Saudi Arabia will have to postpone some of the projects launched under its economic transformation and diversification plan, Vision 2030, in the first admission that the kingdom will have to adjust the plan’s timeline due to the impact of low oil prices on revenue.
Most analysts estimate that Saudi Arabia needs an oil price above $90 per barrel to generate enough revenue to finance the multibillion-dollar plan without worsening the budget balance.
The International Monetary Fund had already announced in October that Saudi Arabia would need crude oil close to 86 dollars per barrel to balance its budget, a price higher than its average this year. If spending by government-related entities such as the Saudi sovereign wealth fund is included, the break-even point will likely rise to $110 in the second half of this year, according to Bloomberg Economics.
With the price of Brent oil below $80 a barrel, the government, which forecasts budget deficits every year until 2026, decided to postpone some projects and avoid huge inflationary pressures and supply bottlenecks, said Finance Minister Mohammed Al Jadaan.
A longer period is needed to “build factories, build enough human resources,” Al Jadaan said in Riyadh. “The delay, or rather the extension of some projects will serve the economy.”
After determining how much borrowing is acceptable without worsening fiscal sustainability, the government has again revised the schedule for some projects, the minister said.
All plans were reviewed based on “economic, social, employment and quality of life returns, among other factors, over the last 18 months”, he said. As a result, some are “being accelerated and some – largely ongoing projects that have not yet been announced – are given a longer lead time,” he said.
The government has long touted the economic diversification and reduced dependence on oil achieved in areas ranging from tourism, manufacturing to digitalization.
But costs are rising for an economy that still relies on oil to provide the majority of public revenue. Following its first budget surplus in nearly a decade last year, the kingdom rewrote its medium-term budget plans and forecast deficits for the coming years as it accelerates spending.