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29 March 2024

Saudi fiscal gap widens in 2009

Saudi fiscal gap widens in 2009. (FILE)

Published
By Nadim Kawach

Saudi Arabia’s budget deficit in 2009 ended the year higher than had been projected because of a surge in spending and a sharp decline in oil export earnings, a key bank in the Gulf Kingdom has said.

Despite an improvement in crude prices this year, the fiscal balance in the world’s oil superpower will depend mainly on the level of spending by the country’s state oil operator Saudi Aramco, the Saudi American Bank Group (SAMBA) said in its September economic bulletin.

Citing figures by the International Monetary Fund (IMF), SAMBA put Saudi Arabia’s fiscal deficit last year at 6.1 per cent of GDP, nearly SR86 billion, far higher than earlier government estimates of about 3.2 per cent and above the budgeted shortfall of nearly SR65 billion.

“The deficit is the first since 2001 and the largest since 1999….the cause of the deficit was a steep decline in revenue, allied to a sharp rise in spending.”

SAMBA cited figures by the Washington-based IMF showing total revenue stood at SR510billion, a 54 per cent decline on 2008.

Oil revenue fell by 56 percent—a much larger fall than the 42 per cent decline in oil export earnings—reflecting the fact that “Saudi Aramco withheld a larger share of oil export earnings for its own investment needs, as it completed a multi-year programme to raise oil production capacity to 12 million barrels a day.”

“Thus, government oil revenue fell to just 71 percent of oil export revenue, down from 93 percent in 2008 and the lowest ratio since 2002,” SAMBA said.

IMF data showed the increase in spending last year was 14.4 per cent, much higher than the Saudi government’s earlier estimate of nearly 5.8 per cent. “Intuitively, this revision makes sense given the number and scope of public sector projects that were rolled out in 2009,” SAMBA said.

“Spending reached 42.3 per cent of GDP in 2009—a significant surge over the ten-year average, and the highest level since 1991, a fiscal year that was distorted by the costs associated with the first Gulf war.”

The study said the spending surge reflected the “exigencies of the global financial crisis and accompanying recession.”

“Indeed, proportionately the surge was the highest in the G-20 group of major economic nations. In its report, the IMF commended the Saudi authorities for what they described as a ‘large and well-targeted’ fiscal stimulus that has helped in supporting broader nonoil economic activity.”

SAMBA said it believed Saudi Arabia can cover any increase in expenditure this year because of higher oil prices and the country’s massive foreign assets.

It noted that in 2009, most of the deficit was accrued in the first half when average oil prices were around $50, compared to about $72 in the second half.

It cited figures by the Saudi Arabian Monetary Agency (SAMA) showing that public sector deposits were drawn down by roughly SR158 billion in the January-July period of last year. At 11 per cent of GDP this was hardly a trivial amount, but even at the trough public sector deposits were worth SR877 billion or 62 percent of GDP, according to the study.

“In any event, deposits have since accumulated steadily during the first seven months of 2010, reaching SR970 billion at the end of July…this rebuild of government savings indicates that the fiscal position is improving,” it said.

“Whether or not the position moves back into surplus will depend on the path of oil prices, government spending, and Saudi Aramco’s investment plans. We see oil prices remaining broadly stable for the rest of the year, staying in the $70-80 band where they have spent much of the past nine months. As such, we expect an average WTI price of $77 for this year.”

SAMBA said it believed Aramco’s investment plans remain expansive, especially on the gas front, but expected the company’s call on oil export revenue to ease somewhat, leaving the government with around 79 per cent of export earnings.

“As for spending, all the indicators suggest that this has been robust in 2010. We anticipate that the rate of increase will cool a little this year, as will expenditure’s share of GDP… nevertheless, at 41.6 per cent, it will remain very elevated by historical standards. Only as we move through into 2012 will expenditure’s share of GDP ease appreciably,” SAMBA Said.

“Based on these assumptions, we see the fiscal position remaining in deficit (as does the IMF), but only marginally at less than one per cent of GDP. In any event, the government’s financial strength is such that the authorities could, if they chose, run large deficits for an extended period of time before even contemplating making fresh domestic debt issues.”