In case anyone had any doubts that Saudi Arabia has very ambitious economic growth plans, the 2018 budget, announced earlier this week by King Salam, must have dispelled them. The kingdom plans to spend $261 billion in 2018, its largest-ever budget. And that’s not all.
Riyadh also eyes reducing the share of oil revenues in the total to less than 50 percent. That would be a huge reduction given that oil accounted for more than 90 percent of revenues just three years ago. To date, oil revenues are about two-thirds of the total. So, basically, there are now two questions that pique the curiosity of observers: Where will the money for the record budget come from, and how will Riyadh accomplish the huge cut in oil revenues as a part of the total?
To answer the first question, it seems that the government is counting on higher taxes and duties as well as lower fuel subsidies to get things going. Fuel prices are to rise by as much as 80 percent from the start of 2018 as a result of the lower subsidies, and some new taxes, including a 5-percent VAT and taxes on expats, are about to come into effect.
Leaving aside the effect these changes would have on the population—an 80-percent price hike will hardly leave everyone cold—it’s doubtful that these measures on their own would be enough to fill the state coffers with enough money for the ambitious spending plans. It seems reasonable to suggest that Saudi Arabia is counting on a scenario where oil prices remain high. Related: U.S. Slaps Sanctions On Israeli Oil Billionaire
The shift from an oil-dependent economy to a diversified one does not happen within a fortnight, so it would make sense to make the best of high oil prices while they last. And they may not last as long as most expect: OPEC sources just said yesterday that the cartel’s secretariat has begun work on various exit scenarios for the OPEC/Russia production cut deal. This is remarkably fast, since OPEC and its partners just agreed to extend the cuts until the end of 2018.
The plan is really ambitious, as is everything in the Vision 2030 program of Crown Prince Mohammed. Saudi Arabia will seek to reduce the share of oil revenues to just 42 percent by 2023. How? Apparently, by developing its tourism sector, building the city of the future that will cost it $500 billion, and betting big on renewable energy and nuclear power. Also, with taxes, of course.
Energy historian Ellen Wald lists three possible sources of the higher income that Saudi Arabia will need to generate, in order to break even in 2023, as it plans to do. These sources are, higher oil prices, higher taxes, and diversification. Of course, a combination of the three is also a possibility.
All of these are risky for different reasons. Higher oil prices, Wald says, may be good for Aramco’s bottom line, but Riyadh just cut the state giant’s tax rate to 50 percent from 85 percent to sweeten the upcoming IPO. Hence, the oil contributions to the budget will not be as great as they used to, even if oil prices rally even higher. Related: Aramco’s “Acquisition Hit List”
The topic of higher taxes is a sensitive one for any society, but a lot more so for a society that until very recently had only heard about personal income tax. Anything can happen, at the very least a slowdown in consumer spending because of higher prices. Falling consumer spending is not exactly conducive to economic growth.
Diversification is the big goal. It is the ultimate goal, actually—an end rather than a means to one. But diversification takes time before it bears fruit. That’s in general. In Saudi Arabia specifically, there is a unique risk: the Aramco IPO. The diversification program of Prince Mohammed relies almost entirely on the proceeds from the listing. Should this fail, Saudi Arabia’s prospects of true diversification away from oil will become very distant.
By Irina Slav for Oilprice.com
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