This will be the first budget to witness deficit after six successive years of financial surplus.
The government appears to be committed to a spending program extending to several years supported by accumulated oil revenues generated during the previous years. Additionally, the government also remains steadfast in maintaining the level of public spending it committed to as part of the G20 accord for sustained growth. However, question marks remain pertaining to expenditure priorities.
While ongoing budget deficits at present can easily be financed from government reserve funds, increasing expenditure appetite may lead to drainage of financial reserves and an increase in public sector indebtedness.
Although consistently high levels of government spending may enhance economic growth, especially in the private sector, it may also encourage the adoption of an expansionary monetary policy that ultimately leads to the occurrence of local inflationary pressures.
It is obvious that the government cannot continue extracting huge amounts of oil and spending revenues generated indefinitely. Therefore strict institutional measures should be put in place to guarantee abiding by a sound policy for oil extraction and observance of intergeneration equity through saving and effective management of part of the annual oil revenues.
Sound economic rationale and cost and benefit analysis should form an integral part of the decision making process when evaluating options pertaining to public spending.
Based on currently available information, our preliminary projections for 2010 indicate the following:
Projected public revenues and expenditure figures will increase to reach about SR545.4 billion for projected revenues during 2010, while actual expenditure by the end of 2010 will reach about SR567.4 billion. This will result in a deficit of about SR21.6 billion or 12.8 percent of the nominal GDP of 2010 estimated at SR1664.7 billion. Inflationary pressures are expected to remain manageable as interest rates are anticipated to increase from their current level near zero, indicating a tighter monetary policy. Despite the expected deficit, we expect the government to continue repayment of part of its public debt ranging between five to eight percent of net government debts.
Due to the combined effect of big decline in oil prices and conservative decline in oil production, and hence decrease in crude oil exports, total revenues for the fiscal year 2009 dropped drastically to SR505 billion i.e. a drop of about 55 percent compared to total revenues for 2008. This drop is a direct result of two factors:
1. Decline of revenues from oil exports at a rate of more than 50 percent to constitute about 86 percent of total revenues in 2009 and more than total revenues in 2008.
2. Nonoil revenues also showed a big decline due to drop in investment income (return on investment of government reserves and savings) resulting from unfavorable conditions of investment and financial markets worldwide.
Increase in government spending in 2009 to about SR550 billion is driven by increased rates of spending on public sector projects and security projects in addition to spending commitments pertaining to various government programs and initiatives concerning employment and social and educational subsidies.
Despite the deficit amounting to 3.3 percent of the GDP in 2009, the government could manage to repay part of its debts. This is a consistent policy being followed since 2002. Currently, the public debt has dropped to about SR225 billion i.e. a decrease of about five percent from last year level.
One of the chronic problems in the context of government administration behavior is spending total amounts allocated to an authority without refunding the balance to the public treasury, the thing that adversely affects the following year's allocations to that authority. There is also a tendency of those in charge of public funds and government policies to highly increase spending with the first news indicating potential increase in the estimated revenues.
The main points included in the announcement of the budget for the fiscal year 2010 are: Public revenues are estimated at SR470 billion, public expenditures are estimated at SR540 billion and budget deficit is estimated at SR70 billion.
Total cost approved for new programs and projects and additional phases of some previously approved projects amounts to SR260 billion (an increase of 16 percent over the current financial year, which was historically the highest, and three times the allotment of the fiscal year 1425-1426, which represents the first year of the Eighth Development Plan).
The government sector, from both revenue and expenditure sides, is the most important player and major component of the Saudi Arabian economy. However, despite the importance of the government sector, the budget, which is the main document that highlights the data pertinent to the government sector activities with regard to expenditure and revenue, does not show the information that suits the importance of the budget and its main components. In the following paragraphs I will share some of my personal viewpoints on the key aspects of the budget as the author of this report, which are not necessarily the viewpoints of Al-Dukheil Financial Group to which I belong. Some of these points are related to the budget structure and its procedures pertinent to the estimation and presentation of expenditures and revenues while others are related to the government's fiscal policy reflected in the budget's figures. It must be noted that such a brief report will not capture all the relevant comments, nevertheless the following paragraphs will review the most important points.
The 2010 budget shows a deficit of SR70 billion due to the increase in the expenditure over the last year's budget even though the 2009 budget closed with a deficit of SR45 billion.
Analysts from banks and other financial institutions in Saudi Arabia describe this increase in government expenditure in 2010 as a confirmation from the government of its policy aimed at combating the depression witnessed by the Saudi economy due to the 2008 global financial crisis. Although this viewpoint is apparently reasonable, I think the increase in expenditure is not strongly related to control of depression in the Saudi economy, if there is any depression at all, but is related to expenditure motives on projects deemed by officials and concerned persons as useful for public interest. Due to the lack of any details about the important projects that will have the lion's share in terms of expenditure size, we cannot determine whether these projects are strongly related to economic development that will increase per capita productivity and productivity of the economy as a whole and thus increase per capita income and welfare. Borrowing at the expense of future to finance current expenditure is a fiscal policy that should only be applied under stringent and well-defined conditions and parameters. This is the second consecutive year of budget deficit and though the public debt is still low compared to GDP (estimated at 12.8 percent of GDP for 2010) and the government had balances of SR1.30 trillion with SAMA (Saudi Arabian Monetary Agency) at the end of Q3, 2009, I feel these factors cannot justify continuing the deficit policy and increasing the public debt to increase expenditure on projects about which we do not have sufficient information to judge their importance and necessity that justify borrowing public funds which are supposed to be for the generations to come or to hedge for crises and catastrophes. I think we should go back to the policy of maintaining a balanced budget whereby expenditures match to expected revenues after allocating part of these revenues to public saving to support the future generations.
The Saudi economy is heavily reliant in all government expenditure on the government sales of oil which reach eight million barrels/day or more. Oil revenue is the major source on which the government relies to finance its public expenditure, which forms the backbone of the national economy. The Kingdom's oil reserve is an inventory that is continuously diminishing due to the government sales and this reserve will certainly be depleted one day, even if after 70 years which is not a long period in nations' lives, if we disregard the technological advances that may lead to the emergence of a substitute for oil as a source of energy.
Thus, the strategic question is what should the government exploiting this sole and major source do in order to secure a source of living for this nation for the post-oil era. The direct answer to this question is saving part of government revenues obtained from the sale of oil in order to build financial reserves and productive capital to serve as a source for financing the nation's needs in the future. As oil revenues form lynchpin of public finance of this nation at present, saving to compensate this diminishing source becomes a necessary and strategic requirement, which is more important than covering the current consumer spending or short-term investment objectives. The funds kept by SAMA for the government as financial surpluses were accumulated because of the oil market conditions with regard to production or prices on the one hand and government spending on the other. The last few years witnessed a rise in oil prices, which resulted in the accumulation of government funds (known as financial surpluses) despite the increase in expenditure. In years before this period the situation was a reverse and expenditure exceeded oil revenues and in place of surplus there was a deficit, which accumulated and led public debt to reach very high levels that exceeded GDP. These temporary financial surpluses or deficits are not what I am referring to when speaking about public saving, what I mean is the retention, as per a binding royal decree, of a certain portion of the oil revenues not to be used under any circumstances except when facing major disasters and after the approval of the senior authorities concerned with the strategic security and future of this nation.
Since the government started to issue five-year plans forty years ago to outline strategies for economic development, the objective of "Income Sources Diversification" remained the first statement to come in the five-year plans documents. Today, after all this long time, the government oil revenue is still the backbone and the main source of government revenue on which the government sector in particular and the whole economy survive. As per the new 2010 budget oil revenues account for 88 percent of the total budgeted revenues. Diversification of income sources is closely related to the future of the nation whose economic life is dependent on a diminishing oil reserve. Thus diversification of income sources should not be limited to just an objective stated in each budget without any measurement for its growth and development in order to dilute the hazards of reliance on the sole and depletable source. So I suggest that the annual budget should include a mathematical indicator that defines the growth in the diversification of income sources. This can be measured using an equation that identifies income sources to be included in calculating this indicator.
I do not think that students of business and commerce, their lecturers and other concerned persons have the slightest clue about the methodology used in the preparation of the government budget. There is no disclosure or explanation about the methodology applied in the preparation of the budget and its different stages and I think that things are almost the same as they were 25 or more years ago.
As for disclosure and explanation of the budget figures and how they are estimated, on both revenue and expenditure sides, there is a serious gap of information. On the revenues side, for instance, the budget does not show how oil revenues, the major component of government revenues, have been estimated since the budget includes no information about the oil production, sales or prices used for the estimation of these revenues.
Other various revenues are not clear or detailed. On the expenditures side there is complete absence of disclosure and details. The budget does not give any break down of expenditure on major projects or even at the level of ministries. Lack of disclosure and explanation of revenue and expenditure figures makes it difficult for the researcher or analyst to analyze the budget and identify its strengths and shortcomings. The whole issue relates to lack of transparency resulting from government bureaucracy especially concerning financial matters.
The Shoura Council comprises an elite set of citizens of high levels of knowledge in different specializations. The members of the Shoura Council also represent the different parts of the Kingdom. The budget is an important document that reflects the economic and financial policies to be adopted by the government in the forthcoming year through spending and revenues collection policies. It is thus very important to submit the draft budget to those appointed by the government as representatives for the citizens to obtain the advice from them. One of the major shortcomings of the budget is that its preparation is restricted to a certain group in a certain ministry (Ministry of Finance) that represents the focal point and gives the final word regarding the do's and don'ts and how things should be carried out despite holding discussions and meetings with officials from other government departments with regard to spending schemes and programs proposed by the ministry in charge of the budget. Thus the participation of the Shoura Council in the discussion and analysis will enrich the budgeting process, minimize its errors and remove some of its shortcomings.
- Dr. Abdulaziz M. Al-Dukheil is chairman of Al-Dukheil Financial Group
