The Ministry of Finance (MOF) has issued its first ever preliminary statement for the draft general budget for the fiscal year 2019, which predicts how the economic and financial landscape will shape up in Saudi next year.
Economic diversification plans continue to take center stage.
Addressing deep-rooted problems
The 2019 Pre-Budget Statement identifies the most important challenges facing public finances as well as the macro-economy as a whole, over the medium term.
The main goal of the government’s 2019 budget is the continued implementation of Vision 2030 programs, initiatives and projects, which will deliver the stated fiscal and economic goals.
Most prominently is the diversification of the economy and stimulation of the private sector to achieve sustainable economic growth, employment, fiscal sustainability and fiscal balance by 2023.
Fiscal balance by 2023
The Kingdom’s public finance is facing challenges, notably oil price fluctuations, which hinders fiscal planning.
The government has therefore launched a Fiscal Balance Program, which aims at strengthening the fiscal discipline, developing non-oil revenues and enhancing spending efficiency to gradually reduce deficit rates in the medium term whilst allowing for fiscal sustainability and the economic growth requirements.
This will result in attaining fiscal balance by 2023.
To achieve Saudi Vision 2030 and its objectives, several programs and initiatives have been launched to promote economic growth and diversify the economic base.
A group of programs has been implemented during 2018, while others programs will be launched later including structural reforms with medium and long-term economic returns targeting several sectors.
Preliminary estimates indicate an increase in real GDP growth to 2.3% in 2019. Real GDP growth is expected to continue to improve gradually to reach 2.4% in 2021, as a result of the impact of structural economic reforms. This is in addition to the contribution of fiscal reforms aimed at reducing the budget deficit to gain investors’ confidence, and the development programs of some of the productive sectors announced in the Vision programs.
(Source: Ministry of Finance)
The MOF expects the deficit to be 4.1% of GDP in 2019 and continue to decline gradually over the medium term until it reaches fiscal equivalent to around balance by 2023.
In addition, the Government has set a ceiling for public debt as a percentage of GDP at 30%, as announced in the National Transformation Program 2020, in June 2016. This percentage is low compared to the G-20 countries high debt levels, which reflects the strength of the fiscal position of the Kingdom.
It is also expected to continue financing deficit relying on debt issuances, which is expected to reach about 22% of GDP in 2019 and to reach about 25% of GDP in 2021, while at the same time using government deposits at the Saudi Arabian Monetary Agency (SAMA) when needed and maintaining appropriate levels of these deposits.
(Source: Ministry of Finance)
The Kingdom’s fiscal procedures and reforms implemented over the past two years have begun to yield positive results. They are directly reflected in the country’s total oil and non-oil revenues, increasing the diversity of revenue sources to become more sustainable.
Preliminary estimates indicate total revenues to reach $260.67 billion (SR 978 billion) in 2019, an increase of 11% compared to the 2018 forecasts.
Total revenues as percent of GDP is expected to reach 31% in 2019. Revenues are expected to continue to grow to reach $278 billion (SR 1045 billion) in 2021, with an average annual growth rate of 6%.
Government spending remains the main driver of economic activity. However, the efficiency of this spending must increase and ensure that it achieves the highest economic return while achieving the goals of fiscal stability.
The Expenditures strategy for the medium term aims at reducing the deficit, until reaching a fiscal balance in 2023.
Total 2019 budget expenditure is estimated to reach $294,89 billion (SR 1,106 billion).
Becoming less oil-reliant
Saudi has implemented several programs and reforms to create new income sources to develop oil and non-oil revenues.
Among the many reforms is VAT, which is expected to become one of the main sources of non-oil revenues in the Kingdom.
Excise tax also been implemented for the same reason, back in 2017, through reducing the consumption of commodities by applying a tax on specific commodities such as soft drinks, energy drinks, tobacco and its derivatives.
The energy price reform initiative is another initiative of the fiscal balancing program. Its aim is to incentivize rational consumption by gradually lifting energy subsidies until reaching the reference price, in order to take advantage of the opportunity cost that enhances public finance revenues while promoting rational consumption.
Expats also factor into diversification plans. The Expat Levy initiative (as part of Saudization) was instated to encourage job localization by narrowing the cost gap between expatriate and Saudi employees in the private sector. This is achieved by imposing a monthly fee on private sector establishments for each expatriate employee based on the number of expats in the establishment. The establishment with more expatriates than Saudis will bear a cost that is higher than those with less than or equal number of Saudis.
Naturally, the private sector has a major role to play as well. In order to support the private sector, a plan to motivate the private sector has been prepared with $53.32 billion (SR 200 billion) in the medium term, a program aimed at enhancing the competitiveness of the private sector, improving the local business environment, and attracting more foreign investment.
For more detailed information, you can find the full statement here.