Fiscal consolidation to slow in Saudi Arabia - report

BMI Research report predicts that Saudi Arabia will continue to move away from significant spending cuts
The rate of fiscal consolidation will slow in Saudi Arabia in the next few years as the government focuses grown enhance policies rather than on the reducing budget deficits, according to a new analysis from BMI Research
By Bernd Debusmann Jr
Sun 22 Oct 2017 09:43 AM

The rate of fiscal consolidation will slow in Saudi Arabia in the next few years as the government focuses grown enhance policies rather than on the reducing budget deficits, according to a new analysis from BMI Research.

According to BMI, Saudi Arabia’s cautious approach towards fiscal consolidation and delays in returning to a fiscal surplus will, initially, result in faster than expected growth over the coming ears, with BMI forecasting a fiscal deficit of 7.8 percent of GDP in 2018 and 5.1 percent in 2019.

“Consequently, we do not expect the budget balance to return to surplus before 2023, against 2021 previously,” the report notes. “Saudi Arabia will easily finance its deficits through its substantial reserves and regular borrowing on the domestic and international debt markets.”

BMI predicts that Saudi Arabia will continue to move away from the significant spending cuts seen in 2015, when expenditure fell by 11.9 percent, and 2016, when it fell by 15.1 percent, and instead forecasts that total spending will expand by 3.0 in 2018 and 2019, up from a projected -0.2 percent in 2017.

Earlier in October, Saudi finance minister Mohammed al-Jadaan remarked that he would not rush to rebalance the country’s budget, as statement which followed an IMF recommendation that the country wait until 2022 to do so. Such a move was also signaled by the Saudi government’s decision to reverse cuts on allowance and bonuses for public sector employees in April and June 2017, as well as by delaying the implementation of a new wave of subsidy cuts.

“Before hiking energy and utilities prices again, we believe that the Saudi government will first introduce a generous cash compensation mechanism for the most vulnerable households,” the report adds, noting that a SAR200bn ($53 billion) stimulus programme will also support businesses.

However, BMI predicts that the adoption of a more gradual approach to fiscal consolidation will not result in a return to previous levels of spending growth, which averaged 14.7 percent yearly between 2005 and 2014.

In the first half of 2017, government spending on goods and services declined by 34 percent, which according to BMI suggests that spending rationalisation is likely to continue.

“We still believe that the government will move forward with a number of fiscal reforms – including phasing out subsidies over the coming years, introducing a value-added tax in 2018 or increasing fees on expatriates – but we also think it will make efforts to shield Saudi nationals from painful fiscal measures,” the report notes.

The report also forecasts government debt to increase to 28.2 percent of GDP in 2020, up from 13.1 percent in 2016.

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