Saudi Arabia crushed by cheap oil – and the cuts are coming

The fall in the price of oil has resulted in Saudi Arabia posting a 2015 budget deficit of 15 per cent of GDP, forcing spending cuts of 14 per cent in 2016, the government said overnight. It also called on the government to approve taxes on goods such as tobacco and soft drinks. The kingdom also announced on Monday that it was raising domestic fuel, power and water prices, according to the official Saudi Press Agency. The country, however, is willing to let oil prices go lower in order to maintain market share, at the expense of all other producers, as is seen by its handling of its current budget deficit. Crude futures recovered much of their Monday losses in Tuesday trading.

For the year, the finance ministry said gross domestic product was expected to increase by 3.4 percent, and the oil sector is expected to grow by 3.06 percent.

Oil income has normally contributed around 90 percent of total revenues.

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security.

The sharp drop in oil prices against a strengthening dollar has made Saudi Arabia’s peg to the dollar inconvenient, but as the oil market tends to be dominated by the dollar, it was in the past a convenient peg for the oil-reliant nation. To cover the difference between its spending and revenue over the past year, Saudi Arabia has drawn its reserves down from $728 billion at the end of last year to around $640 billion.

It was the second deficit year in a row for Saudi Arabia and Riyadh is expected to announce another shortfall when it unveils its 2016 budget later on Monday.

The cabinet said the increase was in line with global energy prices.

Analysts identified positive elements to the budget announcement, Reuters reported, including that the 267 riyal deficit was lower than the 400-450bn feared, and the planned cut in 2016 spending was smaller.

Like Alberta, Canada’s top oil producing province, today the desert kingdom is talking about diversifying government revenue and minimizing the pain of budget cuts on those with lower incomes. The 2015 budget was based on Brent price of $47 a barrel and the same level of crude exports, he said.

Figures given by Economy and Planning Minister Adel Fakieh indicated the cost of Saudi Arabia’s military intervention in Yemen was not a major factor in the budget.

The IMF has warned Riyadh that failure to cut spending and implement reforms will eat up the country’s fiscal reserves in just five years.