Saudi Arabia will cut government spending in 2016 by around 2.3pc below this year's levels, including reductions in domestic fuel subsidies, reflecting the drastic drop in the country's oil revenues from lower oil prices.
In an unprecedented move, the finance ministry said the government plans "a review and evaluation of government subsidies, including amending the system of subsidising petroleum products, water and electricity, and repricing them in a gradual manner over the next five years."
The move is a sensitive one that the Saudi ruling establishment has long hesitated to take since low energy prices are a long-running expectation in Saudi Arabia. The gradual lifting of subsidies is likely to begin with gas, which is sold domestically to industrial consumers at $0.75/mn Btu.
The government "aims to achieve energy efficiency, preserve natural resources and stop wasteful consumption," the finance ministry said. Additional measures would be taken to reduce the impact of the planned subsidy reforms on middle and low-income citizens and on the competitiveness of the business sector, but the government gave no further details.
The 2016 budget approved by King Salman bin Abdel-Aziz today is SR840bn ($224bn), compared to the 2015 budget of SR860bn ($229bn). The spending cut, which is the first in more than 10 years, indicates that the Saudi government expects oil prices to remain at current lower levels in 2016.
Announcing the 2016 budget at a cabinet meeting today, king Salman said he has ordered "comprehensive economic, financial and structural reforms" and that the government is seeking to diversify revenue sources. Oil revenues make up 90pc of Saudi government revenues.
The 2016 budget forecasts overall revenues of SR514 ($137bn), down from actual revenues of SR608bn ($162bn) in 2015, and a deficit of SR326bn ($86.9bn). That deficit is SR41bn ($10.9bn) lower than the SR367bn ($97bn) deficit in 2015. This year's overspending included bonuses and grants to Saudi citizens of around SR100bn ($26.6bn) decreed by king Salman to mark his ascension to the throne, and military and security spending of around SR20bn ($5.3bn).
The 2015 budget, when it was announced in January, had projected revenues of SR715bn ($191bn). The SR107bn ($28.5bn) shortfall in this year's expected revenues is partially attributable to lower than expected oil prices. Saudi Arabia's 2015 oil revenues came to 444.5bn ($118.5bn) — 23pc lower than had been planned — contributing 73pc of government revenues, according to the finance ministry.
The Saudi government never announces the oil price that it assumes in its budgets, but economists based in the country have estimated that the 2015 Saudi budget assumed an oil price of $60/bl for Brent crude. Actual Brent prices averaged $52.44/bl this year. Saudi Arabia has produced an average of slightly above 10mn b/d this year, with exports averaging over 7mn b/d.
The finance ministry said it is introducing a set of policy and structural reforms aimed at reducing spending and economic dependence on oil. But it also said that "given the sharp volatility in oil prices recently," a supplementary allocation worth SR183 ($49bn) has been set aside "to bolster the budget in order to deal with a possible shortfall of revenues and to provide additional flexibility to rearrange capital and operational expenditures on existing and new projects."
In addition to cutting energy subsidies, measures to reduce government spending include reviewing the scale and priority of government projects to "boost the efficiency of capital spending," and a reduction in current spending by limiting wage growth among state employees, which take up over 50pc of the budget.
Saudi Arabia's five-year reform plan also includes the privatization of some sectors of the economy.
Source: Argus Media
Date: Dec 28, 2015