Saudi Arabia is intensifying efforts to shrink the highest budget deficit among the world’s biggest 20 economies, aiming to cancel more than $20 billion of projects and slash ministry budgets by a quarter, people familiar with the matter said.
The government is reviewing thousands of projects valued at about 260 billion riyals ($69 billion) and may cancel a third of them, three people said, asking not to be identified as the discussions are private. The measures would impact the budget for several years, according to two of the people.
A separate plan includes merging some government ministries and eliminating others, two people said, also speaking on condition of anonymity.
The world’s biggest oil exporter is taking unprecedented steps to rein in a budget shortfall that ballooned to 16 percent of gross domestic product last year, curtailing fuel and utility subsidies as well as cutting billions of dollars in spending. The International Monetary Fund expects the shortfall to drop to below 10 percent of GDP in 2017.
The Finance Ministry declined to comment, while officials at the Ministry of Economy and Planning weren’t available for comment when contacted by Bloomberg. Several senior government officials are accompanying Deputy Crown Prince Mohammed bin Salman on an Asian tour.
“The revenue and economic diversification strategy being pursued will only start to yield results over the medium- to long-term,” Raza Agha, VTB Capital’s chief economist for the Middle East and Africa, said by e-mail. “In the short term, it is a question of living with lower oil prices by cutting some capital spending, and financing what’s left via debt sales and drawing down foreign reserves.”
Prince Mohammed is leading plans for the biggest economic shakeup in the kingdom’s history to reduce the economy’s reliance on oil after the plunge in crude prices. His blueprint includes selling a stake in oil giant Aramco and creating the world’s biggest sovereign wealth fund.
In the meantime, however, efforts to repair public finances are slowing the expansion of the biggest Arab economy, with non-oil gross domestic product contracting in the first quarter of this year.
“Much lower government spending will translate into lower private sector growth, which is already started to be seen in economic indicators this year,” said John Sfakianakis, director of economic research at the Gulf Research Center. “It’s a double edged sword as the government has to rationalize spending because of the drop in oil revenues.”