Saudi Arabia Plans Spending Cuts in 2021 as Economy Recovers
(Bloomberg) -- Saudi Arabia said its spending plans for next year would be expansionary, as it leans more heavily on government-controlled funds to make up for cuts to a finance ministry budget battered by a decline in oil prices and the coronavirus pandemic.
The kingdom will stick to its plan to cut spending by 7.3% in 2021 after its deficit widened dramatically this year, according to an annual budget statement released Tuesday. Spending is projected at 990 billion riyals ($264 billion). Revenue is expected to rise to 849 billion riyals. The budget deficit is expected to narrow to 141 billion riyals, or 4.9% of economic output, compared to nearly 300 billion riyals, or 12% of gross domestic product, this year.
Finance Minister Mohammed Al-Jadaan said Saudi wealth funds were expected to spend 100s of billions of riyals in the local economy in the coming years, even as the government’s direct expenditure drops.
“We still believe we are not out of the woods yet and we wanted to make sure we had enough financing for the health service and make sure we are prepared for a wave two, God forbid, to hit Saudi Arabia,” Jadaan said in an interview with Bloomberg Television. The budget “is expansionary. We wanted to make sure that we stimulate the economy and support growth and diversification. It doesn’t need to be just through government expenditure.”
Saudi Arabia had spent less on stimulus for sectors affected by the pandemic than other members of the Group of 20 major economies but was now on a tentative path to recovery, Jadaan said. Growth is expected to rebound in 2021 to 3.2% after the economy shrunk a projected 3.7% this year, or the most in two decades. That is a more optimistic estimate than the 5.4% contraction forecast by the International Monetary Fund.
The world’s largest crude exporter has faced a double crisis this year as oil market turmoil and the coronavirus pandemic combined to pressure state finances. The government’s options for stimulating the non-oil economy have been limited as businesses faced reduced demand and Covid-related restrictions.
While officials rolled out a series of stimulus programs -- including loan payment deferrals -- they also introduced austerity measures, tripling value-added tax and raising import fees. Those steps helped boost non-oil revenue, which made up about 46% of total revenue this year, but dampened the economic recovery. Jadaan said the government had no plan to revise the VAT rate -- as many Saudis had hoped -- unless the economic situation changes.
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“Saudi Arabia’s 2021 budget statement sees a decline in public spending over the next three years. Domestic investments by the sovereign wealth fund won’t offset these cuts. This would limit the rebound from the virus shock.”
-- Ziad Daoud, chief emerging markets economist
Spending by other state institutions like the sovereign wealth fund could potentially help make up the difference. Saudi Crown Prince Mohammed bin Salman Al Saud said in remarks reported by the state news channel Tuesday that he expected the fund to invest 100s of billions of riyals in Saudi Arabia. He said that ensuring a social security net for the most vulnerable also remained a priority.
The finance ministry plans to reduce spending each year from 2021 through 2023, when it’s expected to reach 941 billion riyals. The deficit is projected to fall to 0.4% in 2023, the year by which officials have said they intend to balance the budget.
At the same time, the government’s reserves at the central back are expected to decline to 280 billion riyals in 2021 from 346 billion this year, as it draws on its savings to help cover the deficit. Reserves are expected to stabilize around 265 billion riyals in 2022-2023.
The numbers were largely in line with a preliminary budget statement released in September.
The statement didn’t disclose, however, a breakdown of revenue into oil and non-oil sources for 2021 as it has in other years. Jadaan said that was because Saudi Aramco was now a listed company and disclosing those figures could give clues about the company’s dividend policy.
©2020 Bloomberg L.P.