Saudi Arabia Going Bankrupt?

Almost eight decades after oil was first found in Saudi Arabia, the government has unveiled a blueprint for an economy less reliant on crude sales to fuel growth and fund infrastructure. Four charts show the challenges the kingdom faces and the probable impact of the new policy.

The government has cut spending to shore up its public finances while seeking an alternative source of revenue. Deputy Crown Prince Mohammed bin Salman says authorities want to generate $100 billion per year in additional non-oil revenue by 2020. Reducing subsidies for gasoline, electricity and water will account for $30 billion of that amount, while a new value-added tax will generate $10 billion a year.

But while investors are likely to welcome the plan, Saudi Arabia won’t be able to escape some pain as it’s implemented. Economists in a Bloomberg survey predict growth will slow this year as cuts to government spending – the engine of growth in recent years – take a toll on the private sector.

Non-oil growth will slow to 1.6 percent this year from 3.6 percent in 2015, according to International Monetary Fund forecasts.

Even with $100 dollar oil filling public coffers, Saudi Arabia typically overspent by an average of 25 to 30 percent a year as budget planners looked first at revenue before deciding how much to spend, Minister of State Mohammad Al-Sheikh said in an interview last month.

Future budgets will face more scrutiny and the process has been revamped to consider actual spending needs before funds are allocated, he said. As a result, Saudi Arabia will be able to sustain spending growth of 3 to 5 percent a year, with the budget balanced by 2020.