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The Cheapest Oil Ever Sold

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Saudi Arabia Bolsters Bank Lending With $5.3B Support

Saudi Arabia construction

In a bid to support financial liquidity amid the low oil prices, Saudi Arabia’s central bank will be injecting US$5.33 billion (20 billion riyals) into local banks in the form of time deposits on behalf of government entities.

The central bank, known as the Saudi Arabian Monetary Agency (SAMA), said on Sunday that it would also introduce 7-day and 28-day repurchase agreements, in addition to the existing one-day repo agreements, as part of measures to continue its monetary support.

The crude price slump has tightened liquidity and has pushed the borrowing costs of the Saudi banks up to seven-year highs, Bloomberg data showed last month. The government was said to have offered in June US$4 billion (15 billion riyals) in short-term loans to banks to help ease the liquidity squeeze.

As the ‘lower-for-longer’ oil price is putting pressure on the Saudi economy, which is heavily dependent on crude oil revenues, the authorities are introducing new taxes and trying to diversify proceeds. At the end of last year, Saudi Arabia resorted to reducing government subsidies for water, electrical power and even gasoline, trying to shore up the widening budget gap that had opened with the oil price crash. Saudi Arabia’s deficit was around 16 percent of its gross domestic product in 2015.

Although the IMF expects the budget deficit to narrow from 13 percent of GDP in 2016 to 9.6 percent in 2017, the kingdom still faces tough monetary and budgetary decisions in this oil price environment.

Earlier this month, Bloomberg reported that Saudi Arabia might cancel projects worth over US$20 billion in an effort to narrow the budget deficit. The Saudis are said to be currently reviewing projects valued at a total spending of US$69 billion (260 billion riyals) and may drop one-third of them. Killing off a third of the projects would benefit the budget for a few years.

By Tsvetana Paraskova for Oilprice.com

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