SAUDI ARABIA TO CUT SPENDING NEXT YEAR BY 7.5%

Thu 01 October 2020:

The economy is expected to shrink by 3.8 percent this year, the budget document said

Saudi Arabia plans to cut spending by 7.5 percent in next year’s budget to 990 billion riyals ($263.94 billion) but expects the economy to return to growth as its management of the coronavirus crisis improves, a preliminary budget statement showed.

The projected retrenchment in spending comes as the world’s largest oil exporter faces an economic contraction caused by the pandemic, a drop in oil prices, and crude production cuts, and follows a significant drop in revenue this year.

Spending is expected to decrease to 955 billion riyals and 941 billion riyals in 2022 and 2023, respectively, with the deficit shrinking to 3 percent and 0.4 percent in those two years. Spending this year is estimated at 1.07 trillion riyals.

“The fact that spending is expected to fall further over the next few years suggests that, despite policymakers’ recent suggestions that they are looking at all measures to boost the economic recovery, this is unlikely to involve rowing back on recent fiscal austerity,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

For Mazen al-Sudairi, head of research at Al Rajhi Capital, the government must depend on other means to shore up the economy, “and probably the role of PIF in supporting local economy will increase,” he said, referring to Saudi Arabia’s sovereign fund, Public Investment Fund.

Consumer demand

Saudi Arabia said it was committed to achieving the goals outlined in Vision 2030 – a reforms scheme aimed at diversifying the economy away from oil revenues – but that programs under the vision would undergo “structural improvements” and would be reprioritized to spur growth.

The economy is expected to shrink by 3.8 percent this year, the budget document said, a more optimistic projection than the 6.8 percent contraction estimated by the International Monetary Fund.

In 2021, the economy is expected to swing back to a 3.2 percent growth, partly because of the “continued improvement in containing the pandemic,” it said.

Saudi Arabia estimates total revenue to drop around 17 percent this year to 770 billion riyals from 927 billion in 2019, and to bounce back to 846 billion riyals in 2021.

“The government has sought to find more sustainable sources of revenue to reduce the negative impact of the crisis,” said the document, citing a tripling of value-added tax in July to 15 percent and an increase in customs duties for some goods.

That tax however has lifted inflation and economists say will weigh on consumer demand, dampening economic recovery.

“We have a lower estimate for projected revenues in 2020 considering the COVID impact and below potential revenues from the VAT hike considering depressed consumption,” said Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes.

-Reuters

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