Saudi Arabia unveils 2021 budget

Saudi Arabia unveiled a 990 bn riyals ($263.9 bn) budget for 2021 that will see spending cut by 7.3% and said deficit will jump to around SR298 bn this year as the kingdom tackles the impact from low oil prices and the coronavirus pandemic.

Gross domestic product is projected to shrink by 3.7% this year but to return to a growth of 3.2% in 2021. Revenues for 2020 are expected to stand at SR770 bn and SR849 bn next year.

The budget “aims to provide assurance about the government’s ability to manage the crisis, gradually restore the pace of economic growth, strengthen the social benefits and subsidies schemes and continue to provide basic services,” the finance ministry said Tuesday in a statement.

Oil revenues for 2020 are estimated to be SR412 bn, down by 30.7% compared to the previous year, while non-oil revenues are expected to increase from SR332 bn to SR358 bn, “mainly due to the collection of exceptional profits from government investments,” according to the statement. Public debt is expected to increase to SR937 bn next year from SR854 bn this year.

Unlike previous years, the 2021 budget no longer breaks down projected oil revenue as a separate item. Instead, it is lumped under taxes and “other” revenues. Finance minister Mohammed al-Jadaan told reporters they can’t do that anymore because Saudi Aramco is now a publicly listed company. “The government deals with Aramco as a supplier for tax,” he explained. We have revenue that comes from Aramco, tax that comes from Aramco and also dividends since the government is the largest shareholder.”

With low oil prices as demand for crude declined due to the virus, the government had to resort to austerity measures, including the controversial decision to triple the value-added tax from 5% to 15% in July as the finance ministry sought to plug the budget deficit. The tax hike has dominated economic conversations in the country as citizens and business owners held hope that the government might reverse course.

That hope was temporarily boosted after trade minister Majid al-Qasabi told reporters last month that the government would review the tax after the end of the coronavirus crisis. But the finance minister, while acknowledging that this was a “tough decision,” has denied that any reduction of VAT is currently under review.

“There is currently no plan in the short or medium term to review the value-added tax,” he said in Tuesday’s press conference.

Despite the tax hike, the budget data show that taxes on services and goods are expected to be down by 9% in 2020 compared to the previous year.

“It appears that increasing VAT has had a negative impact on tax revenues size,” one financial analyst said on Twitter. “It would probably be better to return it to 5% and instead try to expand and diversify the tax base.” He deleted the tweet a few moments after posting, another sign of the current atmosphere of fear related to any perceived criticism of government policy.

Saudi Arabia was praised for taking early and strict measures to limit the spread of coronavirus, including the suspension of pilgrimage, restrictions on travel and nationwide curfews. But some of the kingdom’s economic decisions were considered counter-intuitive.

While many of the major economies reduced taxes to encourage consumer spending and pushed significant stimulus packages, Saudi Arabia raised taxes and its stimulus package was more modest than its G20 peers who spent 9.7% of GDP to boost their economies compared to just 3.1% of GDP for the kingdom.

Jadaan, who also has the role of acting minister of economy, defended that policy, arguing that they opted for quality over quantity. “The kingdom managed to focus its stimulus package on the most affected sectors and the ones that would strongly recover after being stimulated,” he said. “As a result, even though we only spent a third of what the rest of the world did, Saudi economy shrinking was among the lowest in the G20.”

Other factors benefited the kingdom and allowed it to weather the crisis better than these countries. While economic reform plans are aiming to diversify the sources of revenue away from oil and unlock the private sector to lead growth and job creation, the Saudi economy remains largely dominated by the government and the majority of citizens are employed by the state.

That meant that Saudi Arabia had more leeway to enforce lockdowns and keep its workers (many of them traditionally accused of having low-productivity) at home for an extended period of time before gradually easing restrictions late in the summer.

On the other hand, the pandemic appears to have helped accelerate growth plans for e-government and e-commerce services thanks to recent regulatory reforms and investment in telecommunications infrastructure. The health ministry, for example, made extensive use of apps to support its coronavirus response, including registration for taking the vaccine that started Tuesday.

On the private sector side, many businesses struggled but we have seen some bright spots too. Food delivery apps experienced exponential growth as people in lockdown have come to depend on them. Local app Jahez, which was founded in 2016, on Sunday announced that it plans to go public on the local stock exchange Tadawul next year. This is such a rapid timeline for a company that raised $36.5m six months ago in what was then described as the largest-ever financing round for a Saudi startup.

The finance minister was asked about whether the government is crowding the private sector through its sovereign wealth fund, the Public Investment Fund. He said government funds are focused on sectors that investors have long been reluctant to enter because they see them as highly risky. He added that the government expects to receive up to SR25 bn in dividends this year from the PIF as a one-off measure to support the budget.

“Saudi Arabia’s 2021 budget statement sees a decline in public spending over the next three years. Domestic investments by the sovereign wealth fund won’t offset these cuts. This would limit the rebound from the virus shock.” said Ziad Daoud, chief emerging markets economist at Bloomberg.

Despite that, and as I wrote last week, Jadaan is optimistic about the coming year. The same optimism can be found in statements by both the king and the crown prince after the budget was released.

King Salman said it was “a tough year in the history of the world,” but added that “we are looking forward to continuing the march of economic growth and comprehensive development...” Crown Prince Mohammed Bin Salman said the Saudi economy has shown resilience in the face of the pandemic.

“The crisis was managed very carefully and effectively, which led to the mitigation of the negative effects on the Saudi economy, which were previously expected to be more severe, as the balance between the precautionary measures and the timing of the gradual return of economic activities was achieved at a good pace,” he said.

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