Is Saudi Arabia going to declare bankruptcy?

Is Saudi Arabia going to declare bankruptcy?

November 11, 2016
Talat Zaki Hafidh
Talat Zaki Hafidh

Talat Zaki HafidhTalat Zaki Hafidh

THE Ministry of Finance is still strong and will be able to deal with the temporary financial difficulties it has been encountering. The current challenges should be dealt with wisely while economic resources should be well managed to overcome these challenges. Optimizing these resources will ensure that the Kingdom will continue to achieve the economic development and progress it seeks.

Following the 45 percent slump in the global price of oil in the past two years, the income of the state decreased by 15 percent last year. On the other hand, public expenditure increased by 13 percent, resulting in a deficit of SR367 billion in last year’s state budget.

Because the global price of oil is expected to decrease further in 2016, the Saudi government’s estimated state income for this fiscal year will be lower than that of previous years when global oil prices were at higher levels. The government had to cut down on public expenditure to ensure that it is commensurate with the decrease in the state’s income.

To explain further, the government’s estimated state income for this fiscal year is SR513.8 billion; public expenditure is estimated at SR840 billion, which means there is a deficit of SR326.2 billion. Because of the deficits of 2015 and 2016, the government has had to resort to domestic and international borrowing.

By December 31, 2014, the national debt reached SR44.3 billion at 1.6 percent of GDP for the same year. By December 31, 2015, the national debt reached SR142.2 billion at 5.9 percent of GDP for the same year. The government has adopted a borrowing policy this year to finance the fiscal deficit. National and international debts reached SR273.8 billion by August 31, 2016. The national debt is SR236.3 billion and the international debt is SR37.5 billion

Resorting to national and international borrowing, suspending the allowances, bonuses and perks received by government officials, and amending the fees of some public services have made many members of the public think that the Ministry of Finance is about to declare bankruptcy.

Many have concerns and fear that the ministry will eventually fail to pay the salaries of government officials, especially in light of the fact that total salaries, wages and allowances reached SR450 billion last year, 50 percent more than the expenditure approved by the budget.

People are worried that the Yemen war is costing us too much. However, the war was waged for legitimate political and security reasons, not only on a national level but also on the regional level. That is why some are still pessimistic about the financial situation in the country. I strongly believe, as a seasoned financial and economic expert and analyst, that the Ministry of Finance is still strong.

Why do I say that? This is because, despite the financial challenges, the Saudi government still possesses strong monetary and financial tools and policies, including reserve assets that will enable it to overcome these temporary challenges. The Kingdom possesses different reserves, considered to be the highest at the global level. The value of assets, last August, exceeded SR2.1 trillion. These assets comprise various investments, gold, cash, deposits and investments in securities abroad.

The International Monetary Fund (IMF) report, issued last June, said the Kingdom can overcome its budget deficit by withdrawing funds from the balance of government deposits at the Saudi Arabian Monetary Agency (SAMA), selling other financial assets or through national and international borrowing. The Kingdom can also focus more on privatization and private and pubic partnerships to face the decline in global oil prices.

The report also said that the measures aiming to increase efficiency and productivity, encourage private investment and enhance Saudi workforce participation in the economy would play a major role in limiting the impact of slow growth that is expected to take place over the next few years.

In a nutshell, the Kingdom has various options and solutions that it can use to overcome the budget deficit and meet its financing needs. It is important as well to combat and eradicate corruption in all government departments.

November 11, 2016