After enjoying a long period of abundance and prosperity, Saudi Arabia is all set to see its fortune diminishing in the near future due to a drastic fall in crude prices. Reflecting this scenario, it announced a record budget deficit and cuts in fuel and utility subsidies on 28th December, 2015. While the kingdom posted a budget deficit of dollar 98 billion in 2015, petrol prices on some products were to be raised by more than 50 percent with effect from 29th December.
The Finance Ministry said that revenues in 2015 were estimated at 608 billion riyals (dollar 162 billion), the lowest since 2009 when oil prices dived as a result of global financial crisis. Income for the year was 15 percent lower than projections and 42 percent less than in 2014, after oil prices fell by more than 60 percent since mid-2014 to below dollar 40 a barrel. Spending in 2015 was estimated at dollar 260 billion, down 6.6 percent from 2014. The deficit in 2015 was the highest in the history of Saudi Arabia which relies on oil for 90 percent of its public revenues.
As for the budget of 2016, revenues are projected at dollar 137 billion, the lowest since 2009, and spending at dollar 224 billion, slightly below 2015 projections of dollar 229 billion, resulting in a projected deficit of dollar 87 billion. The Finance Ministry added that it was planning a series of measures to contain spending including a five-year programme to cut subsidies on electricity and fuel. The authorities were also likely to reduce subsidies on items like water to keep the budget deficit on a lower side.
The 2016 budget and announcement of reforms in Saudi Arabia of course mark the biggest shake-up of economic policy in the kingdom where residents had grown accustomed to low utility and fuel costs as well as almost free education, medical facilities and lots of other highly subsidised basic necessities of life. It is obvious that world’s largest crude exporter is now facing challenging international and regional economic and financial conditions and has to make necessary adjustments to meet the exigencies of the situation. Some of the negative developments impacting on the economy are a sharp decline in crude oil prices and military intervention against Iran-backed rebels in Yemen though some of the blame of depressed oil prices could also be apportioned to Saudi Arabia itself.
It has orchestered a policy that continues to tolerate cheap crude to defend market share and wait for the market to balance without cutting supplies. The kingdom may also be pessimistic about crude prices due to the discovery of shale and the increasing popularity of alternative sources of energy. Also, the Opec heavyweight shows no signs of wavering in its present policy strategy as the planned cuts in spending and subsidies on various items signal that Saudi Arabia is bracing for a prolonged period of low oil prices. In the present situation, the kingdom has obviously two choices. Either it can spend its way out of the current scenario by drawing down its huge level of foreign exchange reserves or start belt-tightening.
The budget for 2016 reflects the mixture of these two policies which seems to be a good beginning. In the past, the country spent lavishly on health, education, infrastructure etc. Though the provision of subsidies is a highly sensitive issue in Saudi Arabia, yet there seems to be no alternative but to make a sharp reduction in expenditures on subsidised items.
Apparently, Pakistan cannot remain immune to the developments taking place in Saudi Arabia. Since most of the countries in the Middle East are almost facing the same situation, expatriates of Pakistani origin would have a difficult time to find employment opportunities in the region. As a result, unemployment in the country could increase and home remittances could decline, depriving Pakistan of a secure and dependable source of foreign exchange.
On the other hand, oil payments would decline due to low crude prices in the international market and provide comfort to the balance of payments position. This indicates the need to analyse thoroughly the prospects of external sector in the years to come and adjust the domestic policies accordingly and in time to meet the challenges of unfolding situation.
Source: Business Recorder