MARKET & ECONOMICSSaudi Arabia’s riyal under pressure after austerity budget

As oil prices fall to their lowest level in 11 years, the Saudi government yesterday announced a budget with the most cautious oil price in 10 years despite it facing the problem of the current decline and volatility in oil prices by reducing its dependence on oil revenues.

The US Energy Information Administration has said that US crude oil production will decrease by half a million barrels a day in 2016 as companies cut production or go bankrupt. The Brent oil price averaged about $US54 ($A74) a barrel this year but is now around $US37.

Saudi Arabia is arguably to blame for hurting its own economy because it is a “swing producer”, meaning it produces so much oil that it can shift prices depending on how much of the product it releases to the market.

Saudi Arabia has so far withstood the cheap oil era by dipping into its massive reserves, but officials are looking for more sustainable sources of revenue, including raising petrol, electricity and water prices.

The IMF has said that if Saudi Arabia raised its fuel prices to Gulf levels, it will save around $17 billion annually.

On Monday, Saudi Arabia’s government announced an 840 billion riyal budget for 2016 – a drop from the 975 billion riyal budget this year.

As of 8am GMT, Brent benchmark was trading at $36.75 per barrel, while United States crude West Texas Intermediate stood at $36.91.

Petrol prices will rise by 50 per cent in the country from December 29, while fuels such as diesel and kerosene and utility charges are also likely to rise.

To make up for the shortfall, the government ran a record deficit of 367 billion riyals (US$97.9 billion) in 2015, or 15 per cent of its gross domestic product, it said in the budget. He promised to diversify the kingdom’s revenues beyond oil, which now accounts for 90 per cent of the government’s income.

The budget “is a significant one for the Saudi Arabian economy”, explained Mr Saliba.

“This was more detailed than we thought, but it was long overdue”, said Fahad Alturki, chief economist at Riyadh-based Jadwa Investment.

Revenues next year are forecast at SR514 billion, down from revenues of SR608 billion in 2015. Oil normally contributes the vast majority of public income.

In a speech to cabinet on Monday, King Salman, overseeing his first budget since taking over the country in January, emphasised the need for diversification.

But despite the slump in the world oil market, Riyadh has maintained high spending and launched an expensive military intervention in Yemen, drawing on huge fiscal reserves it had accumulated when prices were high.