Kingdom tightens its belt

30 November 2001

It is becoming increasingly likely that the 2002 budget will involve substantial cuts in government spending compared with the SR 215,000 million ($57,300 million) budgeted for this year. 'Saudi Arabia is integrated in the global economy and is consequently affected by developments that take place in any part of it,' Crown Prince Abdullah told the kingdom's military leaders on 26 November. 'It would be better to tighten our belts until we have weathered the storm.'

The kingdom is facing the prospect of an average oil price in 2002 some 20 per cent lower than this year. 'It appears the price of Arabian light will average $18-19 a barrel in 2002 as opposed to $23 a barrel in 2001,' says Said al-Sheikh, chief economist at Jeddah-based National Commercial Bank.'Oil revenues are obviously implicated and my view is that government expenditure in 2002 will be less than was budgeted in 2001.'

The government is expected to surpass the SR 180,000 million ($48,000 million) oil revenue budgeted for 2001 at the start of this year. Economists say the government based that forecast on a Saudi oil price of $23 a barrel and production of 8.3 million barrels a day (b/d). However, due to forecast high spending, the government is expected to fall slightly short of its targeted balanced budget.

For 2002, assuming a conservative oil price of $16 a barrel and production of 7.5 million b/d, budgeted oil revenues are set to be about SR 142,500 million ($38,000 million).

On 24 November, the Saudi Arabian Monetary Agency (SAMA - central bank) published its annual report. It confirmed the 2000 actual budget surplus, the first since 1982, was SR 22,700 million ($6,100 million).

Spending in 2002 will prove hard to cut in a number of areas because it has only recently started to rise again and the government will be loath to discontinue new projects. But some exceptions will have to be made. 'There are some areas where you can curtail expenditure,' says Al-Sheikh. 'Some new projects can be delayed. Those with a lifespan of only one year can be cancelled in 2002, while the government is likely to maintain projects with a life of four or five years. Some maintenance spending can also be cut or postponed and it is also possible to cut capital expenditure by not recruiting to replace retirements.'

Economists say the kingdom's recent economic performance puts it in a good position to manage lower revenues next year. 'The government by no means went on a spending spree after the oil price recovered two years ago but used the surplus to pay off debts,' says Brad Bourland, chief economist at Saudi American Bank (Samba). 'That stands the government in better stead for the coming year and shows it is aware of the need to prepare for leaner years. There is a little leeway for cuts in the budget and I think the government has the discipline to act on that.'

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