The IMF cautioned Saudi against increasing public spending and with keeping it sustained as oil prices rise, on the chance that they could as easily drop, leaving the budget exposed and creating volatility.
A sharp rise in oil prices meant a 67 % surge in Saudi revenues in Q2, 2018, while public spending rose 34%, according to government figures.
Just under 50% of spending is on wages for public sector employees, according to the IMF, which proposed “the workforce could be gradually reduced through natural attrition”.
Out of budget spending
Saudi Arabia’s sovereign wealth fund has raised the first commercial loan, a $11 billion loan from banks, a source with direct knowledge of the matter told Reuters, as it seeks to boost its firepower to finance the kingdom’s economic transformation plans.
News of the loan, which was increased from an initial guide size of $6 billion to $8 billion comes after Saudi Arabia indefinitely postponed plans to list state oil giant Aramco, according to four industry sources.
The sovereign fund will pay a margin of 75 basis points over the London Interbank Offered Rate for the loan, the same as that which the Saudi government secured when it raised a syndicated loan earlier this year, the source told Reuters.
The debt raising diversifies PIF’s sources of funding, which in the past were capital injections and asset transfers from the government as well as earnings from existing investments.
The fund is expected to receive some $70bn-$80bn from the sale of part or all of its stake in petrochemical company Saudi Basic Industries Corp (SABIC) to Saudi Aramco.
As far as the wage bill, staff underscored the importance of containing the wage bill given that it accounts for about one-half of government spending and suggested that the workforce could be gradually reduced through natural attrition. The authorities explained that a civil service review is being conducted with the World Bank to help identify reforms to improve the cost-effectiveness of the civil service and deliver on the budget projections, and noted that civil service employment has declined in recent years.
Finally, with capital spending, the IMF said Saudi is planning to increase capital spending in support of Vision 2030. IMF staff welcomed the mechanisms being put in place to review existing and new capital projects before they are funded, but noted that it is too early to say whether the public investment management process has been strengthened sufficiently to ensure that projects deliver efficiently on the intended outcomes.
Staff is, therefore, suggesting a cautious approach to ramping up capital spending.
Source Credit: AME info