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Irina Slav

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Low Oil Prices Force Saudi Arabia To Cut 2021 Budget Plan

Saudi Arabia reduced its budget plan for 2021 by 7 percent from this year’s in response to the economic fallout of the pandemic, which pushed oil prices to multi-year lows.

Reuters reported that Riyadh will spend some $264 billion next year, or 990 billion riyals, as it battles a substantial deficit resulting from the latest oil price collapse.

Earlier this year, the Kingdom was forced by oil market circumstances to implement some unpopular austerity measures, including a triple increase in value-added tax and the cancellation of so-called cost-of-living allowances for much of the population. While the government insisted these were not austerity measures, the fact of the matter was that the drop in oil revenues threatened the economy of OPEC’s number-one exporter.

Saudi Arabia expects its 2020 deficit to hit $79.40 billion (298 billion riyals), representing 12 percent of gross domestic product, all because of the drop in oil revenues, which is seen at more than 30 percent this year. In 2021, however, the government expects the deficit to shrink to 4.9 percent of GDP and return to balance by 2023. Related: Goldman Turns Bullish On Oil: Sees $65 Brent In 2021

These expectations likely mean Saudi Arabia is banking on a pretty strong recovery in oil prices next year. It is not alone in this: Goldman Sachs recently said it expected Brent crude to rise to an average $65 a barrel in 2021 thanks to the rollout of Covid-19 vaccines that will stimulate oil demand growth. Yet there is always a risk that this might fail to pan out: Libya is pumping 1.28 million bpd, and OPEC will start adding another 500,000 bpd to daily production from January 2021 while mass vaccinations will take at least several months.

The Saudi finance ministry has acknowledged the challenging environment.

“In view of the uncertainty surrounding the pace of the global economic recovery and the potential persistence of the crisis, predicting the state of the oil market becomes increasingly challenging,” the ministry said in a statement as quoted by Reuters.

Yet, separately, Minister of Finance Mohammed al-Jadaan signaled optimism: “I think that the economic recovery of economic activities in the third and fourth quarters bodes well for economic growth in the coming years,” he told media.

By Irina Slav for Oilprice.com

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