JEDDAH, 6 December — Saudi Arabia’s budget deficit is manageable, given its substantial foreign reserves and varied sources of lending, but is expected to worsen in 2002 as weak oil prices hit the world’s biggest oil exporter, economists said yesterday.

The Kingdom, which sits on a quarter of the world’s oil reserves, is expected to approve next year’s budget at an extraordinary Cabinet meeting in Riyadh on Saturday.

Economists said a global recession and a drop in oil prices following the Sept. 11 attacks on the United States would impact the Kingdom’s finances next year.

"It will be a tough year," said Saeed Al-Sheikh, chief economist at National Commercial Bank (NCB), the biggest Saudi bank.

"The drop in oil prices will cut revenues significantly which will leave us with yet another deficit, but a big one this time," he told Reuters news agency.

Basing his forecasts on North Sea Brent crude averaging $19.50 a barrel next year, Sheikh said the state’s income next year would probably drop to around SR186 billion ($49.6 billion) from SR230 billion in 2001.

The government was likely to cut expenditures for 2002 to about SR205 billion from SR215 billion this year, which would leave it with an estimated deficit of SR20 billion.

Nominal GDP, which grew by between 2.5 and 3.5 percent in 2001, was also likely to shrink slightly in 2002, Sheikh added.

Saudi Arabia had said that it was aiming for a balanced budget for 2001 with both spending and income at SR215 billion, following its first surplus in two decades in 2000.

Finance and National Economy Minister Ibrahim Al-Assaf has already predicted the budget will slip into the red this year, although economists said high oil prices at the beginning of the year had buoyed income.

The Riyad Bank in its quarterly review released on Tuesday the Kingdom will end the current year in the red with a budget deficit of $3.2 billion following only one year of surplus since 1982.

The bank forecast revenues to drop from a projected $57.3 billion to $54.1 billion, while expenditures were expected to remain unchanged on $57.3 billion.

Brad Bourland, chief economist at Saudi American Bank, also saw a sizeable 2002 deficit, particularly given the Kingdom’s narrow wiggle-room to reduce spending.

"The government has limits to how much it can reduce spending," he said, referring to areas such as salaries for government workers.

He said the government would probably cut spending only marginally, if at all. "Overall expenditure will not be whacked. It’ll only drop by a few percentage points," he said.

Sheikh said at most the government will put a freeze on hiring while pressing the private sector to take on more Saudi employees.

The International Monetary Fund, in its first ever review of the Saudi economy, advised the Kingdom in November to improve its fiscal policy, reduce subsidies and the size of its government as well as introduce labor market reforms.

Oil revenues account for 80 percent of Saudi Arabia’s income and some analysts foresee a grim 2002 for the Kingdom even if the Organization of the Petroleum Exporting Countries (OPEC) reduces its output to shore up prices.

Leo Drollas of London’s Center for Global Energy Studies believes the Kingdom’s gross oil export revenues in 2002 will decline by just over $7 billion to $51.4 billion even if OPEC curbs production by one million barrels per day.

If the cartel does not act, Drollas expects its export earnings to drop by $16 billion to $42.5 billion next year.

Despite the gloomy outlook, two years of booming oil prices have given Saudi Arabia plenty of pockets out of which it can finance its deficit.

Economists said the Kingdom could borrow from local banks, increasing the domestic debt, currently 107 percent of GDP, or rely on its $15 billion foreign reserves.

But they hoped the financial pinch would prompt the government, as during a 1998 oil price crash, to quicken the pace of economic reforms.

"We hope that this will serve as a warning that the government can’t rely on oil which is so volatile and that it has to diversify its sources of income," an economist said.