Saudi Arabia’s deficit problem

Saudi Arabia’s deficit problem

Recently, Saudi Arabia’s public deficit has reached unusually high levels for the Kingdom. In an economy where oil revenues account for 90 percent of government revenues, the slump in oil prices gravely hurts the economy. 

For the past years, Saudi Arabia has been known for its incredibly low public debt, which came in at less than 2 per cent of its GDP in 2014. However, this year’s events have created a record budget deficit, along with a record level of public debt.

As a result, Saudi Arabia issued its first sovereign bonds since 2007 in July 2015.

According to a recent report from the IMF, Saudi Arabia’s public debt is estimated to rise from below 2 percent of its GDP in 2014 up to 33 percent by the end of 2020. The report also shows that in the past three years, Saudi Arabia’s budget surplus was turned into a deficit reaching 21.6 percent of GDP in 2015.

Source: IMF, Fiscal Monitor,October 2015

Several events from 2015 are responsible for the sharp rise of this budget deficit.

The drop by more than 40 percent in crude oil prices in the past 12 months is the main cause, as oil accounts for about 90 percent of Saudi Arabia’s revenues.

Following his recent accession to the throne in January, King Salman spent excessive amounts on subsidies and public job bonuses, including extra months salary to all state employees, in order to consolidate his popularity.

These bonuses cost the Saudi government more than many governments spend in a year.

These events, combined with significant amounts of military spending on the Yemen war and security concerning Syria, as well as aid to Egypt, have led to the sharp rise of Saudi Arabia’s budget deficit.

The economic consequences

This week, a leaked internal governmental document exposed the consequences of the recent rapid climb of the Kingdom’s public debt and budget deficit.

The document revealed that King Salman is planning four main austerity measures. He will freeze government hiring and promotions and suspend the purchase of furniture and vehicles.

Furthermore, the government’s departments are ordered not to contract any new project and to freeze appointments and promotions in the fourth quarter.

The Kingdom’s main measure to cover the budget deficit is its decision to not go down with any new projects and contracts.

In July, the government had already cut back on the construction of football stadiums around the country, as the drop of the oil prices already predicted a growing budget deficit.

Out of the eleven stadiums planned to be built, only two stadiums will be constructed, at a delayed time.

However, Saudi Arabia’s government did not choose to trim subsidies to cover the deficit.  

King Salman’s strategy is clear: he is planning to plug the deficit through cuts on capital spending, rather than listening to the IMF’s advice to trim government subsidies.

This is a political choice, an attempt to win over the population in the context of post-Arab-Spring politics. Through government subsidies and government jobs, King Salman is trying to maintain loyal citizenry and counter potential opposition.  

In a report, the IMF also emphasises the need for a long term strategy for Saudi Arabia to cover its budget deficit and minimize the risks for the domestic environment, namely achieving the diversification of its oil-dependent economy.

Three main reasons cited by the IMF stress the importance of a comprehensive strategy.

First, diversifying would reduce the exposure of the economy to volatility in the global oil market.

Second, it would generate jobs in the private sector, which are necessary to grasp the growing young working-age populations into the workforce.

Third, it would boost productivity and sustainable growth.

Although the Saudi economy has evolved considerably over the past decade, further diversification is necessary.

According to the IMF, the country needs to encourage its workforce to become entrepreneurial and to work for privately in order to create a vibrant, diversified economy.

However, the choice of King Salman to sacrifice capital spending and not public jobs spending reflects its position on diversification: it is not a priority compared to gaining social support from its citizens.

About Author

Assia Sabi

Assia Sabi has previously worked in strategic foresight for several organisations related to the Middle Eastern economic and business environment, such as the National Bank of Abu Dhabi and MEC International Ltd. She holds a double degree with a BA in Politics and International Relations from University of Kent and Sciences Po Lille, a master degree from Sciences Po Lille and has just completed an Msc in International Management for the MENA from the School of Oriental and African Studies (SOAS).