The world’s largest oil exporter this week announced a series of fundraising measures, including a sharp reduction in cash dispensations to Saudi citizens and a tripling of the 15% sales tax rate, starting since July.
Austerity measures will help fill a gap by yawning in the government budget, adding up to almost 8% of Saudi Arabia’s annual economic output when combined with spending cuts announced earlier this year, according to the agency credit rating. The increase in taxes equates to 5% of GDP.
At the same time, the Saudi government announced that it would deepen its oil production cuts by 1 million barrels per day in June, the latest in a series of attempts to raise prices after an abortive battle for market share with Russia and the United States and a sharp drop in demand caused by the pandemic sent crude oil into a record-breaking queue.
Saudi Aramco, the state-owned oil company, said on Tuesday that its net profit fell 25% in the first quarter. The Brent crude price plummeted about two thirds during the first three months of the year, dropping below $ 23 a barrel in late March. US oil prices turned negative in April, but have recovered since then.
Prior to this week’s moves to increase revenue, Saudi Arabia needed more than doubled oil prices to balance its large budget, which includes heavy social and military spending. The deficit could also force the Crown Prince to rethink his Vision 2030 plan to diversify the economy through initiatives including numerous mass tourism projects and a futuristic city.
The war chest of Saudi Arabia, which was built using the proceeds of the crude oil sales, has emptied at an alarming rate.
“Timing [of the oil crash] it’s absolutely horrible because diversification attempts haven’t paid off yet, it hasn’t even started seriously and it becomes much more difficult to do now than it would have been with a full war chest, “said Christof Rühl, a researcher at senior research at Columbia University’s Global Energy Policy Center.
It will now be more difficult for the government to spend a lot on capital-intensive projects, including NEOM, a futuristic $ 500 billion city on the Red Sea, during an austerity campaign. Such plans, said Rühl, “should not be sacrosanct”.
The government’s official foreign exchange reserves declined by $ 26 billion in March, the steepest monthly drop ever. Reserves now stand at $ 465 billion, down from the recent $ 750 billion peak in 2014. The decline earlier this year prompted the central bank to issue a statement stating that it would maintain the Saudi rise. pegged to the US dollar.
The economic environment remains gloomy: the International Monetary Fund expects Saudi Arabia’s economy to contract 2.3% this year. Global oil demand has fallen by nearly 30% last month and this year is expected to drop by 10% annually, according to the International Energy Agency. And global demand may never fully recover from the pandemic, analysts warned.
Saudi Arabia’s finance minister, Mohammed al-Jadaan, recently said that everything must be on the table when it comes to budget cuts, except for the basic needs of Saudi citizens who have benefited from generous food subsidies for decades , electricity and petrol.
“There will be discontent for the superior [tax], but I don’t think this will end. Of course, there are fewer resources for state-led diversification projects, but some of them have been speculative nonetheless, “said Steffen Hertog, Gulf specialist at the London School of Economics.
This view cannot be shared by bin Salman, who wields enormous power as a crown prince and is known by the initials MBS.
Bin Salman launched his economic project in April 2016. He created the Public Investment Fund, a sovereign investment vehicle with starting capital of $ 400 billion, to encourage diversification. It was partly funded by an IPO from Saam Aramco which raised $ 25.6 billion.
Looking ahead, there are doubts that the cuts in oil production undertaken by Saudi Arabia and allied producers can counteract the sharp drop in demand caused by the pandemic. Otherwise, crude oil prices will remain low and the country’s budget pain will continue.
“The reality is that prices will remain far below what they had planned for their budget for a long time,” said Columbia University’s Rühl.
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