the new year, but said that it would provide Saudi nationals with “direct cash support” in cases of financial hardship.
Government revenue is expected to rise 31 per cent to 692bn riyals next year, according to the budget. Much of this is because of a 46 per cent increase in oil revenues, assuming an average oil price of US$50.60 a barrel for the year.
Brent oil was up 1 per cent to $55.05 a barrel in afternoon trading yesterday.
Non-oil revenue, meanwhile, is forecast to grow 6.5 per cent to 212bn riyals next year, up from 199bn riyals in 2016.
The Ministry of Finance said it would finalise a plan next year for the introduction of value-added tax, scheduled to be introduced across the GCC from 2018.
Also on the government’s agenda for next year are “selective taxes” on tobacco, energy drinks and soft drinks, although no further details were given.
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