Saudi Arabia pushes austerity to mitigate latest oil woes

Prince Mohammed bin Salman says reform programme will raise an extra $100bn (£70bn) in revenues a year by 2020

Ben Chu
Tuesday 05 April 2016 09:39 BST
Prince Mohammed bin Salman announced the reform package in an interview with Bloomberg
Prince Mohammed bin Salman announced the reform package in an interview with Bloomberg (Getty Images)

Saudi Arabia has outlined plans to ramp up its austerity programme and avert the threat of national bankruptcy amid a sliding oil price and growing tensions with its regional oil-exporting rival Iran.

In an interview with Bloomberg, deputy crown prince Mohammed bin Salman said the country’s economic reform programme would raise an extra $100bn (£70bn) in revenues a year by 2020, tripling income from non-oil sources and balancing the budget.

This would be on top of the austerity programme unveiled late last year. The extra revenue, according to officials, would come from measures such as a value-added tax, a tax on expats and a tax on sugary drinks. Incomes, however, would remain untaxed.

The news coincided with reports that the Saudis have been banning ships transporting Iranian oil from entering their waters, in what is seen to be an attempt to stifle Tehran’s ability to return to the global energy markets. According to the Financial Times, only around eight tankers have left Iran and reached Europe since sanctions were removed in January.

The obstruction represents the latest sign that the Saudi proposal of an Opec production freeze is dead in the water. Oil prices fell yesterday, with a barrel of Brent dipping 1.53 per cent to $38.08, as traders’ belief in the likelihood of a freeze evaporated.

In February, Saudi and Russia agreed to support prices by freezing production at January’s levels, but only if other major producers did the same. However, Iran is insisting on its right to hike production back to pre-sanctions levels. Iran’s exports last year fell to 1.1 million barrels a day – half of its pre-sanctions output levels.

Saudi’s budget deficit in 2015 ballooned to 15 per cent of the country’s GDP as oil revenues collapsed by 23 per cent. In response, Riyadh unveiled an austerity package in December, which included a reduction in subsidies for water, energy and electricity. It also slashed capital expenditure.

Oil revenues make up around three quarters of the Saudi government’s tax revenues. The International Monetary Fund estimated last year that Saudi needed a global oil price of around $106 a barrel to balance its then level of spending with its revenues.

What is a barrel of oil cheaper than?

Oil prices are up about 40 per cent since January’s lows of $27 a barrel, easing the fiscal pressure somewhat. But prices remain massively down on the $115 a barrel of June 2014. Many analysts think oil prices could have further to fall thanks to a global oversupply and waning demand.

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