While many emerging market countries were crippled under the pressure of Covid-19 and economic slowdown, Saudi Arabia’s Ministry of Finance took swift action to consolidate fiscally, while waging its own battle against declining oil prices.
“Since Mohammed al Jadaan became minister of finance, the ministry has embraced more transparency in government finance, allowing the public to access more details on the kingdom’s finances. Jadaan also resumed fiscal consolidation in a difficult environment by streamlining expenditure, such as cutting unnecessary allowances to public sector employees and cancelling non-priority government projects,” says Garbis Iradian, chief economist MENA at the Institute of International Finance in Washington.
The ministry has made spending cuts of 10% this year, which has left many market-watchers confident about Saudi Arabia’s fiscal consolidation efforts. Should the kingdom continue to keep spending at its current rate, it will be on track to balance its budget by 2024 even with oil prices staying below $50/bbl.
In the eyes of investors, the ministry has made smart, innovative and much-needed fiscal decisions, such as tripling VAT from 5% to 15%. That has been critical in increasing revenue at a time when oil prices remain far below Saudi Arabia’s fiscal breakeven oil price, which some put at $69/bbl in 2020. Since the start of October, Brent crude has traded at $40-41/bbl.
“The increase in the VAT rate from 5% to 15% was not an easy one, but Jadaan managed it successfully and will be remembered as one of the best finance ministers in the Middle East,” Iradian says.
Saudi Arabia has managed to encourage growth in non-oil sectors and has continued on the path to Vision 2030, all the while juggling the presidency of the G20 this year, leaving investors with high expectations for Saudi Arabia’s recovery over the next 12 months.
“As a testament to Saudi’s commitment to adjust the budget, the government increased VAT from 5% to 15% in July, when most of the world was easing fiscal policies,” says Gustavo Medeiros, deputy head of research at Ashmore Group. “Furthermore, there have been notable improvements in procurement rules, expenditure budgeting and execution as well as increased transparency in debt management operations.”