Saudi Arabia is expecting to run budget deficits in coming years as a trade-off for investing in ways to secure long-term benefits for the non-oil sector.
The energy-rich kingdom is forecasting a fiscal deficit of about 2.8% of gross domestic product this year, and hasn’t given guidance for a return to positive territory.
At the same time, the country has taken on massive investment commitments to fund Crown Prince Mohammed bin Salman’s Vision 2030 agenda to diversify the economy away from crude.
In previous years, “we were trying to get our finances and financial management in order so we focused on zero-deficit,” Faisal al-Ibrahim, the kingdom’s minister of economy and planning told Bloomberg Television on Wednesday. “After that, we realised that a deficit by design in a stable region between 2% and 3% is good for investing in the right economic sectors.”
The kingdom’s focus on accelerating the growth of the non-oil sector, the main driver of new jobs, has created an equilibrium between oil and non-oil activities in terms of their contribution to the economy. Non-crude related activities account for about 52% of GDP, al-Ibrahim said, and “we expect this to go higher and higher.”
“These represent structural shifts that take sometimes decades to achieve,” the minister said. Still, the Saudi government is exercising some caution — scaling back some Vision 2030 projects, in part because oil prices remain far below what’s needed to balance the budget.
The country also outlined plans to trim spending in 2025 after overshooting its targets this year.
Saudi Arabia’s economic growth is forecast to be 0.8% this year, rising to 4.6% in 2025, according to the budget.
The non-oil sector is expected to grow more robustly at between 4%-5% in coming years, with Moody’s Investors Service upgrading Saudi Arabia for the first time this month, citing “the development of non-hydrocarbon sectors at a faster pace” as one of the reasons for the elevation.