Saudi mulls slower subsidies, spending cuts to support economy

Saudi mulls slower subsidy, spending cuts copy

Bloomberg

Saudi Arabia may cut energy subsidies more gradually and take longer to balance its budget, Finance Minister Mohammed Al-Jadaan said, as the kingdom seeks to soften the impact of its drive to repair public finances.
The prices of some subsidized domestic energy products will rise to international levels later than previously envisaged, Al-Jadaan said in an interview in Washington. He also said authorities will refrain from rushing to meet a target to balance the budget by 2019 as they assess how the economy is reacting to fiscal policy.
“We will move with our schedule, but areas where we think actually we can adjust the reforms so
that they’re not as aggressive, we will,” he said.
A balanced budget and the subsidy cuts are central to the kingdom’s long-term plan to wean the economy off oil, after the plunge in crude prices caused the shortfall to reach more than 16 percent of gross domestic product in 2016. But the government’s austerity drive, which included slashing spending and curtailing state largess, caused non-oil economic growth, the engine of job creation, to stagnate.
Al-Jadaan’s remarks come after an assessment by IMF staff, in which they said the kingdom could afford a slower pace of austerity
to avoid crippling the economy. “This is possibly the first time for the IMF to tell a country to slow down,” Al-Jadaan said. “We are
taking IMF advice very seriously.”

‘LONGER PERIOD’
Jihad Azour, director of the IMF’s Middle East and Central Asia department, said the kingdom is on the right track with fiscal reforms that would allow it to ultimately
balance its budget. A gradual
approach would enable Saudi Arabia to have more flexibility going forward, he said.
Under the latest subsidy plans, the prices of some energy products might fall short of international levels this year, but would be gradually increased “over a longer period of time,” Al-Jadaan said. The government will also press ahead with a cash transfer program to ensure that Saudi nationals in need are shielded from the impact of the
increase in prices he said, without setting a date for the launch of
the transfers.
And while the government is on track to reduce the budget deficit to below 10 percent of GDP this year, authorities don’t see the need “to go from 10 percent to zero in two years,” he said. Even before that IMF advice, the government had already abandoned some of its attempts to save money, when salary and benefit cuts for state employees were reversed.
The cuts had undermined the Saudi economy at a time when it was already reeling under low oil prices. Gross domestic product contracted in the first two quarters this year for the first time since the global financial crisis.
The government will accelerate its 200 billion riyal ($53 billion) stimulus program to boost growth, Al-Jadaan said. About 40 billion riyals have been committed so far on housing and an industrial development fund, he said. A “significantly” higher amount will be announced before the end of this year and then spent as needed, he said.
The program aims to cushion the impact of reform on Saudi businesses. “We’re focusing on distressed companies that are viable and add value to the economy and to employment, but are running into difficulties,” Al-Jadaan said.
The government has a separate program called the national transformation plan, with a budget
of 370 billion riyals. Spending un-der that program will rise to 72
billion riyals next year, from
60 billion, Al-Jadaan said.

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