Saudi Arabia, the region’s largest economy, is implementing sweeping changes as it seeks to cut its dependence on oil and diversify its revenue streams by introducing reforms that include taxation, a review of subsidies and the limiting of public sector wages amid a continued slump in hydrocarbon prices.

Saudi Arabia’s 2016 budget, which is the first for the country’s monarch King Salman bin Abdulaziz al-Saud who ascended to throne in January 2015, has been closely watched to gauge how the regional economic powerhouse will cope with the challenging times.

The kingdom’s Deputy Crown Prince Mohammed bin Salman al-Saud has been privately outlining plans for sweeping changes in the country’s economy. In mid-December he presented a strategy, which included state spending reforms.

Expenditure framework

The 2016 budget reflects some of the steps outlined in the meeting including enhancing fiscal management by establishing a public finance unit in the Ministry of Finance responsible for setting a budget ceiling by adopting a medium-term expenditure framework for a time period of three years. The kingdom is reviewing and improving budget policies and procedures in preparation to begin implementation this year, according to a statement from the Ministry of Finance.

It plans to optimise capital spending, including a review of government projects, their scope and priorities. The government intends to ensure their “efficient implementation on the one hand, and that they remain consistent with the development priorities, orientations and needs and with financial and funding requirements on the other,” the ministry said in the press release.

The National Project Management Agency which was set up following a resolution by the Saudi Council of Ministers will work with all concerned parties to achieve this in 2016.

The government will optimise the operating expenditures, including the rationalisation of government agencies’ expenses, the utilisation of technology for the delivery of government services, and the development of controlling governance mechanisms.

Saudi Arabia also plans to control the growth of recurring expenditures, especially wages, salaries and allowances, which amounted to SR450bn ($120bn), exceeding 50 per cent of the approved budget expenses, according to the statement.

It plans to improve the methodology and tools for the management of state assets and embracing policies designed to achieve wider structural reforms in the national economy and reduce its dependence on oil.

These measures, which will be implemented in five years starting 2016 include privatising a range of sectors and economic activities; overcoming legislative, regulatory and bureaucratic obstacles in the private sector; reforming and developing government performance; improving transparency and accountability levels, the press release said without elaborating which of the sectors the government intends to privatise.

Improvements in the investment environment are also sought next year to create new jobs in the private sector and providing partnership opportunities between public, private and non-profit sectors.

Subsidies and taxation

Investments will be encouraged in education, health, security, social and municipal services, water and sanitation, electricity, roads, electronic transactions, scientific research, to help Saudi citizens.

Saudi government, which has doled out tens of billions of dollars in subsidies intends to review government support, including the revision of energy, water, and electricity prices. The new prices will be implemented gradually over the next five years

A review of taxation system will also be conducted including the current levels of fees and fines and completing the necessary arrangements for the application of the value added tax (VAT) approved by the Supreme Council of the Arab Gulf States Cooperation Council. In addition, the government considering further taxes on goods such as tobacco and soft drinks.

Debt management

The government is establishing a unit in the Ministry of Finance for public debt management. The new unit will be responsible for developing and overseeing the public debt and financing strategy and strengthening the kingdom’s ability to borrow both domestically and internationally. This, the Ministry of Finance said will contribute to the market for sukuk and local bonds.

Riyadh, which has yet to raise money from the international market after the oil price collapse has already been issuing local currency bonds. The government last week approached financial institutions to sell them bonds worth SR20bn. The country started selling bonds to the banks in July for the first time since 2007, primarily, to meet expenses. The latest issue brings to SR98bn the amount of bonds issued by the government to local banks so far this year.