Hit by low oil prices, Saudi Arabia makes unprecedented cuts

Long accustomed to cheap utilities and some of the lowest petrol prices in the world, Saudis woke to a shock Tuesday as authorities made massive subsidy cuts after falling oil prices caused a record deficit.

In a clear departure from its decades-old generous welfare system, Riyadh announced prices would rise on fuel, electricity, water and even plane tickets and cigarettes.

Residents of the oil-rich Gulf kingdom have long enjoyed cheap prices on basic goods and services, but officials made clear that was no longer sustainable after the stunning drop in crude prices over the last 18 months.

"We have to rationalise unnecessary spending... This requires changes to focus on essential expenditures," Finance Minister Ibrahim al-Assaf was quoted as saying Tuesday by the Al-Eqtisadiah newspaper.

After years of high spending, authorities moved swiftly to impose unprecedented cuts after announcing Monday a 2015 budget deficit of $98 billion - the largest in Saudi history and a whopping 15 per cent of Gross Domestic Product (GDP).

Prices on fuel products were raised by up to 80 per cent as of midnight, including a 50 per cent jump in the price of the most commonly sold petrol to 0.90 riyals ($0.24) per litre.

Vehicles thronged petrol stations in Saudi Arabia Monday evening to fill up tanks at the old rates.

Abu Othman, a 63-year-old motorist, said that despite the increase, petrol prices remained "reasonable".

"It (Other OTC: ITGL - news) is natural to expect such measures in these circumstances," he told AFP while filling his car.

 'Wrong economic policies'

The swift action to cut subsidies was unexpected, even if there had been no doubt Saudi Arabia would post a deficit this year as oil prices have dropped below $40 a barrel since mid-2014.

With (Other OTC: WWTH - news) oil prices expected to remain low, Saudi authorities also projected a shortfall of $87 billion in the 2016 budget.

Revenues in 2015 dropped to $162 billion, the lowest since the global financial crisis in 2009, due to a massive $123 billion fall in oil revenues.

The contribution of oil income to revenues dropped to just 73 per cent in 2015, from an average of 90 per cent in the past decade.

The budget and price increases dominated talk on Saudi social media on Tuesday, with Twitter (Xetra: A1W6XZ - news) user Fahad al-Owain saying many would suffer from the price hikes.

"Rich people can overcome the rises but the poor depend on the government," he wrote.

But others said it was time for Saudis to tighten their belts.

"I believe this budget will teach us the art of rationalising consumption," Twitter user Udai al-Dhaheri wrote.

Diversifying revenues

Authorities announced other measures aimed at reducing Saudi Arabia's reliance on oil revenues by diversifying the economy, including by increasing charges on public services.

Non-oil revenues rose by 29 percent this year to $43.5 billion, contributing 27 percent to public revenues.

But Saudi economist Abdulwahab Abi-Dahesh said much more needed to be done.

"This remains a very small contribution and needs to be increased," he told AFP.

"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," Abu-Dahesh said.

That would boost non-oil income to around 40 per cent of public revenues, a new landmark for the kingdom.

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.

"This budget represents the beginning of a comprehensive programme to build a strong economy... with various sources of income," he said.

The International Monetary Fund has warned Riyadh that failure to cut spending and implement reforms will eat up the country's fiscal reserves in just five years.
 

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