Saudi to boost spending next year to revive growth

Saudi Arabia plans to increase spending next year as the government tries to revive an economy that has been battered by low oil prices and several years of austerity, the finance minister said. Mohammed al-Jadaan told the Financial Times that Riyadh would set out an expansionary budget in 2018 to respond to the needs of the struggling private sector, which is reliant on state spending. In recent years, the government has been forced to slash expenditure and delay projects as prolonged low oil prices caused the budget deficit to widen to 17.2 per cent of gross domestic product in 2016.

It has since narrowed to 9.3 per cent of GDP, but the economy has fallen into recession this year after it shrank in two consecutive quarters. “The budget will be expansionary,” Mr Jadaan said in an interview. “We are considering extending the spending ceiling for next year.” The ministry plans to move towards a balanced budget by 2020 and has set expenditure of 928bn Saudi Arabian riyals ($247bn) for 2018, up from SAR890bn this year.

Oil output cuts have caused growth to contract by 1 per cent in the second quarter and by 0.5 per cent in the first three months of the year. Unemployment edged up in the second quarter to 12.8 per cent, and about a third of 25-29 year olds are out of work. Mr Jadaan pledged to respond to the economy’s needs.

“We will spend if the economy requires,” he said. “We will not shy away from our responsibility to ensure our people are comfortable and create the required jobs.” The ministry is also preparing a three-year SAR200bn stimulus programme to give another boost to the flagging economy. Mr Jadaan said he hoped that the first SAR40bn of the package would be bolstered by the approval of a second larger phase by the year’s end.

The International Monetary Fund had this month urged Saudi Arabia to ease the pace of fiscal consolidation given weak growth. “A rapid fiscal consolidation is neither necessary nor desirable,” the IMF said. Cuts to state project spending has already spiralled through the private sector and adjustments to energy subsidies have increased costs for households.

The austerity measures have come even as Crown Prince Mohammed bin Salman has been touting his ambitious reform programme intended to wean the economy off its addiction to oil and create thousands of private sector jobs. The privatisation of Saudi Aramco, the state oil company, is central to funding his vision. He unveiled plans this week for a vast $500bn investment zone in the kingdom’s north-west coastal region at a conference where he sought to woo foreign investors to back his schemes. The finance ministry is also funding loans for private sector ventures in healthcare, education and hospitality in underserved locations. This SAR1bn programme will be expanded in future years, Mr Jadaan said.

Source – FT

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