Balancing the Saudi books to improve growth

The sixth line of the Riyadh metro has now opened – a considerable achievement executed at unprecedented speed, according to architects and engineers interviewed by Valentina Pasquali. But the IMF is predicting growth in the Saudi economy of only 1.5 percent this year. Not so great.

It is easy to be sceptical of macroeconomic forecasts, subject as they are to sizeable revisions and, in Saudi Arabia’s case, to the vagaries of the oil market. Our colleague Matt Smith has written on the difficulties of calculating GDP – particularly in service sector-heavy economies.

In Saudi Arabia’s case, the sovereign balance sheet looks fine and ratings agencies are happy-ish. Public debt is around only 28 percent of GDP and the finance ministry projects that it will climb to about 33 percent by the end of 2027. The US and European states can only dream of such metrics. How about north of 100 percent?

But cash management is an issue. Contractors and others are worried about being paid – at least being paid on time.

The banks are lending as much as they can to the mega-projects, and state oil giant Aramco is tapping the debt markets as a proxy for the state. Ihsan Buhlaiga, an economist and former Shura Council member, told Nadim Kawach that the kingdom wants to build foreign reserves and prefers not to sell down assets such as those held by the Public Investment Fund.

“I can tell you that the budget deficit in Saudi Arabia is not real … it is an optional deficit, because the government can achieve a balance between spending and revenue on an annual basis,” Buhlaiga said.

Quite so. One way Saudi Arabia can achieve balance is by tapping international markets.

In the real economy, unemployment among Saudis has fallen by a full percentage point from 9 percent to 8 percent. But that is still significant.

Also significant is the level of poverty in a population of 19 million nationals in a total of more than 33 million. In Saudi Arabia poverty tends to fall among nationals rather than expatriates because, for the most part, poorer guest workers just leave. According to Escwa, the UN commission for western Asia, one in seven Saudi nationals was living in poverty in 2023. Foreign direct investment has also disappointed.

Some would never have predicted that the kingdom would implement VAT. Or that home ownership would reach 63 percent of nationals, which it has, according to the CEO of the National Housing Company, speaking in November.

The kingdom has been also making strides in petrol and diesel pricing – sensitive issues for the Buraidah taxi driver. Last week Aramco hiked diesel prices by 44 percent compared with the start of 2024. A litre of 95 octane gasoline will now set you back SAR 2.33 or 62 US cents, according to globalpetrolprices.com. In the UAE, where prices are revised every month to ensure costs are covered, the 95 is AED2.5 or 68 US cents a litre.

Since 2022, Saudi Arabia has also examined and adjusted gasoline and diesel prices dynamically. This is not only good for the central government budget deficit, but covering costs discourages waste and is environmentally responsible. Compare and contrast with Egypt and Iran.

The kingdom can, though, do better than 1.5 percent growth. And to do so it needs to adopt the same hard-headedness it has brought to VAT, gasoline pricing and housing. It should borrow from the international markets to fund projects and to provide jobs for that growing workforce.