Budget figures indicate Saudi Arabia’s robust economic progress

Saudi Arabia’s second-quarter budget comes on the heels of several positive recent developments, including the improvement in the Kingdom’s credit rating and Saudi Aramco’s impressive financial results. Such developments indicate that the Saudi economy is on track to heal from the effects of the COVID-19 pandemic.

The budget posted a reduced deficit, higher oil and non-oil revenues, and balanced control over key expenditures. A rise in debt has been recorded, but with debt financing very much in control.

According to the official figures, first-half actual revenues totaled SR452.8 billion ($120.7 billion), or 53 percent of the full year’s budget revenue estimate of SR849 billion. Actual expenditure for the first half of 2021 stood at SR464 billion, or nearly 47 percent of the estimated 2021 budget expenditure of SR990 billion.

The total half-year deficit stood at SR12.05 billion, or 8.5 percent of the forecast full-year deficit of SR140.9 billion, at a time when other countries are amassing massive actual and forecast budget deficits to manage the economic fallout caused by the pandemic.

The Kingdom’s budget deficit continues to decline on a quarterly basis, mainly as a result of higher oil prices and production levels. Saudi Arabia posted a deficit of SR4.6 billion in Q2, compared with SR7.45 billion in the previous quarter.

Considered more significant for the policymakers responsible for the diversification of the Kingdom’s economy, however, is the continuing increase in non-oil revenues. These reached SR204 billion in the first half of the year, or nearly 46 percent of the total projected revenues of SR452.8 billion. Oil revenues accounted for the remaining 54 percent, at SR248 billion.

The lion’s share of non-oil revenues was derived from taxes on goods and services. This amounted to SR121 billion for the first half of the year, with Q2 accounting for SR67.9 billion compared with SR53.6 billion in Q1. The figures put to rest any fears about the effect the rise in the rate of value-added tax, from 5 percent to 15 percent, might have on public expenditure and tax revenue.

The Kingdom’s half-year expenditures totaled SR465 billion, with Q2 accounting for SR252 billion and Q1 SR212 billion. The key expenditure during both quarters was compensation for public-sector employees, which remained steady at SR122 billion, followed by a rise in Q2 in the cost of government purchases of goods and services to SR45.5 billion from SR27.6 billion in Q1. This, once again, highlights the Saudi government’s stated policy of investment in the domestic economy.

With a rise in overall Saudi debt, financing expenses increased from SR5.8 billion in Q1 to SR7.4 billion in Q2, which still represents a very manageable level of debt financing. Saudi international reserves were worth more than $464 billion.

Subsidies totaled SR13.2 billion for the first six months, but it was noticeable that this item decreased to SR4.23 billion in Q2 from SR5.42 billion in Q1 as the government followed up on its promise to rationalize some fuel subsidies. But at the same time social benefits for those affected most by the effects of the pandemic, along with unemployment support measures, increased this expenditure item to SR29.5 billion in Q2 from SR12.3 billion in Q1. Compared with the first half of 2020, social spending increased by about 51 percent.

In what is also a positive sign for the private sector, the trend of spending on non-financial capital expenditure by the government also increased in Q2, to SR21.9 billion from SR14.9 billion in the previous quarter. The six-month total therefore stands at SR36.8 billion, less than the corresponding six-month period in 2020, when the figure was SR57.4 billion.

While the overall budget deficit has declined sharply, and will continue to do so in the coming quarters, total government borrowing now stands at SR922.8 billion, compared with SR853.5 billion at the beginning of this year.

Domestic debt stood at SR535 billion, or 58 percent of total debt, while external debt is SR387 billion. This excludes debt raised by Saudi Aramco.

In terms of principal repayments, these were mostly for domestic debt: SR4.7 billion in Q2, compared with SR50 million for external debt. This was to be expected as the Ministry of Finance’s international-debt program has only recently started, with maturities due in 5, 10 and 20 years, and even longer time frames, while domestic sukuk programs are accrued out on short-dated maturities.

Notwithstanding adverse geopolitical risk events, the Saudi economy is set to finish the current fiscal year in a far better shape than originally budgeted.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.