Saudi Arabia moving forward with confidence
Consistency has been one of the laudable hallmarks of Saudi economic policy in recent years, even in the face of a global economy buffeted by exceptional risks, not least of course the COVID-19 pandemic.
Policymaking has been explicitly anchored in a strategic framework under the broader Vision 2030. The 2022 budget continues this track record while also reaping some of the benefits of a policy guided by clear goals.
The budget not only paints the picture of an economy positioned for a strong rebound but also one that can do so while closing the substantial fiscal gap created by the pandemic and a period of exceptional oil market volatility. Remarkably, after a double-digit (as a percentage of gross domestic product) deficit in 2020 and an estimated 2.7 percent (of GDP) shortfall in 2021, the Kingdom now projects a SR90 billion budget surplus for 2022. This would equal roughly 2.5 percent of GDP and mark the first positive outturn after a string of deficits since 2013. An extraordinary oil price rally over the past year has been a major driver of this turnaround despite output cuts, but the resilience also reflects the effective handling of the pandemic as well as real progress in revenue diversification.
In the third quarter, non-oil income made up 40 percent of total government revenues and the value-added tax alone now generates nearly half of all non-oil income, up from a quarter in 2020. The Kingdom is estimated to require an oil price of some $65 per barrel to balance its budget, something that looks realistic on current projections. Government revenues are on track to narrowly exceeded SR1 trillion, up 12.4 percent year-on-year.
The commitment to restoring macroeconomic balance, the ambitious reform agenda under Vision 2030, and the credible handling of the pandemic promise to make 2022 a year of very robust recovery for the Saudi economy. Headline GDP growth is projected to shoot up from an estimated 2.9 percent in 2021 to 7.4 percent, partly because of the planned oil output increases in line with the OPEC+ targets. Saudi Arabia, whose production in 2021 likely ended up running at some 9.1 million barrels per day, is on track to extract 10.12 mbd in January, eventually rising to 11 mbd when the OPEC+ cuts are fully phased out. But also the non-oil economy is amid a broad-based recovery with confidence indicators back at pre-pandemic levels and credit growing at a historically high rate (some 15 percent annually).
The budget reflects a strong commitment to a structural transformation whereby the direct role of the state in driving economic activity is giving way to a much more diversified approach.
Partly in reflection of a strategic medium-term framework for fiscal policy, the projected spending in 2022 is declining to SR955 billion, the lowest since 2017. Apart from thus deliberately severing the old link between oil prices and public expenditure, the government remains committed to keeping VAT at its increased rate for now while signaling that any surpluses will be used to build buffers for the future. The 2022 budget underscores the departure from the past practice of pro-cyclical fiscal policy while building fiscal resilience that allows the government to deal with economic shocks. The government has also indicated it is developing a more holistic risk management framework. Public debt is projected to decline to 25.9 percent in 2022, a level that now counts as very low in international comparison. The OECD economies averaged 80 percent already before the COVID-19 shock in 2019.
A key goal of the much more rules-based fiscal policy paradigm is increased predictability that is seen as conducive to steady non-oil growth. But this stance also repositions the government as a direct driver of economic activity. Even as the public treasury takes a step back, investment activity is likely to reach unprecedented levels thanks to the increased participation of the private sector, often in partnership with various government vehicles. A range of investment initiatives unveiled to date foresees capital mobilization of some SR12 trillion until 2030. Entities such as the Public Investment Fund and the National Development Fund will play an important role in driving this agenda forward.
The world remains an uncertain place, as shown by the new omicron variant that reminds us that the worst public health crisis of our time is not yet over. But the Saudi budget reflects a welcome commitment to consistency in policymaking amid these uncertainties by not sacrificing important strategic goals to short-term expediency. Such a posture will be of growing importance as the Gulf economies progress with their transformation, both in terms of empowering the private sector and making their prosperity less reliant on oil.
• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.