The Saudi Ministry of Finance has released its 2022 pre-budget statement, in line with the national policy to enhance the budget-preparation process and facilitate multi-year fiscal planning to enhance transparency and fiscal disclosure.

This is a far cry from the traditional once-a-year budget announcements, and is to be welcomed by both local and international investors and rating agencies.

The major elements that stand out in the statement are that it indicates a steady improvement in all major economic and fiscal matrices, while still adopting a conservative approach to budgeting oil and non-oil revenues, as a precautionary measure against the risks of resurgence of the COVID-19 pandemic or changes in the current bullish fortunes of oil prices.

Some of the key takeaways include a narrowing the 2022 budget deficit to 1.6 percent, an increase in forecast revenues to SR903 billion ($240.8 billion) compared with a forecast of SR864 billion, while spending is expected to remain as planned at SR955 billion, indicating a continued tighter control over this item, with expenditure increases forecast by 2024.

The new projections show the Kingdom maintaining a budget deficit close to 1 percent of gross domestic product through 2024, as opposed to pre-pandemic plans to balance the budget by 2023 — a target that many countries with substantial borrowing also have ditched in the medium term.

Another key takeaway concerns the method and approach for new financing needs; the statement highlighted the fact that SR127 billion would be raised through new debt in 2022 but that the Kingdom will now focus on issuing debt with fixed yields, to mitigate the risks of variable yields.

In light of possible higher inflationary pressure and a potential rise in global interest rates, led by the US dollar, this approach is realistic. Gross public debt is projected to be SR980 billion, which represents 31.3 percent of GDP in financial year 2022, compared with 30.2 percent in FY 2021, and principal repayments on debt will reach SR76 billion.

While budget surpluses of SR27 billion in FY 2023 and SR42 billion in FY 2024 are forecast to be realized, the new debt issuance will be directed toward principal repayments. International investors will view this favorably, along with credit-rating agencies that like to see a more balanced debt-maturity profile and principal repayments met on time.

Barring any external geopolitical event, or a sharp resurgence of the pandemic, the 2022 pre-budget statement sets a clear road map for the Kingdom’s fiscal and economic position.

Dr. Mohamed Ramady

The strategy detailed in the statement also aims to enhance the government’s fiscal position by maintaining appropriate reserves at SAMA, the Saudi Central Bank, with the aim of reaching SR350 billion in FY 2022. This represents an increase over the previous year’s projections and this upward trend is expected to continue in the medium term.

Turning to the domestic markets, the fiscal strategy takes into account the goals of Vision 2030 to enhance growth of the local financial sector, deepen the domestic debt market and diversify financing instruments such as bonds and sukuk, the latter of which is becoming more popular both with monthly government tranche borrowing and Saudi investors.

A key element underpinning these fiscal projections is a forecast for growth of real GDP by 7.5 percent in 2022, driven in particular by healthy growth in non-oil GDP and the receding effects of the COVID-19 pandemic, along with growth in the oil sector as the Kingdom ramps up production quotas under an OPEC+ agreement.

If such assumptions are derailed, the government aims to sustain its spending ceilings approved in 2020 for the medium term, with expenditures projected to reach SR955 billion for FY 2022 and SR951 in FY 2024. This indicates a strong political and fiscal commitment to maintaining expenditure levels as planned and continuing with successful spending-efficiency initiatives, while improving the efficiency of targeted social expenditures and reprioritizing spending based on national development needs.

Hand-in-hand with this strategy will be opportunities for development funds and the private sector to participate in leading investment opportunities, accelerated privatization projects and the many of the mega infrastructure projects that are under way in the Kingdom. In this regard, the Public Investment Fund plans to inject approximately SR150 billion into the national economy annually until 2025.

Despite such expenditures, the Ministry’s pre-budget statement forecasts a reduction of the inflation rate to 1.3 percent in 2022, rising to 2 percent in 2023 — lower than the forecast level of 3.3 percent for 2021.

Barring any external geopolitical event, or a sharp resurgence of the pandemic, the 2022 pre-budget statement sets a clear road map for the Kingdom’s fiscal and economic position that continues to build upon the steady, but impressive, progress already made.

The expectations are that if this continues, rating agencies will upgrade the Kingdom’s sovereign credit rating by at least one notch in 2022. The final budget statement, due in December, will build on this positive pre-budget forecast.

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.