Saudi Budget 2017: Shrinking deficit, raising expenditure

Saudi Arabia has announced today its general budget for the fiscal year 2017 that shows its gross domestic product (GDP) growth has risen by 1.4 percent to 2581 billion Saudi Riyals (SAR) or over $ 688 bn in 2016.

The budget also indicates that this year’s deficit was lower than originally expected, at about 297 billion riyals ($79.2 bn), or 11.5 percent of GDP, compared with over 15 percent of the GDP in 2015.

This situation would give Saudi Arabia the opportunity to claim that it is succeeding in keeping public finances in check. Meanwhile, it would give the government more room to raise public expenditures in 2017, while decreasing the fiscal deficit even further.

Higher spending and revenues

According to the figure released by Saudi Ministry of Finance, total revenues are expected to reach SAR 528 billion in 2016, 2.7 percent more than SAR 514 billion ($137.0 billion) projected at the beginning of the year. While spending for 2016, after excluding expenses related to previous years, is expected to reach SAR 825 billion ($220 billion), a 1.8 percent decrease compared to SAR 840 billion ($224 billion) projected at the start of the year, and 15.6 percent less than last year’s expenditure of SAR 978 billion ($260.7 billion).

However, total expenditure expected by the end of the current fiscal year, including late due payments for the previous years is SAR 930 billion ($248 billion).

The budget expenditure for 2017 is estimated at SAR 890 billion ($237 billion), an 8 percent increase over the projected 2016 expenditure of SAR 825 billion. The 2017 Budget includes additional funding for NTP initiatives, estimated at SAR 42 billion, in addition to the projects which have already been funded through surpluses of previous fiscal years and a funding package to stimulate and promote growth of the private sector.

Total revenues are expected to reach SAR 692 billion ($ 184 billion) in 2017, a 31 percent increase compared to initial projections this year.

Shrinking deficit, rising debts

The Saudi government announced that due to the implementation of measures to reduce spending, expenditure was lower than initially projected, and as result, the 2016 deficit will decrease to an estimated SAR 297 billion ($79.2 billion) or 11.5 percent of GDP, significantly lower than its highest level in 2015 at SAR 366 billion and is slightly less than the deficit predicted by the International Monetary Fund (IMF) for this year around $83 bn or 13 per cent of the Kingdom’s GDP.

The fiscal deficit for this year is substantially less than the one recorded in 2015 which was ballooned to a record despite a sizable reduction in the government expenditures. As per official statistics, the Kingdom’s fiscal deficit hit 367 billion riyals ($97.7 billion), equivalent to 15 percent of GDP in 2015. While, the IMF data suggest that the fiscal deficit of the Kingdom climbed to about $103 billion, or 15.9 percent of GDP in 2015 from 3.4 percent of GDP in 2014.

Although Saudi deficit is still substantial and is the highest in the Middle East, but the new figure would allow the Saudi government to claim significant success in its battle to decrease its massive deficit and in keeping public finances in check. Looking forward, the IMF is forecasting the Kingdom’s fiscal deficit to decline further to 9.5 percent in 2017, while the Saudi government is expecting that the deficit will reach SAR 198 billion ($53 billion) in 2017, or 7.7 percent of GDP (in fixed prices), and down by over 33 percent year-on-year.

As per the Saudi government, the deficit will be partially financed by issuing new debt instruments (in line with the national debt strategy), in addition to drawing from reserves. The total national debt for the fiscal year (2016) was approximately SAR 316.5 billion ($84.4 billion), which is 12.3 percent of the projected GDP in fixed prices for 2016.

The total expenditure to service the national debt during the current fiscal year is expected to be SAR 5.4 billion ($1.44 billion), while the cost of servicing the national debt for the coming fiscal year 2017 is expected to be SAR 9.3 billion ($2.48 billion).

Trends going forward

Against this backdrop, three negative trends will continue to overshadow the Saudi general budget in the coming years. First, the military expenditure continues to occupies a large share, or about a quarter of the budget in 2016, although the government expects the ratio to fall back to around 21 percent of the total budget in 2017. Second, the inflation, the General Cost of Living Index, a key indicator of the overall level of prices, has shown an increase of 3.4 percent in 2016 from the base year of 2007 and compared to 2015.

Higher energy and water prices led to a sharp increase in inflation in recent months to over 4 percent. Finally, Saudi Arabia’s net foreign assets at SAMA, the Saudi central bank, will continue to shrink. These assets shrank $11 billion from September to $544 billion in October, 16.3 percent down on a year earlier and their lowest level since December 2011.

Importantly, the IMF has also identified key risks to Saudi Arabia’s economic outlook which could hurt confidence and growth. Oil price volatility and the possibility of further decline in crude prices and more volatile international financial market conditions could constrain external financing and put additional pressure on reserves, domestic liquidity, and credit.

This could also have a bearing on speed and commitment of reform implementation and possible escalation of regional tensions or domestic security concerns.
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Dr. Naser AL-Tamimi is an independent UK-based Middle East researcher, political analyst, and commentator with particular research interests in energy politics and Gulf-Asia relations. AL-Tamimi is the author of the book, (China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance? Routledge, 2014). He has also carried out extensive research on various aspects of Middle East-China/Asia relations, Saudi Arabia in particular. AL-Tamimi has worked for numerous Arab media and academic institutions, in the United Kingdom and a number of Arab countries and has written several articles, papers, and chapters in English and Arabic, (available at: https://independent.academia.edu/nasertamimi ) on the most pertinent political and economic issues affecting the Middle East. The writer can be reached at: Twitter: @nasertamimi or @chinaarabnews and email: [email protected]