Saudi Arabia is the first G20 member to announce significant budget cuts, despite a pandemic that is far from being over. As the world’s largest oil exporter, Riyadh’s decision has far-reaching impacts beyond the Gulf region. Even as many other nations focus on stimulus packages and spending, Saudi Arabia will move the opposite direction.

Saudi Finance Minister: Saudi Arabia Will Cut 2021 Spending by 7.3 Percent

The largest economy in the Gulf will cut its budget spending in the coming year by 7.3 percent to 264 billion dollars, according to Finance Minister Mohammed Al-Jadaan.

The budget cuts and the economic slump in Saudi Arabia have far-reaching global consequences: the demand of the world’s largest oil exporter for imported goods has already fallen significantly. In addition, tens of thousands of guest workers have been laid off in the oil-rich nation.

The budget cuts should reduce the budget deficit from around twelve percent this year to 4.9 percent of economic output next year. At the same time, Al-Jadaan announced that additional billions should be pumped into the economy from state investment funds and further privatizations: “We believe that we are not over the mountain yet and want to make sure that we have enough financial resources for the health care system that we are prepared for a second wave,” said Al-Jadaan.

Riyadh’s Stimulus Program

In the current year, Saudi Arabia launched a major economic stimulus program and thus once again widened its budget deficit. Nonetheless, Al-Jadaan sees the country in a “very comfortable situation because of our moderate national debt”.

However, according to Senior Economist Jason Tuvey of Capital Economics, the proposed cuts indicate another aspect:

“The fact that spending is expected to fall further over the next few years suggests that, despite policymakers’ recent suggestions that they are looking at all measures to boost the economic recovery, this is unlikely to involve rowing back on recent fiscal austerity.”

Saudi Arabia has been hit twice as hard by the coronavirus pandemic: on the one hand, by the number of people infected ( 361,000) and deaths (6,112), and on the other hand, by the economic consequences of rigid curfews to contain the virus.

MBS Praises ‘Effectiveness’ of Saudi Fight Against COVID-19

Saudi Crown Prince Mohammed bin Salman was quoted, saying: “the economic crisis has been managed with great care and effectiveness, which led to the mitigation of the negative effects on the Saudi economy.”

“2020 was a difficult year for the whole world due to the outbreak of the coronavirus pandemic, but the kingdom’s economy has proven its ability to withstand its impact,” he added.

The non-oil sector, which Crown Prince Mohammed bin Salman has been promoting for years, has also suffered considerably. In addition, the exports of the oil exporter have plummeted both in terms of volume and price due to a global economic crisis.

The oil price was even negative for the first time. The OPEC oil producing organization, led by Saudi Arabia, had to agree to drastic production cuts with Russia on several occasions in order to stabilize the price at around 50 USD per barrel.

In the future, according to Al-Jadaan, Saudi Arabia no longer wants to publish its oil revenues, as the until then fully state-owned oil company Saudi Aramco has been listed on the stock exchange since December 2019.

Aramco pays higher dividends than the company generates in free cash flow – the lion’s share in the government purse. In order to plug financial holes in the group, other non-essential companies from the oil conglomerate should also be sold.

The finance minister is now hoping for a turnaround: economic growth of 3.2 percent should be achieved in 2021 after a 3.7 percent contraction in 2020. However, the International Monetary Fund (IMF) expects the Saudi economy to shrink by 5.4 percent this year.