Importance of the balance of payment in Saudi Arabia

The importance of the balance of payments to the Kingdom of Saudi Arabia is a mirror, reflecting the degree of interconnection between the Kingdom’s economy and the economies of other countries/regions between business, investment and financial transactions, and the resulting Equivalent financial rights are settled now or in the future. It also provides a holistic view to determine the weaknesses and strengths of the Kingdom’s economic external conditions, as well as the impact of variables on the stability of the country’s total budget and foreign exchange reserves and the growth of domestic products.

According to a report by the Kingdom’s Ministry of Finance, expenditures in the first quarter of 2023 amounted to 283.86 billion riyals, a drop of 21.9% from 363.7 billion riyals in the previous quarter. The kingdom’s non-oil revenue rose 9% to 102.34 billion riyals in the first quarter of 2023, compared to 94.26 billion riyals in the same period last year. The Saudi authorities have been cautious about their 2021 budget, even though their income forecasts seem to be too pessimistic. I believe that non-oil revenue will increase enough to increase spending this year (the authorities plan to cut it). The deficit may be about 7% of GDP, but there are many financing options. In the long term, i believe that as spending growth slows and non-oil revenue continues to grow, the deficit will shrink. By 2024, the deficit is expected to be less than 4% of GDP.

Although the investment role of public investment funds will also play a role, the growth of non-oil GDP will largely depend on the growth of central government spending. This year’s retail and hotel industries and construction industries may all perform well. Petrochemical companies and those focused on government procurement may be in trouble. We expect non-oil growth of 2.3% in 2020, a slight decrease from last year. The continuously improving business environment will encourage more foreign investment in the medium term, and non-oil growth will exceed 4% by 2024.

According to the latest data released by the Central Bank of Saudi Arabia, by the second quarter of 2020, the current account balance recorded a huge deficit of 67.42 billion riyals, compared with a surplus of 8.34 billion riyals in the previous quarter and a surplus of the second quarter. 42.86 billion rials. There is no doubt that this is such a serious imbalance. On the one hand, the emergency it represents is not in line with the usual economic fluctuations in the oil market, and on the other hand, it is inconsistent with the geopolitical development in the Middle East. on the other hand. Rather, this is due to the effects of the corona crisis, as preventive measures have led to restrictions on travel and the end of economic activity. This has led to a plunge in global oil demand, leading to a sharp decline in prices of 55% in the second quarter of 2020.

The plunge in oil prices and the decline in global demand, tend to a drop towards the significance of oil exports in the Kingdom of Saudi Arabia. By the second quarter of 2020, the value of oil exports from the country has fallen by 61.8% year-on-year to 74.7 billion rials, while in the same period It is 195.8 billion riyals for the same period in 2019. This is reflected in income. For government oil companies, the second quarter fell 45.3% compared to the same period last year.

In order to solve this imbalance in the trade balance, the government chose to use fiscal policy tools because it increased the value-added tax from 5% to 15% from July 2020. This is because the tool is being reviewed and compared with monetary policy tools. Then thereafter to make adjustments, such as lowering the exchange rate, especially because this imbalance is considered an emergency, as the global economy is expected to recover, and global trade will continue to recover until next year 2021. The demand for oil has gradually increased and the price level has increased.

On the other hand, according to my broad view, the KSA 2021 budget is expansionary: renewed focus on healthcare and tourism. However, preliminary forecasts for the 2021 fiscal year show that real GDP will grow by about 3.2%, and the Saudi government also aims to reduce the budget deficit to 141 billion rials (about 37.6 billion US dollars).

Despite relatively stable expenditures, Saudi Arabia is expected to record low deficits and low use of public debt and reserves with reasonable funding. This is an important and welcome development. “Sustainability” is the way forward, while maintaining sufficient vitality and flexibility while maintaining positive global and local economic development.

I believe that in the midst of low oil prices and the uncertainty of the pandemic, Saudi Arabia’s economy may witness a slowdown in growth in 2021 as the world currently facing this ongoing global pandemic. Saudi Arabia’s tourism industry will gain traction in 2021. However, I expect the economy will only gradually recover, and there will be no strong rebound in 2021 across the world including Kingdom of Saudi Arabia.

However, the total budget depends on oil revenue, which fluctuates as in previous years, and if it is not at the level related to the corona epidemic, this matter needs to rationalize expenditure efficiency on the one hand, and budget Increase revenue sources and establish cash reserves to deal with the decline in oil revenue and current account imbalances. Although the fiscal balance plan announced in 2016 is very important, it is one of the 2030 vision plans. It aims to achieve a budget balance by 2020, and then it was revised and the balance of payments was also extended to 2023, but it still needs to be reconsidered. Improve its efficiency. Face the shock of oil prices and strike a balance between financial stability and growth. In the short term, economic factors must be considered, and in the medium and long term, debt repayment obligations and public financial debt principal repayment should be considered.

As for non-oil exports, due to logistics restrictions on production and logistics, in the second quarter of 2020, non-oil exports have also fallen by 25.3% year-on-year to 41.9 billion rials, compared with 56.2 billion rials in the same period in 2019. Distribute goods to limit the spread of epidemics. Corona in most economies in the world. In terms of imports, compared with the 56.3% decline in total exports in the same period last year, it has dropped by 23%, reaching 106.8 billion rials in the second quarter of 2020, compared with 138.9 billion rials in the same period last year.

Saudi Arabia export since July 2017 to July 2020:

This data set a record high of US$28.2 billion in October 2018 and a record low of US$970 million in May 2020. Saudi Arabia’s export value dropped from 1978.56 million rials in the first quarter of 2020 to 1171.2 million rials in the second quarter of 2020. Source: Saudi Arabian Monetary Authority. These figures show the degree of dependence of the Saudi economy on imports, because the ratio of non-oil exports to imports is only 39%, which means that it is very important to diversify the production base of the Saudi economy to achieve growth. On the one hand, in non-oil exports, facing account balance imbalances, reducing dependence on imports.

The balance of payments also needs to study the relationship between financial conditions and foreign capital flows. In the second quarter of 2020, the financial account recorded a deficit of 65.85 billion riyals, and this deficit was due to a huge change in reserve assets. Reserves decreased by 97.29 billion rials, and the reserve surplus was 53.15 billion rials. Yar the same period last year. Although the direct investment category decreased by 6.37 billion rials, the securities investment category (including investment fund shares and debt securities) and other investment categories (including commercial credit, deposits and loans) recorded 13.49 billion rials and 24.32 rials . In the second quarter of 2020, it will be 1 billion riyals.

The withdrawal of funds from reserve assets is linked to the balance of goods and services, because it provides funds for import expenditures, and the demand for imports has not fallen to the extent that exports have fallen. Imports fell by 23% and exports fell by 56%. In addition, despite the decrease in the number of non-Saudi workers in the past two years after application, the amount of workers’ remittances exceeded expectations, increasing by 7% each year, reaching 28.99 billion rials in the second quarter of 2020. Expenses for foreign labor of their companions. Saudi Arabia’s real gross domestic product grew by 3.9 percent year-on-year in the first quarter of 2023 as non-oil activities picked up pace, data issued by the General Authority for Statistics showed. Between January and March this year in 2023, the Kingdom’s activities in the non-oil sector, government services, and oil industry increased by 5.8 percent, 4.9 percent, and 1.3 percent, respectively.

Conclusion:

In view of the fact that the Kingdom of Saudi Arabia continues to rely on these levels of imports of goods and services, relative to non-oil exports, the import level is relatively high. Given the fixed exchange rate of the rial, the current balance will still be affected by fluctuations in the oil market. Sometimes there are surpluses and deficits at other times. However, by similar to the oil market conditions in the past five years and exploring future trends in the oil market, it shows that these fluctuations continue, and prices will remain in the range of US$45-55 per barrel in the next few years. This means that the possibility of realizing a deficit is not just realizing a surplus in the current balance. On the one hand, financing the budget deficit and taking into account the scale of future debt in repaying public debt poses a challenge to fiscal policy. And repay the debt principal.

Disclaimer:

This article is based on information disclosed to the public from reliable sources, which is current at the time of writing. However, I (Dr. Nasser Al-shareef), can’t take any responsibility, consequences caused by considerations of the accuracy or completeness of the content, or due to any consequences relied on for its content. In addition, the information and opinions contained here:

• It is not intended to conduct a complete or comprehensive study or provide recommendations and should not be seen as a substitute for specific recommendations and due diligence for individual situations.
• No intention to constitute any invitation to buy or sell any tool or engage in any trading strategy; and/or
• Does not constitute a guarantee of future performance.

Dr. Nasser Alshareef

Chair of Business Administration Department at Majmaah University

@DrNasserAlshar1