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The Reliance of The Saudi Arabian Economy on Oil Revenues

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Fiscal policy plays a crucial role in Saudi Arabia as the main vehicle through which the country’s oil wealth is converted into economic outcomes and distributed for the benefit of the population. The Saudi Arabian economy has always been based on oil revenues. Changing this concept requires courage and strong decisions. These decisions must have inside them reforms and economic planning.

The reliance of the Saudi Arabian economy on oil revenues raises two key challenges for policymakers. The first is how they should best manage the country’s current heavy dependence on oil revenues and ensure that the domestic economy is insulated to the extent possible from volatility in the global oil market. The second is how they can help the economy to diversify so that the current reliance on oil revenues is reduced over time.

To rectify this situation, reform drive appears more durable given political consolidation. Events in 2017 suggest that the government’s reform efforts remain broadly on track to encourage non-oil sectors. Fiscal consolidation has continued, and financing sources have been expanded. Efforts to improve the investment environment — at least for portfolio inflows — have been stepped up.

The reform drive also appears more durable given recent political consolidation by its main sponsor, the Crown Prince. The anti-corruption drive appears to have unsettled some domestic investors and could weigh on investment in the near term, but it is undoubtedly a long-term positive for the economy.

Fiscal deficit narrows as oil earnings climb. Starting with the fiscal situation, preliminary official estimates indicate that the government recorded a much-reduced fiscal deficit of around SR230bn or 9 percent of GDP in 2017, down from 13 percent of GDP in 2016. The main driver was a pickup in oil revenue, which put on SR110 bn over 2016.

This large nominal gain was not simply a result of higher oil prices. In fact, this accounted for only about half the increase. Of equal importance was the government taking a much larger-than-normal share of oil export earnings — around 86 percent compared with 73 percent in 2016. This is despite the fact that Saudi Aramco’s tax rate has actually been slashed.

Given the proposed privatization of Saudi Aramco, one would expect the government to take a smaller share of oil export earnings in the years ahead, though as the dominant shareholder it can expect most of this reduction to be made up from increased dividend flows.

Alawaji (2012) – Deputy Minister of Water and Electricity for Electricity Affairs and Chairman of the Saudi Electric Company – has demonstrated that Saudi Arabia adopts a proactive approach to sustainable energy for income and energy saving.

According to SAMBA Financial Group report (2018) of “Saudi Arabia: Macroeconomic Forecast 2018-2022”, the Non-Oil income has good prospects. Non-Oil revenue recorded a decent gain in 2017, growing by SR66bn. Additional fees (such as excise duty on harmful imports, and a levy on expat dependents) along with more efficient collection were helpful domestically, while gains from foreign assets were also robust, despite a shrinking base. For the medium term there should be a decent contribution from VAT, which was introduced on schedule at 5 percent in January. However, the net gain from VAT is likely to be negative, at least in 2018, given the rollout of cash payments to lower-income households, which are designed to dampen the impact of both VAT and higher petrol and utilities costs. Other sources of non-oil income include privatization receipts — though to date there has been little meaningful progress on this front — and tourism revenue, which offers particularly strong potential. Beyond this, the ongoing clampdown on corruption might contribute substantially to government revenues, though there is obvious uncertainty about this process.

In terms of expenditure, the government’s priority has been to get to grips with current spending, which ran out of control in the early part of this decade. In fact, spending on goods and services accounted for more than public sector salaries in 2014. The government’s relentless focus on this issue has seen spending on goods and services fall by a colossal 62 percent between 2014 and 2017.

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The Reliance of the Saudi Arabian Economy on Oil Revenues. (2019, August 08). GradesFixer. Retrieved May 18, 2022, from https://gradesfixer.com/free-essay-examples/the-reliance-of-the-saudi-arabian-economy-on-oil-revenues/
“The Reliance of the Saudi Arabian Economy on Oil Revenues.” GradesFixer, 08 Aug. 2019, gradesfixer.com/free-essay-examples/the-reliance-of-the-saudi-arabian-economy-on-oil-revenues/
The Reliance of the Saudi Arabian Economy on Oil Revenues. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-reliance-of-the-saudi-arabian-economy-on-oil-revenues/> [Accessed 18 May 2022].
The Reliance of the Saudi Arabian Economy on Oil Revenues [Internet]. GradesFixer. 2019 Aug 08 [cited 2022 May 18]. Available from: https://gradesfixer.com/free-essay-examples/the-reliance-of-the-saudi-arabian-economy-on-oil-revenues/
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