Saudi Arabia Fiscal January 2021

Saudi Arabia

Saudi Arabia: Government announces smaller 2021 budget in bid to rein in deficit

January 11, 2021

In mid-December, the government announced the 2021 budget. Total spending is seen shrinking from 2020 and revenue is expected to rise markedly as the economy recovers, with the fiscal deficit forecast to narrow. If realized, the budget will likely drag on momentum this year. That said, our panelists see a wider fiscal deficit than the government is predicting amid likely spending pressures. Moreover, the role of the country’s sovereign wealth fund (PIF)—which is not part of budget calculations— is expected to grow significantly this year and next thanks to the injection of additional funds, which could provide a boost to activity.

The government is penciling in spending of SAR 990 billion (USD 264 billion) in 2021 (expected 2020 outturn: SAR 1,068 billion), with cuts to both current and capital spending. Revenue is seen rising to SAR 849 billion (expected 2020 outturn: SAR 770 billion), thanks to a full year of higher VAT receipts and some recovery in the oil sector. This would see the budget deficit shrink from 12.0% of GDP in 2020 to 4.9% of GDP this year. The budget assumes GDP growth of 3.2%, broadly in line with our panelists’ predictions. However, panelists are less optimistic about public finances, and see a deficit of 7.1% of GDP this year.

As James Reeve, chief economist at Samba Financial Group, comments:

“We doubt that spending will be cut in 2021 and have penciled in a 2.1% increase. We think a government spending increase will be needed to sustain the recovery, and expect infrastructure spending to gather pace again as the impact of Covid fades. We also feel that there is fiscal space to increase spending given the likely gains in nonoil revenue and rock bottom financing costs.”

Shortly before the budget announcement, Crown Prince Mohammed bin Salman stated that the PIF would inject SAR 150 billion each year into the economy in 2021 and 2022—up sharply from SAR 58 billion in 2019—as the kingdom continues its diversification drive. This should support activity somewhat in the face of a more restrictive government budget.

That said, there are question marks over project execution, as Mohamed Abu Basha, economist at EFG Hermes, states:

“The planned spending cuts are further manifestation of the increasing role of PIF in the economy. […] The gov’t will slash capital expenditure to its lowest level in nearly 15 years, highlighting the extent of the shift in roles between the gov’t and PIF. PIF holds a portfolio of nearly USD560bn worth of projects, led by its flagship project Neom City. So far, progress on most projects has been on the slow side; even the projects that are in the execution phase are mostly in the very early stages of infrastructure work. […] With the record of low progress, we are keeping our forecasts on the conservative side in terms of expected investment spending by PIF. The institution is stretched, in our view, between its various roles in the economy, being the country’s wealth manager (the function of a pure sovereign wealth fund), the manager of a big portfolio in the local market and the developer of key projects in the Kingdom.”

FocusEconomics Consensus Forecast panelists see a fiscal deficit of 7.1% of GDP in 2021 and 4.5% of GDP in 2022.


Author:, Economist

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