Oil crash forces S. Arabia to cut ‘unnecessary’ budget expenses

U.S. President Barack Obama (R) meets with Saudi King Salman bin Abdulaziz in the Oval Office of the White House in Washington September 4, 2015. © Gary Cameron
With oil prices collapsing more than twofold in the space of one year, Saudi Arabia will be forced to cut “unnecessary expenses” to plug a budget hole estimated at $120 billion. The announcement was made by the finance minister during an official visit to the US.

“We have built reserves, cut public debt to near-zero levels and we are now working on cutting unnecessary expenses while focusing on main development projects and on building human resources in the kingdom,” Ibrahim Al-Assaf told CNBC Arabia in an interview broadcast on Sunday.

The country’s budget balances at prices of just over $100 per barrel, while Brent crude is currently selling for just under $50. Riyadh has command of the world’s third-highest foreign currency reserves, which stand at around $650 billion after the government has already spent around $70 billion covering the shortfall since the start of the year.

There has been little indication as to which areas of expenditure would be trimmed. The move was first tentatively touted at the end of last year, when Riyadh promised to “rationalize” the multiplying public sector salaries.

“There are some projects like the ones that have been approved a few years ago and haven't been carried out until now – that means such projects are not currently necessary and can be delayed,” said US-educated Al-Assaf, who has previously worked for the IMF.

Saudi Arabia has already downscaled several high-profile infrastructure projects, including a $200 million plan to buy high-speed trains, and to construct high-tech football stadiums in large cities. But Al-Assaf insisted that extreme cuts would be counter-productive.

“Projects in sectors such as education, health and infrastructure are not only important for the private sector but also for the long-term growth of the Saudi economy.”

Truly effective cutbacks could be realized in socially sensitive areas, such as reducing the $50 billion the government spends annually in fuel subsidies, something neighboring UAE has recently done, creating a spike in consumer energy prices.

Last month, the IMF said that Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment” to stem its drain of valuable cash reserves.

However Al-Assaf said the country is likely to issue bonds, for the first time in the best part of a decade, as well as raising money on the international markets for specific large projects.

However, the biggest economy in the Arab world which dominates OPEC has been unwilling to cut its crude output, and is thought to have played a key role in instigating the slump in crude oil prices. The budget crisis only worsened when Saudi Arabia started an expensive military campaign in Yemen.

The IMF predicts that the growth of the country’s economy will slow by 2.8 percent this year.