Saudi Arabia reveals plans to cut record high budget deficit

As one of world’s biggest oil exporting country’s economy starts to send signals of deterioration due to sharp drop in oil prices, Saudi Arabia prepares for spending cuts and reforms to energy subsidies to boost its ailing economy

Photo by: Reuters
Photo by: Reuters

Saudi Arabia's King Salman chairs a session of Saudi Shura Council in Riyadh, December 23, 2015

Saudi Arabia, its finances hit by low oil prices, announced plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatization.

The 2016 budget, released by the Finance Ministry on Monday, marked the biggest shake-up to economic policy in the world's top crude exporter for over a decade, and includes politically sensitive reforms from which authorities previously shied away.

The plan suggests the kingdom is not counting on a major recovery of oil prices any time soon but is instead preparing for a multi-year period of cheap oil. The International Monetary Fund warned in October that Riyadh would run out of money within five years if it did not tighten its belt.

"Our economy has the potential to meet challenges," King Salman said in a speech, adding the 2016 budget launched a phase in which his kingdom would diversify its revenues.

The government ran a deficit of 367 billion riyals ($97.9 billion) or 15 percent of gross domestic product in 2015, officials said. The 2016 budget plan aims to cut that to 326 billion riyals, reducing pressure on Riyadh to pay its bills by liquidating assets held abroad and issuing bonds.

The success or failure of the budget plan will be key to maintaining the confidence of financial markets in Riyadh.

As the deficit has swelled, the riyal has dropped in the forwards market to its lowest since 1999 because of fears Riyadh may eventually have to abandon its peg to the US dollar.

In its budget statement, the ministry said it would adjust subsidies for water, electricity and petroleum products over five years. That is a politically sensitive step since the kingdom has traditionally kept domestic prices at some of the lowest levels in the world as a social welfare measure.

Changes will aim to make energy use more efficient and conserve natural resources, while minimizing the negative effects on lower- and middle-income Saudis, the ministry said.

Minutes later, state news agency SPA said the government had raised domestic fuel, water and electricity prices. The price of 95 octane gasoline climbed to 0.90 riyal ($0.24) per liter from 0.60 riyal - though it remained very low by global standards.

The ministry also outlined other reforms including "privatizing a range of sectors and economic activities," although it did not give details.

The government plans to introduce a value-added tax in coordination with other countries in the region and raise taxes on soft drinks and tobacco, the ministry said, without giving a timeline. The United Arab Emirates has said it expects a regional VAT to take about three years to introduce.