Saudi Arabia’s shift from budget balancing to fiscal sustainability: non-oil revenues see 53% growth

RIYADH: Saudi Arabia’s total revenues amounted to SR258.54 billion ($68.92 billion) in the third quarter of 2023, the Ministry of Finance said in its quarterly budget performance report on Wednesday.

Data released by the ministry indicates that non-oil revenues surged by 53 percent in the three months to the end of September compared to the same quarter last year, reaching a total of SR111.53 billion.

Non-oil revenues accounted for 43 percent of the Kingdom’s total revenues over the period, marking a significant increase from the 24 percent recorded in the same timeframe the previous year.

“I believe that the budget for Q3 2023 reflects the economic and financial reforms that the Kingdom has adapted since the launch of its Vision 2030 in 2016,” Talat Zaki Hafez, economic columnist and banking expert said.

Hafez explained that the significant growth in non-oil revenues is one of the objectives that the Kingdom’s Vision 2030 sought to accomplish.

The share of oil revenues, previously the main component of Saudi Arabia’s income, declined from 76 percent in the third quarter of 2022 to 57 percent in the same period of this year.

I believe that the budget for Q3 2023 reflects the economic and financial reforms that the Kingdom has adapted since the launch of its Vision 2030 in 2016.

Talat Zaki Hafez, Economic columnist and banking expert

“One of the issues that has affected the oil revenue is the Kingdom’s voluntary reduction of oil production. It started with 500,000 bpd (barrels per day: and moved up to another 1 million since July which is a total reduction of 1.5 million bpd,” Hafez said.

Vision 2030 aimed to pivot towards non-oil activities due to the volatility of crude prices. Relying predominantly on oil revenues left the Saudi economy vulnerable to the unpredictable swings in global markets.

This strategic shift is set to enhance economic stability, create new opportunities for growth, and secure a more sustainable financial future for Saudi Arabia.

Conversely, total expenditures in the third quarter of 2023 rose by 2 percent compared to the same period of the previous year, reaching SR294.32 billion. The resulting budget deficit for this period amounted to SR35.77 billion.

Hafez explained: “The increase in expenses coupled with the significant decrease in oil revenues has reflected on the overall deficit that was shown in Q3 of 2023.

“That’s an issue? No that is is not an issue as long as the objective of the Vision 2030, in its economic and financial reforms, is to focus on two things: To grow the non-oil revenues, and that’s an important fact, and also to guarantee that you have financial sustainability regardless whether the budget shows a surplus or deficit.”

Taxes on goods and services emerged as the primary contributor to non-oil revenues, comprising 63 percent of the total and reaching SR70.26 billion in the three months to the end of September.

This category displayed remarkable growth, surging by 57 percent from SR44.9 billion in the same period of 2022.

Meanwhile, taxes on income, profits, and capital gains experienced the most significant growth among non-oil revenue streams, with a remarkable surge of 148 percent compared to the same quarter last year, amounting to SR8.2 billion.

Although this category represents a small portion of total non-oil revenues, accounting for 7 percent, it has shown significant progress from 5 percent in the equivalent quarter of 2022 when it amounted to SR3.32 billion.

On the expenditure front, employee compensation accounted for the largest portion of expenditures, representing 44 percent and reaching a total of SR130.6 billion. This marks a 3 percent increase from the third quarter of 2022.

Although comprising a smaller portion of the Kingdom's total expenditures, it's noteworthy that total grants experienced a substantial leap of 336 percent during this period, amounting to SR4.04 billion.

Analyzing the allocation of expenditures by sector for the three months to the end of September, the military sector accounted for 21 percent of the total expenditures, amounting to SR62.29 billion. This marks a 15 percent increase compared to the same period of the previous year.

The health and social development sector represented 20 percent of the expenditures, with a total of SR57.44 billion.

It's noteworthy to mention that this particular category has already utilized 98 percent of the year's allocations, reaching SR185 billion within the initial 9 months of this year. This sector was initially budgeted for SR189.34 billion for the fiscal year 2023.

“The beauty is that the Kingdom is still spending on education, health and all of the social related protection programs that have witnessed growth during this period, like the Citizen Account Program and the Social Security System,” said Hafez.

The Citizen Account Program was established to protect Saudi families from the expected direct and indirect impact of various economic reforms, which may cause additional burden on some segments of society.

Hafez explained that the primary goal is not solely to conclude any financial period, whether it's on a quarterly, semi-annual, or annual basis, with either a deficit or surplus. “While surpluses are certainly welcomed, they are not the primary objective,” he said.

The economist added that the Kingdom’s objective has transitioned from simply balancing the budget. Back in 2016, with the inception of Vision 2030, the focus was shifted towards achieving financial sustainability where the government can consistently fulfill its financial commitments without interruption, irrespective of the fluctuating oil prices.

“The General Authority of Statistics has issued their GDP (gross domestic product) flash estimate for Q3 and it has clearly indicated that non-oil activity has increased by 3.6 percent and the government activity has increased by 1.9 percent on an annual basis,” Hafez said.

Total revenues for the initial 9 months of 2023 reached SR854.31 billion, accounting for 75.6 percent of the approved budget for fiscal year 2023.

During this period, non-oil revenues surged by 22 percent, totaling SR348.96 billion, and constituting 41 percent of the total revenues for this timeframe.

In contrast, oil revenues witnessed a 24 percent decrease, amounting to SR505.35 billion in the first 9 months of the year. Their percentage share declined from 70 percent in the same period last year to 59 percent by the end of the third quarter of 2023.

Expenditures in the initial three quarters of the year reached 81 percent of the allocated budget for fiscal year 2023, totaling SR898.26 billion during this period. Consequently, this led to a government deficit of SR43.95 billion within the same timeframe.

Total public debt stood at SR994.26 billion by the end of September, with SR628.6 billion categorized as domestic debt, while the remaining SR365.62 billion is classified as external debt.

Hafez said: “The public debt is less than 25 percent of GDP, which is one of the lowest if compared to advanced economies or G20 countries, and also the public debt is covered by ample, with government reserves standing at more than SR407 billion by Q3 2023,”

He added: “It means we have enough liquidity to cover our public debt, bearing in mind that the public debt is mostly domestic debt.”