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Saudi Arabia’s fiscal map becoming more transparent

Last week, Saudi Arabia’s Finance Ministry made a historic announcement: Its first quarterly budget report. The fiscal map of Saudi Arabia is becoming more predictable and transparent. It is one of the many steps the country is taking to make its economic thinking more open but also more fiscally disciplined; the need for further reforms is urgent. What the country aspires for under the Vision 2030 plan is to steer away from its dependency on oil. The country’s volatile revenues have to become more predictable as it moves away from crude.

The latest budget report is an example of this volatility, which Saudi Arabia is trying to limit. Quarterly revenue rose 72 percent to SR144.1 billion ($38.4 billion), while expenses fell 2.5 percent to SR170 billion. Oil accounted for 77.7 percent of the total revenues compared to 62.1 percent during the same period last year.

Last year’s oil exports averaged 7.6 million barrels per day (bpd). Saudi Arabia has shouldered a large part of the output cuts arranged with members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia, in late 2016, which are undoubtedly impacting the Kingdom’s oil export revenues. The Kingdom settled for the biggest cuts — 486,000 bpd. Saudi Arabia initially reduced more than that but output ticked up in April, according to the latest OPEC report.

The oil market is influenced by both strong evidence of compliance by OPEC members — which many initially doubted — and the return of the US shale output as oil prices have rebounded. Since OPEC agreed to cut output six months ago, US shale production has risen by about 600,000 bpd, accounting for 33 percent of the OPEC and non-OPEC cuts of 1.8 million bpd. OPEC will have to think hard about extending production cuts and possibly adopting deeper cuts. Not too long ago, the chief executive of Total, the French oil and gas giant, said that oil prices could slide by the end of the year due to a rapid increase in US shale drilling.

It is precisely this kind of uncertainty and volatility that Saudi Arabia wants to avoid and push toward diversifying its non-oil revenue options. On the revenue side, Saudi Arabia is on the path toward greater options. 

Taxes and fees such as foreign corporate income tax, taxes on goods and services, taxes on trade and transactions, such as customs, and other taxes such as Zakat, comprised 9.5 percent of the total revenues and 43 percent of non-oil revenues; they are slated to rise in the coming few quarters.

The overall economic picture looks healthier as the country’s finances are being rationalized, underscoring the urgent need to diversify sources of revenue.

John Sfakianakis

Despite the lower economic output, taxes across the board saw an increase, which is probably due to improved collection capacity. For the first time, we also have a quarterly breakdown of “other” revenues, which represent the Saudi Arabian Monetary Agency (SAMA) and the Public Investment Fund (PIF) returns. In the first quarter of this year, revenues from both institutions are notable and comprise 56.9 percent of the total non-oil revenues. In the first quarter of 2017, they seem to have been the only revenue item to have dropped (by 8 percent) although these could be market and dividend effects or differences in the fair value of accounts. Going forward it will be important to disaggregate the two revenue items. Revenue from sovereign investments becomes increasingly important in times of lower oil prices.

All governments find it hard to cut expenses when revenues drop, however, it is an unavoidable necessity. Overall expenses dropped by 3 percent with the largest expense being compensation of employees, which comprised 55.2 percent of all expenses in the first quarter of 2017 against 56.8 percent in the same period last year. The 5 percent drop in public sector salaries is on the path of consolidation but it is not clear if they are exclusive of last month’s reinstated benefits.

The National Transformation Program (NTP) 2020 set an objective of reducing civil service employment by 20 percent by 2020. Actually, employment in the civil service had fallen in 2015 and 2016. The government has initiated a program that is being piloted in a number of ministries to improve human resource practices within different institutions. Non-financial assets (lands, buildings, machines and other physical assets) and other expenses that emerged as the second and third highest expenditure for the first quarter increased 22 percent and 7 percent respectively.

Purchases of goods and services — the fourth largest expenditure in the first quarter of the current fiscal year — dropped by a sizeable 22 percent; this is essential in order to be on track for a balanced budget by 2020. Purchases need to remain below SR200 billion this year and next in order to stay on target. Interestingly, social benefits fell by 15 percent, which could be a seasonal factor or mainly due to better rationalization and targeted policies that have been unfolding since last year.

Debt seems to be in a very healthy state at around 12 percent of the gross domestic product (GDP), depending on the size of growth. The fiscal gap of SR26.2 billion was financed from the government’s current account, not from SAMA’s reserves. Going forward the fiscal gap will probably be covered from local and international debt sources as well as by some tapping into foreign assets.

The overall fiscal picture looks healthier as Saudi Arabia’s finances are being rationalized. However, the latest fiscal numbers underscore the country’s urgent need to diversify sources of revenues and plan, as much as possible, for an economy beyond oil.   

 

John Sfakianakis is the director of economic research at the Gulf Research Center (GRC) in Riyadh.