Saudi Arabia is using a surge in its petrodollar income to heed a call by the International Monetary Fund (IMF) to slash its public debt, rebuild eroding financial reserves and spur growth in its non-oil sector.
For a third year, the world’s oil superpower allocated a large part of its budget surplus to cut the debt, boost its financial reserves, and increase capital expenditure for new projects and those shelved in previous years, when it reeled under heavy deficits because of low oil prices.
From a record SR690 billion ($185bn), or more than 90 per cent of the GDP, in 2000, Saudi Arabia’s public debt has been slashed to only SR267bn towards the end of this year.
The debt is set to plunge further in the next fiscal year as Riyadh has announced that part of the surplus in the 2008 budget released last week would be used to settle the debt along with consolidating the financial reserves.
The Kingdom, home to more than a quarter of the world’s extractable crude resources, forecast a budget surplus of SR40bn but experts expect the actual surplus to be far higher since the government assumed a relatively low oil price.
The actual surplus in 2007 was put at around SR178.5bn, much lower than the 2006 surplus of SR289.7bn due to a surge in spending this year.
According to the Ministry of Finance, around SR100bn of the 2007 surplus would be used to build the financial reserves while nearly SR53bn would be allocated for the settlement of the public debt.
Budget allocations in 2008 for development projects also showed the Kingdom is determined to diversify its economy and achieve sustainable growth in the non-oil sector. A breakdown showed such allocations peaked at nearly SR165bn.
“In fact, the greater focus of the budget on capital expenditure, debt retirement and reserve accumulation whilst providing more resources to the private sector is highly commendable at this stage of the cycle,” Saeed Al Shaikh, senior economist at the Saudi National Commercial Bank, said.
“Although non-oil private sector investment has so far lagged government investment, this trend will likely reverse aggressively over the medium-term, as the private sector benefits from major government initiatives and spending. This budget showed the fiscal policy is prudently expansionary.”
Saudi Arabia started to record budget surpluses three years ago when oil prices began a rapid upward trend. From only $35bn (Dh128bn) in 1998, Saudi Arabia’s oil export earnings jumped to more than $90bn in 2000 and shot up to a record $165bn in 2006.
The revenues are expected to exceed $170bn this year.
The surge in the earnings has largely impacted its financial assets and reserves, which had plummeted to one of their lowest levels in 1998, when oil prices tumbled to below $10 a barrel due to a production and price war. From only five billion dollars at the end of 1998, Saudi Arabia’s official fiscal reserves leaped to $17.5bn at the end of 2001 and $27.5bn at the end of 2006. They swelled to a record $31.5bn at the end of September and are projected to continue rising in 2008 as crude prices are forecast to remain strong.
The assets of the Saudi Arabian Monetary Agency (Sama), central bank, also made big leaps. From around SR224bn at the end of 2001, the assets nearly quadrupled to SR884.3bn at the end of 2006 and continued their growth to hit a record SR1.08 trillion at the end of October, said Sama.
In its latest annual review of the Saudi economy, the IMF hailed the government’s positive response to the Fund’s recommendations, noting that the reforms have started to produce results. In 2006, non-oil growth accelerated to 6.3 per cent, the Fund said.
“IMF executive directors commended the Saudi Arabian authorities on the continued strengthening of economic performance during the past year, underpinned by buoyant private sector activity, prudent economic policies, and a further increase in oil prices. High oil revenue contributed to increasing fiscal and external current account surpluses and a further build-up of Sama’s net foreign assets, while activity in the non-oil economy gained further momentum,” the report said.
“Directors noted that the economic outlook remains positive. A sustained broad-based expansion of non-oil activity, through continued implementation of structural reforms, would be key to creating employment opportunities for the rapidly growing Saudi labour force over the medium term,” it said.
Saudi riyals is the actual budget surplus this year
Saudi riyals out of the 2007 surplus will be used to build financial reserves
Saudi riyals worth of assets were accumulated by the Saudi central bank Sama by the end of October this year
Riyadh uses oil money to cut public debt