Saudi to continue austerity measures in 2018, says Capital Economics

Saudi Arabia’s Fiscal Balance Program indicates another round of austerity measures in 2018 after this year’s budget, which allows for slower fiscal consolidation, London-based Capital Economics said in a note.

The potential clampdown on spending next year, however, will not be as harsh as that in 2015-16, it added.

“The authorities were keen to emphasize that, in the absence of further fiscal reform, the kingdom would face a ‘chronic fiscal imbalance’ that would fully deplete the government’s savings at SAMA (Saudi Arabian Monetary Authority) and lead to a sharp rise in public debt,” CE said.

The consultancy added that the size of fiscal adjustment would depend on oil prices, forecasting Brent crude to rise to $70 per barrel by the end of 2020.

“On that basis … we estimate that the kingdom would need to implement further austerity measures equal to 3 percent to 4 percent of non-oil GDP,” CE added. “That compares to an adjustment equal to 25 percent of non-oil GDP in 2015-16.”

The Fiscal Balance Program forms another part of Saudi Arabia’s reform drive and provides details on the government’s plan to return the budget position to balance by 2020 – a key target outlined in the Vision 2030 and the National Transformation Plan.

Saudi Arabia had recorded a deficit of 12.5 percent of GDP last year.

According to Capital Economics, the program shows that policy making in Saudi Arabia is improving. It also points to the kingdom’s plan to shift away from outright spending cuts towards a greater reliance on revenue generation.

The government plans to introduce the value-added tax early next year, along with a tax on “harmful” products. Subsidy cuts are also said to be in the offing.

The household allowance, which is intended to partly compensate families for the extra burden they face as a result of fiscal reforms, is likely to lead to higher spending. Savings from subsidy reforms and other revenue generation measures, however, will outweigh this. 

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com