Complex Made Simple

More Saudi spending born out of rising oil prices would be a major slip-IMF

There are fears the recent recovery in oil prices could ease pressure on Saudi to slow its reform drive and diversification strategy away from oil.

Saudi has projected a budget deficit of $52 billion in 2018, or 7.3% of GDP with plans to balance the budget by 2023.

Director of the IMF’s Middle East and Central Asia department, Jihad Azour, said Riyadh’s break-even oil price was $83 a barrel in 2017, and “expectations for 2018 are that it will be around $85-$87 a barrel”.

Currently, Brent oil is at $80 from $65 in mid February.

Brent prices have risen by about $47 a barrel, or 175% since hitting a cyclical low in January 2016, but not quite what Saudi needs to balance the budget, enough though to lean towards easing reform process, something the International Monetary Fund (IMF) warned against, in its recent reprot following consultative trips to the Kingdom.

Video: Can SABB bank’s $5bn merger bid with Saudi Alawwal open doors to M&As?

Warning: don’t overspend

Saudi’s economic reform program is making good progress, the IMF said, but cautioned the government against boosting spending as oil prices rise.

Government spending rose by 18% in Q1 this year, compared to 2017, reaching $53.5 bn, reported Forbes Middle East.

The exchange rate peg to the U.S. dollar continues to serve Saudi Arabia well given the structure of the economy, according to the IMF.

“The primary challenges for the government going forward are to sustain the implementation of the bold structural changes that are underway, meet the medium-term fiscal targets it has set, and resist the temptation to re-expand government spending in line with higher oil prices,” said the IMF’s Tim Callen, who led a team that held discussions with Saudi Arabia earlier this month.

The IMF expects growth to pick up in Saudi Arabia this year and continue over the medium-term as reforms introduced as part of the country’s Vision 2030 plan make progress. To that end, Callen said achieving a balanced budget by 2023 looks attainable.

“The government remains committed to wide-ranging economic and social reforms to transform the economy away from its traditional reliance on oil and to create a more dynamic private sector that creates jobs for the growing working age population,” said Callen.

Read Forget winning the World Cup: Saudi is playing to win big at sports business

What reforms are underway?

The IMF applauded the introduction of VAT.

Forbes reported that Saudi revealed that its non-oil income rose by 63% in Q1 2018, thanks to its tax collection drive and other reforms. The government netted close to $14 billion in non-oil revenues thanks to the implementation of VAT and other fees.

“Meanwhile, overall revenues rose by 15% in Q1 2018, according to the finance ministry and Saudi revealed that its oil revenues increased marginally by 2% to reach roughly $30 billion,” said Forbes.

The IMF said that Saudi is focused on job creation for nationals in the private sector, particularly for youth and women.

Read: Saudi’s education sector will grow to $12 Billion by 2023

“Policies should focus on sending clear signals about the limited prospects for public employment, easing restrictions on expatriate worker mobility, further strengthening education/training, and continuing to support increased female participation,” the IMF said.

“Reforms should focus on removing structural impediments that may dissuade financial institutions from entering these markets.”

The IMF also supported the recent energy price reforms and the introduction of the citizens’ accounts.

“Further gradual energy price increases should continue, while the citizens’ accounts should be reviewed periodically to confirm they are adequately compensating low and middle-income households for the higher energy/VAT costs,” the IMF said.

Saudi Finance Minister Mohammed bin Abdullah Al-Jadaan said that the statement “confirms the progress made by the Kingdom’s government in implementing economic and structural reforms.”

Read Saudi VAT App helps consumers avoid price traps set up by retailers

Saudi’s respite from oil crisis

Reuters said the kingdom’s foreign reserves stood at $493 billion at the end of March 2018 and have been basically stable for eight months after declining steadily for nearly three years following the oil price crisis.

“In turn, oil revenues support an enormous number of government jobs. The kingdom depends far more on public employment than most other countries,” said Reuters.

Public sector jobs account for nearly 35% of all employment and the wage bill alone absorbs 12% of GDP, according to the IMF.