World Economy

Riyadh to Cut Billions From Budget

Riyadh to Cut Billions From BudgetRiyadh to Cut Billions From Budget

Saudi Arabia is preparing to cut billions of dollars from its budget amid a steady drop in crude oil prices. Reportedly, Riyadh is currently working with advisers to review capital spending plans and delay some projects.

“The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10% or more,” wrote Bloomberg, citing two people familiar with the matter speaking on condition of anonymity.

According to the sources, besides reviewing its capital spending, the Saudi government may delay or reduce some of its projects to save money. However, spending items such as public sector salaries would not be affected, the report claims.

The Saudi budget, which draws some 90% of its revenue from the petroleum sector, has been heavily hit by a 50% drop in oil prices and is expected to incur a deficit amounting to 20% of GDP in 2015, the International Monetary Fund has estimated.

“This is a response to the lower oil prices but also to the fact that capital spending has been growing strongly over the past few years,” Fahad Alturki, chief economist and head of research at Jadwa Investment Co., told Bloomberg while commenting on the report.

He added that though a cut in capital spending “will impact economic growth, the non-oil sector is not as reliant on government spending as it was 20 or 30 years ago.” The Saudi Finance Ministry declined to comment.

Earlier in August, the Financial Times reported that Riyadh planned to raise $27 billion on the bond market by the end of 2015 to balance its budget, which had been prepared based on an estimated crude oil price of $106 per barrel.

As a result of the sharp recent dip, the price for Brent crude oil currently stands at $43.32 per barrel as opposed to over $100 a year ago, while the price of WTI crude oil has dropped to $39.55 from over $90.

Saudi Arabia, which dominates OPEC, is thought to have played a key role in instigating the slump in crude oil prices. The biggest economy in the Arab world has been unwilling to cut its crude output. In June, OPEC confirmed it is not cutting output, which has even increased since last year from under 30 million to about 32 million barrels per day.