Stung by low oil prices, Saudi Arabia makes unprecedented cuts

Next year’s budget suggests Saudi Arabia is basing its revenue on a price of $26 a barrel for export crude, if production remains at 10.2 million barrels per day, said Fahad Alturki, chief economist and head of research at Saudi-based Jadwa Investment. “It’s supported by the government, but now they are entering too many wars and need more money”, the 22-year-old medical student said.

To make up for the shortfall, the government ran a record deficit of 367 billion riyals (US$97.9 billion) in 2015, or 15 per cent of its gross domestic product, it said in the budget.

Revenues next year are forecast at SR514 billion, down from SR608 billion in 2015, when oil revenues accounted for 73 percent of the total.

On Monday, Saudi Arabia announced a record high $98 billion budget deficit.

After years of spending its massive oil wealth to bolster the local economy and provide subsidized energy and other utilities to its 30 million people, a steep decline in oil prices has forced the kingdom to reassess these plans.

The revisions include raising the price of 91 octane gasoline to 0.75 riyals a litre from 0.45 riyals and increasing the price of 95 octane gasoline to 0.90 riyals from 0.60 riyals.

The IMF has said that if Saudi Arabia raised its fuel prices to Gulf levels, it will save around US$17 billion annually.

But unlike Alberta, which is an oil-price taker, Saudi Arabia can change its reality by changing course.

Diesel, electricity and water prices will also increase.

The International Monetary Fund had projected a deficit of $130bn.

Oversupply, despite low crude prices, and weak demand are putting downward pressure on markets. The unwritten social contract that swaps public obedience to the Al Saud in return for widespread state employment, good government services and rule by traditional values has afforded Saudi Arabia far greater stability than its poorer neighbours. “I expect that the government will be able to easily raise non-oil revenues above the 200 billion riyal [$53 billion] mark next year with the introduction of the new fees”. The actual price of Saudi oil in 2015 averaged United States dollars 49 a barrel.

In a speech to cabinet on Monday, King Salman, overseeing his first budget since taking over the country in January, emphasised the need for diversification. Non-oil revenue increased from SR 126.8 billion in 2014 by SR 36.7 billion to SR 163.5 billion; an increase of 29 per cent compared to 2014, indicating that the country is slowly peeling away from its hydrocarbons-based economy and diversifying into other sectors.