Saudi fuel price hike as 2016 budget shortfall projected

1200x-1Saudi Arabia has announced that it will increase its fuel prices in line with other GCC countries amid an extended dip in oil revenues. The kingdom will increase the price of petrol by two-thirds to 0.75 riyals (Dh 0.73) a litre from 0.45 riyals (Dh 0.44) for 91-octane. The rise is part of a basket of measures that includes higher domestic power and water tariffs and trimmed government spending.

This cut in subsidies brings Saudi Arabia in line with most of its neighbours. The UAE ended fuel price controls, along with water and electricity subsidies in Abu Dhabi, this year. Bahrain has just approved cuts to diesel and kerosene subsidies. However, there are some key differences in Riyadh’s announcement.

The price of fuel has traditionally been low in the kingdom, with many seeing it as a natural part of living in the world’s largest producer of oil. Many other major petroleum-producing countries acted similarly. Venezuela, for example, subsidises petrol so heavily that it cost around 7 fils a litre. This is far below the true cost and is clearly unsustainable.

Raising the cost of fuel, however incrementally, will allow Saudi Arabia to create a valuable source of revenue it needs for expenditures in 2016 and beyond. With this new revenue stream in place, the kingdom will establish a reliable income that is not directly tied to the ups and downs of global commodity prices.

This petrol price increase is part of a societal shift, laying the groundwork for a time when income from hydrocarbons isn’t the primary driver of the Saudi economy. There are, of course, short-term economic benefits that will be detectable in 2016, but the long-term psychological effects will pay greater dividends.

What follows these announcements is extremely important. Saudi Arabia is preparing itself for a post-oil future and facing the immediate effects of the recent downturn in oil prices with prudent steps. This is the start of a process that will inevitably include more announcements and changes. The kingdom ought to be applauded for having taken the first step.

This article originally appeared in The National newspaper

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Riyadh also projected a shortfall of $87 billion in next year’s budget, the first since King Salman (below), took over the country in January. The finance ministry said in a statement that revenues in 2015 were estimated at 608 billion riyals ($162 billion), the lowest since 2009 when oil prices dived as a result of the global financial crisis. The budget “comes amid challenging international and regional economic and financial conditions” including “very low oil prices,” the statement said.King-Salman

The 2015 deficit is the highest in the history of Saudi Arabia, which relies on oil for 90 percent of public revenues, but was not as big as some expected.

The dive is largely due to Saudi Arabia’s own policies and those of other OPEC nations, who are refusing to cut oil production as they seek to drive less-competitive players, including US shale producers, out of the market. Oil prices slid in response to the statement, with the US benchmark West Texas Intermediate losing $1.29 to $36.81 a barrel, while Brent crude shed $1.27 to $36.62 a barrel in London.

The International Monetary Fund had projected the 2015 deficit to be around $130 billion and other reports also put it above $100 billion. The ministry said oil income made up just 73 percent of total revenues in 2015, way below its contribution in previous years. Meanwhile, non-oil revenues rose 29 percent to $43.6 billion.

The 2016 budget projects revenues at $137 billion, the lowest in six years, and spending at $224 billion, slightly below 2015 projections of $229 billion.

Spending this year came in at $260 billion, the ministry said, almost equal to 2013 expenditures and down 6.6 percent from 2014. Saudi Arabia normally overspends its budget projections by around 20 percent.

Riyadh
Riyadh maintained high spending in 2015Riyadh 

Such subsidies are a highly sensitive issue in Saudi Arabia, where residents have grown accustomed to low utility and fuel costs.

The finance ministry said it is also considering plans to raise charges on public services and to apply value-added tax in cooperation with other Gulf Arab nations, which are facing similar pressure from the oil price drop.

It unveiled economic and fiscal reforms to make the budget more sustainable, including a programme to contain spending growth, especially for wages and benefits which accounted for half of the 2015 budget. A quarter of next year’s spending, or $57 billion, has been allocated for defence and security expenditures, the ministry said. It was unclear how much the intervention in Yemen was costing as Saudi Arabia has not previously released figures on defence spending.

The IMF has warned Riyadh that failure to cut spending and implement reforms will eat up the country’s fiscal reserves in just five years. The kingdom withdrew more than $80 billion this year from the reserves, which stood at $732 billion at the end of 2014, and issued bonds worth around $20 billion. The ministry also said nominal gross domestic product for 2015 is estimated to drop 13.35 percent to $653 billion. The economy was forecast to grow by 3.35 percent this year.

This article was originally published by AFP

 

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