Saudi Arabia’s King Salman has decreed economic reforms aimed at diversifying sources of revenue and decreasing high dependence on oil amid the steep decline in crude prices.
The King Speaks
In a Wednesday televised speech before a meeting of the Shura (Consultative) Council, the king said, “Our vision for economic reform is to increase the efficiency of public spending, utilize economic resources and boost returns from state investment…I have directed the Council of Economic and Development Affairs to devise the necessary plans, policies and programs to achieve that.” Salman went on to emphasize the importance of continued investments in education, housing, health care, transportation and employment.
Saudi King Salman Bin Abdulaziz
The Royal Kingdom is confronting an unprecedented budget crunch as oil prices have fallen by more than 60% since July 2014. Oil income represents more than 90% of Saudi’s public revenues.
King Salman said that Saudi is able to withstand low oil prices, referring to the large number of large infrastructure projects and the increase in the country’s fiscal reserves that occurred in previous years- during the rule of his predecessor King Abdullah- when oil prices were high.
The size of Saudi’s fiscal reserves has allowed the country to surmount the consequences of the steep drop in oil revenues, the king said. He added that development projects have not been impacted by the fall in prices. Saudi Arabia would “maintain stability and balance between revenue and spending on big development projects in all sectors.”
Saudi’s 2016 Budget To Be Released Next Week
Next week, Saudi’s 2016 budget is expected to be announced. The IMF said in October that the country is forecast to post a record budget deficit of between $100 billion to $150 billion in 2015, or more than 20% of GDP. Last year, Saudi Arabia reported a $17.5 billion budget deficit, its second since 2002.
The IMF also warned that Saudi could burn through its financial assets within five years if it did not enact vigorous reforms- including the expansion of non-oil revenues- saying that not doing so would further deplete its foreign reserves.
Saudi wasn’t the only MENA player that the IMF warned. “Intensifying conflicts and depressed oil prices are weakening growth prospects and raising risks across the region, a situation compounded by the recent bout of global financial market volatility,” the agency said in its October Middle East and Central Asia Regional Economic Outlook.
The IMF projects 2015 growth in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region to be 2.5%, down from 2.7% growth in 2014. The IMF projected fiscal deficits to be 12.7% of GDP in the MENAP oil exporting countries and 7.3% of GDP in the oil importing countries of MENAP this year.
Foreign Reserves Decline
In order to finance its budget deficit over the past year, Saudi has withdrawn funds from its foreign reserves and has also issued bonds to finance its budget deficit. OPEC’s largest producer, Saudi currently produces approximately 10.4 M/bpd.
The kingdom’s reserves declined to $644 billion at the end of October from $732 billion at the end of 2014. The finance ministry has also issued bonds valued at $20 billion for the domestic market.