Saudi Arabia's Budget Deficit Due to Low Oil Prices

As of October 2024, Saudi Arabia’s real GDP is expected to grow only 0.8%, a stark decrease from an earlier estimate of 4.4%. This downturn is attributed to a combination of lower oil prices, with Brent crude trading around $70.70, and increased spending commitments as part of the Vision 2030 initiative aimed at diversifying the economy. The Finance Ministry has projected budget deficits of 2.9% of GDP for 2024, up from a previous estimate of 1.9%. The fiscal breakeven oil price, necessary for balancing the budget, has risen to $96.20 per barrel, indicating that current oil prices are insufficient to support the kingdom’s financial needs.

Implications of Low Oil Prices

The ongoing low oil prices are expected to constrain Saudi Arabia’s ability to fund ambitious projects and social programs. The kingdom’s public debt has increased from around 3% of GDP in the 2010s to approximately 28% today, allowing some flexibility in managing deficits but also raising concerns about long-term fiscal sustainability.

Economic Growth and Diversification Efforts

Despite the challenges posed by low oil prices, Saudi Arabia is pursuing reforms to stimulate non-oil economic activity, which grew by 4.4% year-on-year in the second quarter of 2024. The government intends to leverage sovereign and development funds to drive capital investment and foster growth in the private sector, reflecting a commitment to reducing dependence on oil revenues in the future.

Conclusion

Saudi Arabia’s budgetary pressures underscore the vulnerability of its economy to fluctuations in oil prices. As the kingdom navigates these challenges, its ability to implement structural reforms and diversify its revenue sources will be crucial for achieving long-term economic stability.