Saudi Arabia to slash capital spending by 71%

© Fahad Shadeed
With the largest budget shortfall among the world’s 20 biggest economies, Saudi Arabia is planning more austerity measures this year. The kingdom will scrap projects worth more than $20 billion as it comes to terms with cheaper oil.

According to the Saudi government’s bond prospectus obtained by Bloomberg, capital expenditure is expected to fall to $20.6 billion (75.8 billion riyals) this year compared with $70.2 billion (263.7 billion riyals) in 2015. Two years ago, the country’s capital spending was $98.6 billion (370 billion riyals).

“I would’ve liked to have seen more cuts to current spending rather than focusing almost entirely on capital expenditure,” said Khatija Haque, head of Middle East and North Africa research at Emirates NBD. She added “in the short-term, the impact will be slower growth” as government spending and investment is reduced.

Saudi officials have suspended bonuses and reduced allowances for government employees, and a 20 percent cut to ministers’ salaries. As a result of the cuts spending will decline to $155 billion (581.2 billion riyals) from $190 billion (714.4 billion riyals).

The kingdom’s growth will likely slow to 0.6 percent this year from 3.4 percent in 2015, according to HSBC Holdings.

In the summer, Riyadh unveiled a plan for the post-oil era in a move to reshape the kingdom’s economy. As part of the initiative, the country plans to triple non-oil revenue and cut public sector wages and subsidies by 2020.

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

Under the new program, Riyadh intends to boost non-oil revenues to $141 billion (530 billion riyals) within four years, from current $43.5 billion (163.5 billion riyals).

The crude price fall has had a significant impact on the kingdom’s economy as oil sales account for almost 90 percent of the country’s earnings. Saudi Arabia is suffering a record budget deficit which is estimated at $87 billion this year. According to government projections, it will decline to 13.5 percent of GDP this year from 15 percent in 2015.

This week Saudi officials are meeting with investors on the country’s first international bond issue aimed at strengthening the strained finances. The offering is expected to exceed $10 billion.