Impact of increased government spending in Saudi Arabia

By Prerna Garg and Priya Chetty on August 14, 2021

Government expenditure is a system for strengthening the capacities of humans in health, income, and education (Haddad, et al. 2018). For analyzing a country’s development and growth, government spending is used as the key indicator. Countries’ approaches while offering social protection, public services, and goods are highlighted if there are large variations in the key indicators. The purpose of this article is to discuss the efficiency of Saudi Arabia’s government spending. This will be highlighted by explaining key indicators used for assessing growth and development in Saudi Arabia.

Government spending in Saudi Arabia

Saudi Arabia is known for its oil business and in the past decline in oil prices has increased the deficit in the government budget which ultimately affected the country’s credit rating. Recently, Saudi Arabia’s “Vision 2030” has instilled the subject of the efficiency of government spending (International Monetary Fund 2019). Vision 2030 states the country’s long-term expectations and goals that will reflect Saudi Arabia’s capabilities and strengths. It has been expressed that the country can no longer depend on oil revenue for its growth as the world is shifting to a global energy market. Under this vision the efficiency and productivity of Saudi Arabia have been improved and increased confidence in public spending. The increase in efficiency of government spending in Saudi Arabia can be witnessed by a number of recent developments in its economy.

Decrease in fiscal deficit

The increase in oil revenue is 40% as compared to increase non-oil revenue which is 59%. This has been maintained by VAT, expatriate charge, excises, and profits from the settlement contracts. Moreover, current expenditure has increased by 23% because of the Royal Decree Allowances and enhanced social benefits to its citizens (International Monetary Fund 2019). However, capital spending has been narrowed in respect to the previous years. The Public Investment Fund had invested in SAR 32 billion in 2018-2019 first quarter in the domestic economy. There was a budget surplus in the year 2019 as a result of strong revenue growth and moderate growth in expenses.

Increase in current account surplus

There has been an increase in the current account surplus due to higher oil exports and reduced remittance paid as it was partially offset by enhanced service imports. Moreover, large overseas investment was reflected due to public enterprises and institutions. There was an increase in the financial account as a diversified investment portfolio strategy was adopted, which was partially offset by PIF external borrowings and government. In 2018 financial account was increased to $490 billion.

Increase in real GDP from increased government spending

In 2018, oil GDP increased by 2.8% whereas non-oil GDP showed an upside trend of 2.1% as compared to the year 2017 (Hasanov, et al. 2020).  Non-oil growth increased due to enhanced government spending, increased confidence, better credit conditions, and improved liquidity. However, this also led to an increase in expatriate charges and weakening the construction industry. This further resulted in a departure from the construction sector causing a decline in inflation, consumption, and remittance outflow. Recently, an expansion in the building programs has been witnessed by some construction entities. Therefore, government capital spending is still on the lower side. Recently, small companies have grown and there has been an increase in employment contracts. 

Growth in mortgage lending

Return on assets and bank capital have shown a strong movement in the year 2018. There was no major impact of IFRS 9 on the bank’s balance sheet. Liquidity and credit conditions have improved causing no financial imbalances. SAMA (Saudi Arabian Monetary Authority) is continued for closely monitoring the quality of real estate credit (International Monetary Fund, 2019). SAMA mentioned that mortgage lending includes only a small part of the bank’s credit and the average long-term value is below the limit of SAMA. The risk of mortgage lending is offset by reduced salary loans and guarantees provided by the government on the new mortgage loans. Moreover, few institutions have been fined for violating lending policies. 

Improved fiscal policy framework

Reforms have been introduced for strengthening the budget process, framing medium-term fiscal policies, and implementing an online expenditure management system. These fiscal reforms were welcomed by staff that included a plan to roll out Etimad through the government. However, it has been witnessed that there has been an increase in spending as there is an increase in the oil prices over the last few years (Hasanov, et al. 2020). The purpose of the fiscal framework is to keep the spending at a sustainable level even when there are changes in oil prices. Implementing these policies will enable the staff to maintain and deliver medium-term targets according to the budget decided.

Future improvements towards Saudi Vision 2030

The above mentioned indicators highlight that there has been an improvement in Saudi Arabia’s public spending. The government has become more productive by adopting a diversified portfolio approach and not limiting themselves only to the oil revenue. “Vision 2030” has promoted growth prospects in the country under which a new fiscal policies framework has been implemented resulting in better achievements of medium-term targets of budgets prepared.

Saudi Arabia is a country where the government generates revenue mainly from the export of oil. In early 2000 their government was inefficient in its spending and productivity because of the decreasing oil prices across countries. However, with time Saudi Arabia has transformed its policies and spending system that has resulted in a better expenditure management system. There has been a decrease in the fiscal deficit, an increase in the current account surplus, and an increase in the real GDP of the country. These indicators reflect that Saudi Arabia’s government is performing better in its spending and making its country’s position stronger in the world economy. Efficiency and prodcutivity of the government will further improve with the new fiscal policy framework implemented under the “Vision 2030” scheme.

References

  • Haddad, H. B., Naifar, N. & Mohammad, A. I., 2018. Assessing government spending efficiency and explaining inefficiency scores. Cogent Economics & Finance, Volume 6, pp. 5-20.
  • Hasanov, F. J., AlKathiri, N., Alshahrani, S. A. & Alyamani, R., 2020. The Impact of Fiscal Policy on Non-Oil GDP in Saudi Arabia, Saudi Arabia: KAPSARC.
  • International Monetary Fund, 2019. SAUDI ARABIA, Saudi Arabia: IMF.
  • International Monetary Fund, 2019. World Economic Outlook, July 2019. [Online]
    Available at: https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019
    [Accessed 29 July 2021].
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