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18 July 2024

Saudi cuts borrowing on back of oil boom

By Nadim Kawach




Soaring crude oil prices have enabled Saudi Arabia to slash its borrowings – but the world’s oil superpower needs to keep part of the debt to maintain liquidity at reasonable levels and check inflation, say experts.

The kingdom’s petrodollar income has increased nearly six times over the past seven years. And last year its public debt dived below 20 per cent of gross domestic product (GDP) after exceeding GDP in late 1990s.

Riyadh is using part of its huge budget surpluses to repay debt and replenish currency reserves that once plummeted to alarming levels due to low oil prices.

Public debt shrunk from SR366 billion (Dh365bn) at the end of 2006 to SR267bn (Dh266bn), or about 19 per cent of GDP, at the end of 2007, according to a bank report. “By the end of 2008 it is expected that the country’s debt will decline to 12 per cent of GDP,” said EFG-Hermes Group, Egypt’s largest investment bank. “The government is working to reduce the debt but to a level that will not hurt the economy or lead to a sharp increase in liquidity.”

The surge in oil prices has brought Saudi Arabia a fresh fiscal boom similar to that of the late 1970s and early 1980s. After sharp deficits and slow economic growth during the 1990s the kingdom has enjoyed high surpluses and rapid growth over the past five years.

The kingdom has forecast a surplus of SR40bn ($10.6bn) this year – but experts expect the actual figure will be much higher.

A report by the Saudi Jadwa Investment Company said: “The government has more than enough reserves to pay off its entire debt yet it continues to use more of the budget surplus to build up those reserves than to cut debt. Many people assume that debt is bad and that it should be eliminated. It is certainly the case that too much debt is a bad thing.
However, there are a number of good reasons why the government needs some debt and why repaying it all would have a negative impact on the economy, particularly in fuelling inflation.”

The report said debt was an important tool for monetary policy. Banks invested in government debt because it carried a very low risk of default. By issuing debt a government can absorb liquidity from within the banking sector and therefore reduce the growth in lending and ultimately inflation.
When a government repays debt held by banks it frees money for them to lend, which stimulates economic growth but can also feed inflation.

“Saudi Arabia’s debt position is now comfortable,” the EFG-Hermes report said.