Saudi Arabia said on Thursday it had successfully cut into its huge state budget deficit this year and will increase government spending in 2017 to boost flagging economic growth.
The deficit shrank to SAR297bn ($79bn) in 2016. That was well below a record SAR367bn gap in 2015, and below the government’s projection in its original 2016 budget plan of a deficit of SAR326bn riyals.
“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 2017.
The financial challenges for Saudi Arabia stem largely from the fall in the global price of oil over the past two and a half years.
It is not yet been announced how the 2016 deficit stacks up as a percentage of the economy. It was 15 per cent of GDP in 2015.
The drop in the deficit is nonetheless likely to reassure international investors worried about Saudi Arabia’s ability to cope with an era of cheap oil. The riyal came under speculative pressure this year but currency jitters have eased in recent months.
Riyadh slashed spending on infrastructure and perks for civil servants to get its finances under control. For the first time in years, it kept its spending below its original budget projection in 2016; actual spending was SAR825bn compared with a projection of SAR840bn.
Revenues came in slightly higher than expected at SAR528bns instead of SAR514bn as the government raised cash with steps such as higher municipal and visa fees.
In its 2017 budget plan, Riyadh said it would increase spending to SAR890bn from the SAR840bn originally projected for 2016. But next year’s deficit will shrink further to SAR198bn because of higher oil prices and non-oil revenues, the government said.
Economic growth slowed to 1.4 per cent in 2016, far below the average of 4 per cent in the past decade, as austerity measures hurt consumers’ income and deterred private companies from investing – even though their investment is vital to diversify the Saudi economy beyond oil in the long term.
By increasing state spending on infrastructure, the 2017 budget aims to support economic growth, while a new system of cash payments to poorer citizens will offset the impact on them as the government gradually raises domestic energy prices to reduce its subsidy burden, the finance ministry said.
It gave no details of the planned subsidy cuts.
The following are major economic policies and targets described in Saudi Arabia’s 2017 state budget.
ENERGY SUBSIDIES: The government plans to gradually phase out subsidies on energy, although needy citizens will receive “direct cash support” to help them manage, the budget statement said without specifying when this would happen.
DEBT: Over the next four years, Saudi Arabia plans to diversify its debt sales, both domestically and internationally, to include sukuk. It will also seek to sell instruments denominated in different currencies, depending on market demand and conditions.
PRIVATISATIONS: The National Centre for Privatisation will determine in 2017 the possibility of privatisations in various sectors including public utilities, sports, health, education, transport and municipal services.
SALES TAX: The government will complete arrangements for the introduction of value-added tax, which is to begin at a 5 per cent rate in 2018.
PUBLIC-PRIVATE PARTNERSHIPS: Seventeen government agencies have identified 85 potential projects which could be suitable for cooperation between the public and private sectors. The budget document did not elaborate.
BALANCED BUDGET: The government continues to work towards achieving a balanced national budget in 2020.
EFFICIENCY SAVINGS: A review of the five highest spending government ministries by the Spending Rationalisation Office resulted in savings of around SAR80bn ($21.3bn). It did not identify which ministries were part of the review.
Additional initiatives aimed at increasing the efficiency of capital and operational expenditures will be announced in future.
ACCOUNTANCY: All government agencies will change their accounting practices to rely on the accrual principle, with the move expected to be completed before or during 2020.
Under the accrual principle, transactions are recorded in accounts during the time period in which they occur, instead of when the cash flows relating to them happen.
EXPENDITURES: The Ministry of Finance will work with other government agencies to prepare a framework for expenditures over the medium term, a period defined as between three and five years.
A road map to allow for a full transition to this framework will be developed, the budget statement said, without providing a timeframe for when this would happen.
FINANCIAL PLANNING: Plans and models will be established which will help facilitate the preparation of the 2018 and subsequent budgets.