Saudi Budget 2017: Major break from the old mold

The Saudi 2017 budget announcement has broken from the traditional budget mode with some significant steps in the pipeline, with measures that were highlighted in the Vision2030 and National Transformation Plan 2020 being implemented.

Unlike previous budgets, the 2017 budget is based on a four-year budgetary cycle for the period 2017-2020, the first of its kind and in line with the newly established Ministry of Finance general fiscal unit to ensure a fiscal balance program in reducing unnecessary expenditure and maximizing non-oil revenue.

Taking a medium to longer term budgetary cycle is more important for national development and transformation plans rather than reacting to short term revenue fluctuations based on a single commodity like oil. The Saudi government has stated it will not shy from taking some tough decisions on subsidies and announced that all subsidies will gradually be removed over the medium term budget cycle and that to alleviate hardship amongst lower income citizens a direct cash support will be made.

Expatriate remittances tax and fees had been rumored to be introduced but was not implemented, with the government committed to implementing the 5 percent GCC-wide VAT tax from fiscal 2018 on the so-called sin commodities like tobacco and fizzy drinks.

Expenditures have been set at SAR 890 billion compared with budgeted 840 billion riyal in 2016, and an actual expenditure of 825 billion riyal, or a 8 percent rise, indicating that despite low oil prices, the Saudi government is still pursuing a fairly accommodative budget expenditure program bearing in mind that a new element of budget expenditure has to meet the implementation of the ambitious Vision 2030 and National Transformation 2020 programs which are estimated to cost 217 billion riyal over the period 2018-2020 with an allocation of SAR 42 billion in the new fiscal year.

Revenues have been forecasted to reach SAR 692 billion, compared with SAR 514 billion for 2016, and an estimated 2016 actual of SAR 528 billion, indicating a deficit of SAR 297 billion for fiscal 2017, lower than the previous year and seemingly based on a forecasted average oil price of $55 per barrel for fiscal 2017.

Beyond oil

Non-oil income is estimated at 212 billion riyal, up over the SAR 181 billion estimated for 2016 with an actual 199 billion riyal, indicating a rise in this element as the Public Investment Fund acquires more international investments over the new budget cycle and the Kingdom tries to wean itself gradually from dependency on oil revenues.

Unlike previous budget statements, the Ministry of Finance gave a very detailed breakdown of non-oil revenues with an estimated 62 billion from SAMA investments in 2016 and 35 billion riyal in the previous year.

Setting the budget oil price level at $55 per barrel indicates that the Kingdom is keen not to see oil prices rise too sharply above the $60 bpd benchmark and, as Energy Minister Khaled al-Falih, commented following the OPEC and non-OPEC agreement in December, the Kingdom would be prepared to intervene again to cut production if need be to ensure that there is a steady path towards balancing market supply and demand.

Capital expenditure is set to rise compared with 183 billion riyal for 2016, sending a positive signal to the local stock market which had been worried about a potential slowdown in government project expenditures, especially in the contracting sector.

Job creation and an invigorated localization program is at the heart of the new budget, especially in the defense sector, as well as implementing the government’s competitiveness and procurement laws to optimize on capital expenditure and to ensure these projects are consistent with national priorities. Again these are significant breaks from traditional Saudi budget announcements.

Public debt is estimated to be a 316 billion riyal or 12.3 percent of the GDP for 2016 and is forecasted to rise to 30 percent of GDP over the period 2020, with the government announcing its intentions to raise more international debt, following the successful international mega bond placement of $17.5 billion in 2016.

The budget announcement did not mention any change to the current fixed exchange parity for the Saudi Riyal and this is not expected to change over the current four-year fiscal cycle.

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Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.