Saudi Arabia is expected to be tempted by strong oil prices and overshoot public expenditure by nearly 20 per cent in 2010 as part of an ongoing expansionary fiscal policy aimed at cementing the domestic economy.

Banque Saudi Fransi (BSF), one of the largest banks in the world’s oil superpower, projected the 20 per cent rise in actual spending and said this would quash earlier scenarios about a possible surplus in the kingdom’s budget.

Citing government data, BSF’s chief economist John Sfakiankis said actual spending peaked at nearly SR596.4 billion (Dh584bn) in 2009, nearly 26 per cent above state expenditure projections for the 2009 budget of SR475bn.

In a study sent to 'Emirates 24|7', he noted that in December, the Saudi finance ministry estimated in its 2010 budget statement that state expenditures reached SR550bn in 2009, adding that the government discovered a full SR46bn of spending that had taken place in 2009.

“Prior to the budget release, we had forecast public expenditures of SR578.9bn for 2009. As a result of the revision in actual data this September, we are revising our 2010 state expenditure forecast to SR648bn, reflecting our expectation that government departments will overspend their allocations by about 20 per cent this year,” he said.

“It is likely that the government's initial expenditure estimates, to be released in December, will underestimate the level of overspending that has taken place, which has happened in recent years.”

Sfakiankis cited recent strict instructions by the government to all departments to rein in spending, but said he believed it would likely take a few years before the level of over-spending reaches acceptable levels of closer to 10 per cent.

“Higher state expenditures will make it difficult for the government to turn budget surpluses in 2010 and 2011 unless there is a decent turnaround in energy demand globally. As of now, we forecast government revenues of SR639.6bn in 2010, up 25 per cent from 2009 but not enough to support a fiscal surplus this year. We expect a small deficit of SR8.4bn amounting to nearly 0.5 per cent of GDP,” he said.

“Initially, the government could post a provisional surplus in December because the final expenditures figure is not generally released until the third quarter. Next year, we foresee government revenues of SR682.3bn against expenditures of SR704bn, thus yielding an SR21.7bn budget deficit amounting to around 1.2 per cent of GDP.”

Sfakiankis said he believed sustaining small deficits as these does not pose a problem for the Saudi government given its massive foreign assets, ontrolled by the Saudi Arabian Monetary Agency (Sama), the kingdom’s central bank. Up to July, Sama held SR1.564 trillion in net foreign assets, up almost three per cent from December levels and nine per cent from levels a year earlier.

Figures showed Sama’s net foreign assets exceed 100 per cent of GDP while the country's public debt this year would account for less than 13 per cent. As early as 2004, debt-to-GDP surpassed foreign assets to GDP. “The government has been able to sustain high levels of overspending in recent years due to its substantial cushion of foreign assets, much of which was accumulated during an oil price boom supported by strong production between 2003 and 2008,” Sfakiankis said.

“State stimulatory spending effectively prevented the Saudi economy from contracting in 2009 as recession gripped the world. The government sector grew 4.4 per cent that year, helping achieve overall GDP growth of 0.6 per cent.”

The study noted that during 2009, Sama drew down its foreign assets by 7.5 per cent as it sought funds to finance an abundant spending programme being undertaken by the government to stimulate the economy.

“The government is interested in building an efficient and more-productive economy over the long term, but its spending patterns demand caution,” it said. “Current expenditures almost doubled between 2000 and 2009 to SR416.59bn. Over the same period, the ratio of current expenditures to total spending has fallen to under 70 per cent in 2009 from 92.2 per cent in 2000 due to the nine-fold rise in capital expenditures to SR179.8bn in 2009.”

According to Sfakiankis, while capital expenditures can be phased out should the government face difficulties balancing its budget in the longer term, it is more difficult to reduce current expenditures – a good proportion of which includes mushrooming wage bills at various government ministries, such as the recent Armed Forces salary increase. In a recent study, a key Saudi bank said the 2009 budget deficit ended the year higher than had been forecast because of a surge in spending and a sharp decline in oil export earnings, the country’s main source of income.

Citing figures by the International Monetary Fund, the Saudi American Bank (Samba) put Saudi Arabia’s fiscal deficit last year at 6.1 per cent of GDP, nearly SR86bn, far higher than earlier government estimates of about 3.2 per cent and above the budgeted shortfall of nearly SR65bn.

“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.”