Al-Assaf has responded with caution. He has forecast government revenue at SR 170,000 million, more optimistic than the 2002 revenue forecast of SR 157,000 million but some way below the estimated actual 2002 revenue of SR 204,000 million.
Oil market volatility is the principal reason for Al-Assaf’s budgetary conservatism. Saudi American Bank (Samba)estimates that the 2003 budget is based on a Saudi oil price of $17.50 a barrel – roughly equivalent to $19.50 a barrel for the benchmark Brent crude – and production of about 7.5 million barrels a day (b/d). In 2002, the kingdom is set to have produced an average of 7.6 million b/d at a Saudi price of $23.50 a barrel.
Oil prices in 2002 have been much stronger than expected at the start of the year for several reasons. The hot political climate of the Middle East, and specifically the threat of military action against Iraq, has added an estimated $4 a barrel to the price. OPEC quota cuts have also played a part, with quota-bound members bringing actual average production down by roughly 1.5 million b/d in 2002 over 2001.
But the situation could change dramatically next year. The International Energy Agency forecasts oil demand in 2003 to grow by just 1 million b/d, while non-OPEC supply is due to increase by some 1.3 million b/d. The message is that OPEC will have to cut its production still further – and Saudi Arabia will likely make the largest sacrifice. Of equal concern, the political premium is unlikely to stay as high throughout 2003 if the Iraq situation was resolved and Venezuelan President Chavez was ousted.
Non-oil revenue, accounting for about 20 per cent of the total, remains largely static. However, under plans revealed to MEED in September by Abdulrahman al-Tuwaijri, secretary-general of the Supreme Economic Council, the government is looking at ways to boost non-oil revenue through VAT and luxury taxes. There have also been muted suggestions that income tax, which is to be levied on foreigners from 2003, will be extended to Saudis as well.
Al-Assaf’s theme of caution was evident in the spending plans. Budgeted expenditure of SR 209,000 million is higher than any previous year except the anomalous 2001, when the previous year’s high oil prices allowed the purse strings to be relaxed. Nevertheless, it represents a 7 per cent cut on the estimated actual spending in 2002.
Rising public spending is driven primarily by the extra demands placed on the government by a growing population. This is borne out by a glance at the breakdown in budgeted spending. Education and health already account for the second and fourth largest budget allocations; spending on both is budgeted to rise significantly in 2003. In contrast, spending on defence, the largest chunk of the budget, is forecast to fall slightly, while expenditure on public administration, the third largest part of the budget, is projected to fall dramatically.
Al-Assaf’s real question is how far the government can afford to overspend. Over the past decade, expenditure has been on average 25 per cent over budget each year. The 2002 performance slightly improved on this trend, with spending only 11 per cent over budget.
The result is debt, and Saudi Arabia now owes more than ever. Based on the government’s estimated 2002 performance, government debt now stands at SR 675,000 million, roughly 94 per cent of GDP. If the government sticks to its budget in 2003, this will rise to SR 714,000 million, according to Jeddah-based The National Commercial Bank.
Exchange rate: $1=SR 3.75