Saudi to boost 2017 spending as it cuts into deficit

Saudi Arabia says it has successfully cut into its huge state budget deficit this year and will increase government spending in 2017 to boost flagging economic growth.

The deficit shrank to $79bn in 2016. That was well below a record $98bn in 2015, and below the government’s projection in its original 2016 budget plan of a deficit of $87bn.

“Our economy, thank God, is sturdy and it has enough strength to cope with the current economic and financial challenges,” King Salman said on Thursday in a nationally televised address to introduce the budget for 2017.

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The financial challenges for Saudi Arabia stem largely from the fall in the global price of oil over the past two-and-a-half years.

It is not yet been announced how the 2016 deficit stacks up as a percentage of the economy. It was 15 percent of GDP in 2015.

The drop in the deficit is nonetheless likely to reassure international investors worried about Saudi Arabia’s ability to cope with an era of cheap oil. The riyal came under speculative pressure this year, but currency jitters have eased in recent months.

“The 2017 budget sends a clear message that the deficit is falling faster than expected and investment is gradually returning,” said John Sfakianakis, director of economic research at Gulf Research Centre in Riyadh.

Saudi Arabia, which has fought a costly war in Yemen for nearly two years, projects a drop in 2017 military spending.    

A cabinet statement on the budget said defence spending would reach $51bn in 2017 but gave no details.    

That is almost 11 percent lower than the figure that Riyadh said it expected to spend in the 2016 budget.    

The Stockholm International Peace Research Institute reported in April that Riyadh’s military outlays grew by 5.7 percent last year to $87.2bn – making it the world’s third-largest military spender.

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Riyadh slashed spending on infrastructure and perks for civil servants to get its finances under control. For the first time in years, it kept its spending below its original budget projection in 2016; actual spending was $220bn compared with a projection of $224bn.

Revenues came in slightly higher than expected at $141bn instead of $137bn as the government raised cash with steps such as higher municipal and visa fees.

In its 2017 budget plan, Riyadh said it would increase spending to $237bn from the $224bn originally projected for 2016. But next year’s deficit will shrink further to $53bn because of higher oil prices and non-oil revenues, the government said.

“Oil revenues are projected to increase 46 percent … in 2017 – that’s a massive jump. The budget appears to assume much higher oil prices than current prices,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

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Economic growth slowed to 1.4 percent in 2016, far below the average of 4 percent in the past decade, as austerity measures hurt consumers’ income and deterred private companies from investing – even though their investment is vital to diversify the Saudi economy beyond oil in the long term.

By increasing state spending on infrastructure, the 2017 budget aims to support economic growth, while a new system of cash payments to poorer citizens will offset the impact on them as the government gradually raises domestic energy prices to reduce its subsidy burden, the finance ministry said.

It gave no details of the planned subsidy cuts.