By Monitoring Desk
Riyadh: OPEC kingpin Saudi Arabia on Tuesday announced an expansionary budget for 2019 but projected a shortfall for the sixth year in a row due to low oil prices.
The budget projects a deficit of $35 billion, still about 32 percent lower than the estimated deficit for the current calendar year.
Spending is estimated at $295 billion, the largest in the oil-rich kingdom´s history, while revenues, mostly from oil, are estimated at $260 billion, said a statement read by King Salman.
Saudi Arabia, which has introduced economic reforms aimed at reducing its dependence on oil, has posted budget shortfalls since 2014 when crude prices crashed.
"We are determined to pursue economic reforms, control fiscal management, bolster transparency and strengthen the private sector," the king said in a brief statement to the cabinet.
The finance ministry said the kingdom, which is pumping about 10.5 million barrels of oil per day, succeeded in reducing the estimated budget deficit in 2018 by 31 percent to $36 billion due to the partial rebound in crude prices.
The ministry also said the country´s economy, which contracted by 0.9 percent last year, grew by 2.3 percent. It expects growth to hit 2.6 percent in 2019. The ministry said the Gulf kingdom would resort to drawing on state reserves and borrowing to plug the deficit.
The announced budget is the kingdom’s largest-ever, as the world’s biggest oil exporter boosts spending to spur economic growth.
Despite falling oil prices, Saudi Arabia will continue paying its citizens cost-of-living allowances, the country's King Salman announced.
The budget will boost spending even as Saudi Arabia endeavors to close its budget deficit, indicating Riyadh's priority to spur growth in an economy hurt by lower oil prices. State spending will increase by more than 7 percent next year to 1.106 trillion riyals ($295 billion) from 1.030 trillion riyals, in line with a September pre-budget statement, according to the country's finance ministry.
The International Monetary Fund previously forecast the country's budget deficit to shrink to less than 2 percent of gross domestic product (GDP) next year in the event that the allowances were scrapped. The budget deficit for 2019 will now be 4.2 percent of GDP, according to the government's statement Tuesday.
Saudi Arabia's economy shrank for the first time in nearly a decade last year as headwinds batter its private sector. Businesses have struggled to deal with higher electricity and fuel prices and a 5 percent value-added tax (VAT) introduced at the start of the year. Unemployment, hovering just over 12 percent as of last summer, is at its highest level in a decade.
And new quotas and fees on foreign workers have triggered an exodus of more than 900,000 expatriates from the country in the last two years. This caused the labor market to contract, leaving gaps that the local population, lacking vital skills and training, cannot yet fill, analysts and executives say.
Saudi officials have said they are now reconsidering the fees on foreign labor, which charge private businesses between $80 and $107 monthly for each foreign worker they hire.
A pre-budget statement in September committed to both increasing domestic energy prices and boosting spending by more than 7 percent in 2019 to help stem unemployment and support growth. But that was during a time of bullish forecasts for oil prices, which have now fallen 30 percent in the last three months. And despite an OPEC production cut decision of 1.2 million barrels by January, prices are set to remain under pressure, thanks to slowing global demand and booming shale production in the U.S.
As long as oil prices remain at their current lows, stimulating growth will be the immediate priority, said Jean-Paul Pigat, Dubai-based head of research at consultancy Lighthouse Research and a former economist at Emirates NBD.
"Weak growth and high unemployment are the priorities today," Pigat told CNBC. "Sure it will increase the budget deficit, but that is a concern that can be addressed many years from now."