JEDDAH: Saudi Arabia’s Cabinet recently approved the National Transformation Program 2020 (NTP), an implementation plan for National Vision 2030.

The approval of the NTP is credit positive because the plan offers a credible path to achieving fiscal and economic diversification away from oil and will improve competitiveness.

“Although we see significant implementation risks, we think that even if Saudi Arabia implements part of the NTP, the plan will benefit the sovereign’s credit quality by supporting its fiscal and economic strength,” said a statement from Moody’s Investors Service.

The five-year program starts this year and consists of 178 strategic objectives, with nearly 400 indicators and 350 targets used to define the 2020 goals and measure progress.

The Cabinet approved 543 initiatives for this year, at a total cost of SR268 billion between now and 2020, or 10.9 percent of 2015 nominal GDP.

The strategic objectives can be broadly grouped into three categories: public sector and fiscal reforms; economic diversification and improvements in the business environment; and social reforms, with many objectives falling into more than one category.

Strategic objectives that could yield a positive fiscal effect include revenue diversification, the privatization of government services and assets, and the restructuring of the public sector, Moody’s added.

The NTP aims to triple non-oil revenues to SR530 billion (22 percent of GDP) by 2020 from SR163.5 billion in 2015 (see exhibit) through income taxes on non-Saudi nationals, increased “sin” taxes on tobacco and sugary drinks and other sales taxes, higher government fines and fees, and a value added tax, among other measures.

This will reduce the government’s reliance on oil revenue — which has historically accounted for around 90 percent of government revenue — and make government finances more resistant to future fluctuations in oil prices. Moreover, because economic growth will remain largely driven by government spending, a broader revenue base will make the economy more resilient to future oil price swings.

On the expenditure side, the government plans to reduce spending on wages and salaries to SR456 billion by 2020, from a baseline of SR480 billion, supported by a 20 percent reduction in the total civil service workforce and improved performance evaluation of government employees.

The NTP also targets a reduction in water and electricity subsidies that will lead to an additional SR200 billion in savings through 2020.

The Ministry of Health plans to keep operating expenditures for inpatient treatment constant in nominal terms. Another goal is to reduce the number of social security beneficiaries by getting individuals who are of working age back to work.

Finally, various ministries have been tasked with improving spending efficiencies, reducing budget overruns and increasing internal revenue generation.

Planned privatization measures include raising the share of services delivered and facilities operated by the private sector, focusing on desalination and waste water treatment, power generation, postal services, education, and road, rail and ports.

The plan does not include a specific target for total revenue generation from the privatization of government assets.

Nevertheless, reforms aimed at improving the business environment and competitiveness and fostering private sector development will support Saudi Arabia’s economic strength.

The NTP is an enormous undertaking, and implementation risks are high.

Past experience suggests that the government may face political difficulties in implementing reforms. Aside from political challenges, the logistical challenges of implementing such a broad set of reforms in an environment that has proven so resistant to change in the past are very significant.

“Nevertheless, we still view the passage and even a partial implementation of the NTP to support the Kingdom’s credit quality,” stated Moody’s Investors Service.