Saudi Arabia’s 2016 budget is out and the most awaited economic data from the Middle East’s economic powerhouse did not contain any surprises.

Reduced spending, economic reforms, and finding alternative revenues streams to cut the kingdom’s dependence on oil were the key themes as state coffers shrink and the economy slows down.

Riyadh expects a SR326bn ($87bn) budget deficit in 2016. Revenues are projected at SR513bn, almost 16 per cent lower than the actual figure in 2015, which sat at SR608bn, according to a press release published by the Finance Ministry on 28 December.

Oil sales were the key contributor to the government’s financial muscle. At SR444.5bn, hydrocarbons accounted for 73 per cent of the total revenues in 2015. However, it is still 23 per cent lower than oil receipts in 2014, a clear indication of the financial challenges now facing the largest economy in the Middle East.

Fresh challenges

If 2015 was a hard year, there will not be much respite for Saudi Arabia in 2016. With oil touching 11-year lows in the past few weeks of 2015 and no signs of a price reversal in the near future, the kingdom is doing everything it can to adjust to the new economic realities and has even made the unpopular choice of cutting down on subsidies to the public.

As usual, policymakers in Riyadh did not mention the average price of crude at which they have based their revenue projections for the year. However, the kingdom admitted the budget for the next fiscal year has been adopted in light of “very low oil prices” as average rates of oil for 2015 declined by more than 45 per cent from a year ago.

“This budget also comes amid challenging international and regional economic and financial conditions, namely a global economic slowdown in growth,” the Finance Ministry said in the statement.

Opec, the dominant oil cartel in the world, is battling with US shale producers for its share of the global crude trade. The Saudi-led price war has sent shockwaves across the GCC. The Gulf states, which account for about a third of the world’s proven oil reserves, rely heavily on the sale of crude and are now braving softening economies and rethinking spending plans amid shrinking revenues.

Expenditure control

Saudi Arabia expects actual spending for 2015 to reach SR975bn, which is a 13 per cent increase on the estimated budget spending. In 2016, the government estimates it will spend SR840bn, a reduction of SR135bn ($36bn) from actual spending last year.

In previous years, maintaining budgetary spending has not been a problem for the kingdom. The $100 a barrel economic windfall allowed Riyadh to continue spending tens of billions of dollars on mega infrastructure projects. Understandably, overspending is unlikely to be seen next year.

The Finance Ministry said the hike in 2015 spending was mainly due to additional salaries for civil and military employees, beneficiaries of social security and retirees. This amounted to SR88bn, a 77 per cent increase in total expenditure in addition to what has been spent on military and security projects, which amounted to SR20bn. Saudi Arabia now plans to control recurring expenditures, especially wages, salaries and allowances, which amounted to SR450bn and exceeded 50 per cent of the approved budget expenses. The government’s operating expenses will also be curtailed, including the rationalisation of government agencies’ expenses, according to the statement.

Economists say this is a landmark budget for the country, which will help ease the burden of low oil prices in the short term and prepare the economy for growth once the slump in oil prices ends. 

“The budget announcement is a significant one for the Saudi economy,” says Jean-Michel Saliba, Middle East and North Africa economist at the US’ Bank of America Merrill Lynch. ”It likely marks the end of material overspending practices, given the tighter controls. It starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue- and expenditure-side measures. It likely signals no near-term changes to energy or foreign exchange policy.”

Sweeping reforms

The kingdom’s Deputy Crown Prince Mohammed bin Salman al-Saud has been the force behind the economic reforms the kingdom so direly needs. In mid-December, he revealed his plans for sweeping changes in the economy in a meeting with senior officials, businessmen and economists.

The 2016 budget reflects some of the steps outlined in the meeting, including enhancing fiscal management by establishing a public finance unit within the Finance Ministry. The unit will be responsible for setting a budget ceiling by adopting a medium-term expenditure framework for a period of three years. The kingdom’s budget policies will also be reviewed and the implementation of the new framework will begin in 2016.

Capital spending, including a review of government projects, their scope and priorities, is another key point on Riyadh’s agenda in the next fiscal year. The government has earmarked less than half of what it had allocated for the infrastructure and transportation sector last year, slashing it from SR63bn in 2015 to SR23.9bn in 2016.

The reduction in spending could mean delays in some of the kingdom’s largest upcoming projects including the new metro lines for Mecca, Jeddah and Medina, as well as regional rail schemes such as the Saudi Landbridge.

Support provision

As a safety net against the excessive volatility of oil prices and potential decline in revenues, the government has established a budget support provision of SR183bn to have the flexibility of redirecting capital and operating expenditures on both ongoing and new schemes.

Public development funds such as the Saudi Industrial Development Fund, Saudi Fund for Agricultural Development, Real Estate Development Fund and the Saudi Credit and Saving Bank, will continue to finance different development projects to the tune of SR49.9bn.

Infrastructure and transport are not the only sectors to see funds slashed. The education and training sector, which received SR217bn from the state budget in 2015, is set to get SR192bn in 2016 as Saudi Arabia prepares to spend SR213bn, almost a quarter of the total expenditure, on military and security services.

This is the first budget for the country’s monarch, King Salman bin Abdulaziz al-Saud, who ascended to the throne in January 2015. This is also the first time the country has publicly announced its defence expenditure, underpinning the economic cost for the kingdom, which is leading a Gulf coalition in the Yemen war.

Privatisation focus

The government plans to improve the management of state assets, and over the next five years it is looking to privatise a range of sectors and economic activities; overcome legislative, regulatory and bureaucratic obstacles in the private sector; and improve transparency and accountability levels, according to the Finance Ministry.  The authority did not elaborate on which of the sectors the government intends to privatise.

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

The kingdom, which has doled out tens of billions of dollars in subsidies, intends to review the level of government support in the future, including a revision of its energy policy and utility prices. The new prices will be implemented over the next five years.

As the first installment of new tariffs, the Council of Ministers on 29 December announced a hike of more than 50 per cent for some of the petroleum products in the country. Price increases for electricity, water and sewage, diesel and kerosene, are to follow, the Saudi Press Agency reported, quoting a cabinet statement.

To beef up alternative revenue lines, Riyadh is reviewing the taxation system, including the current levels of fees 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 is considering further taxes on goods such as tobacco and soft drinks.

“In 2016, we will see continuous growth on the part of public revenues and attempts to diversify income, be it through fees or VAT or fees on empty land as we saw [in November],” says Fahad Alturki, chief economist and head of research at the local Jadwa Investment. “Energy subsidy reforms, which will be applied gradually, will serve as an important alternative income.”

Debt management

The kingdom is establishing a unit within the Finance Ministry for public debt management. It will be responsible for developing and overseeing the public debt strategy for both domestic and international borrowing. The debt programme will be mindful of liquidity conditions in the local market to ensure the private sector has access to funding. These steps, the ministry said, will help sukuk (Islamic bond) and local bond markets to expand.

Saudi Arabia’s public debt at the end of the 2015 is estimated at SR142bn, which is equivalent to 5.8 per cent of the expected GDP this year. This compares with the state’s debt of SR44bn registered at the end of 2014, which represented 2 per cent of GDP that year.

Riyadh, which has yet to raise money from the international market after the oil price collapse, has already been issuing local currency bonds. In mid-December, the government approached financial institutions to sell them bonds worth SR20bn, according to media reports. The country started selling bonds to banks in July for the first time since 2007, primarily to meet expenses. It has so far issued bonds worth SR98bn this year.