Saudi Arabia this week announced historic spending reductions in its 2016 budget aimed at controlling a deficit that came in at 376 billion riyals ($98 billion) this year, or around 15 per cent of GDP. The Saudi government said it would cut subsidies on fuel, electricity and water and would impose a new value added tax and a tax on tobacco as well as gradually privatising some state-owned entities, the financial news agency Bloomberg said. The moves come amidst pressures on dwindling state revenues on the back of oil prices that have hit record lows. Brent crude stood less than a dollar away from its 11-year low of $35.98 last week, Reuters reported. Oil stood at $125 a barrel in March 2012. The 2016 Saudi budget plan aims to cut the country's deficit to 326 billion riyals, according to the Al-Arabiya news website. It projects spending of 840 billion riyals, down from 975 billion riyals spent this year. According to Al-Arabiya, oil revenues accounted for 73 per cent of total Saudi government revenues, which are down 23 per cent compared to last year, Bloomberg said. To cover the deficit, the Saudi government has been drawing on its foreign reserves, and these dropped by more than $95 billion in the first 11 months of this year to $627.7 billion, Bloomberg noted. Following the budget announcement, the government sharply increased domestic fuel prices, according to the Saudi Press Agency. The Wall Street Journal reported that the price of octane 95 petrol had been raised to 0.90 Saudi riyals ($0.24), a litre up from 0.60 a litre. The price of octane 91 petrol was increased to 0.75 Saudi riyals a litre from 0.45. According to the Journal, prices were also increased on gas, diesel, kerosene and other utilities, such as water and electricity. Fuel-subsidy cuts are often a sensitive issue, especially in countries which have been subsidising these products for decades. Politicians often refrain from making the cuts for fear of public protests, but Bloomberg reported that Saudi economy and planning minister Adel Fakeih had told reporters in Riyadh that the subsidy cuts would not have a “large effect” on people on low or middle incomes. Economists have long argued that subsidising fuel leads to distorted usage and other ills. Jeffrey Nugent, an economist at the University of Southern California in the US, said that such countries had achieved little progress in raising non-oil revenues and had failed to convert oil resources into physical and human capital at a recent conference organised by the Economic Research Forum in Kuwait. A press release following the 2014 International Monetary Fund's article IV consultations with the Saudi government said that Fund had “underscored that an upward adjustment in energy prices would support a strong fiscal position and the efficient use of energy. The price adjustment should be well-planned and communicated, while ensuring that vulnerable groups are not adversely affected.” The fiscal tightening is expected to weigh on growth, however. A note by Capital Economics issued earlier this month said that the Saudi economy had shifted down a gear in recent months and that growth in Saudi Arabia had eased in October to a little below four per cent year-on-year. The IMF meanwhile is forecasting growth of 3.4 per cent for the kingdom in 2015 and 2.2 per cent in 2016. The low oil prices that have triggered the dilemma Saudi Arabia is facing are the product of oversupply in the market. As the IMF put it in its October Regional Economic Outlook for the Middle East and Central Asia, “the shale revolution, the decision by the Organisation of Petroleum Exporting Countries (OPEC) to protect its market share, and the anticipated lifting of sanctions on Iran are all putting downward pressure on prices.” “Persistently weak global growth has also contributed to lower oil prices from the demand side, most recently amid concerns over slowing growth in China and emerging market vulnerabilities more generally.”
