Saudi Arabia plans spending cuts in 2021 as economy recovers

Saudi Arabia said its spending plans for next year would be expansionary, as it leans more heavily on government-controlled funds to make up for cuts to a finance ministry budget battered by a decline in oil prices and the coronavirus pandemic.

The kingdom will stick to its plan to cut spending by 7.3 per cent in 2021 after its deficit widened dramatically this year, according to an annual budget statement released on Tuesday. Spending is projected at SAR990bn ($264bn). Revenue is expected to rise to SAR849bn. The budget deficit is expected to narrow to SAR141bn, or 4.9 per cent of economic output, compared to nearly SAR300bn, or 12 per cent of gross domestic product, this year.

Finance Minister Mohammed Al-Jadaan said Saudi wealth funds were expected to spend 100s of billions of riyals in the local economy in the coming years, even as the government’s direct expenditure drops.

“We still believe we are not out of the woods yet and we wanted to make sure we had enough financing for the health service and make sure we are prepared for a wave two, God forbid, to hit Saudi Arabia,” Jadaan said in an interview with Bloomberg Television. The budget “is expansionary. We wanted to make sure that we stimulate the economy and support growth and diversification. It doesn’t need to be just through government expenditure.”

Saudi Arabia had spent less on stimulus for sectors affected by the pandemic than other members of the Group of 20 major economies but was now on a tentative path to recovery, Jadaan said. Growth is expected to rebound in 2021 to 3.2 per cent after the economy shrunk a projected 3.7 per cent this year, or the most in two decades. That is a more optimistic estimate than the 5.4 per cent contraction forecast by the International Monetary Fund.

The world’s largest crude exporter has faced a double crisis this year as oil market turmoil and the coronavirus pandemic combined to pressure state finances. The government’s options for stimulating the non-oil economy have been limited as businesses faced reduced demand and Covid-related restrictions.

While officials rolled out a series of stimulus programmes – including loan payment deferrals – they also introduced austerity measures, tripling value-added tax and raising import fees. Those steps helped boost non-oil revenue, which made up about 46 per cent of total revenue this year, but dampened the economic recovery. Jadaan said the government had no plan to revise the VAT rate – as many Saudis had hoped – unless the economic situation changes.

Spending by other state institutions like the sovereign wealth fund could potentially help make up the difference. Saudi Crown Prince Mohammed bin Salman Al Saud said in remarks reported by the state news channel on Tuesday that he expected the fund to invest 100s of billions of riyals in Saudi Arabia. He said that ensuring a social security net for the most vulnerable also remained a priority.

The finance ministry plans to reduce spending each year from 2021 through 2023, when it’s expected to reach SAR941bn. The deficit is projected to fall to 0.4 per cent in 2023, the year by which officials have said they intend to balance the budget.

At the same time, the government’s reserves at the central back are expected to decline to SAR280bn in 2021 from SAR346bn this year, as it draws on its savings to help cover the deficit. Reserves are expected to stabilise around SAR265bn in 2022-2023.

The numbers were largely in line with a preliminary budget statement released in September.

The statement didn’t disclose, however, a breakdown of revenue into oil and non-oil sources for 2021 as it has in other years. Jadaan said that was because Saudi Aramco was now a listed company and disclosing those figures could give clues about the company’s dividend policy.