Saudi Arabia’s 2025 budget balances spending with stability

Another deficit is likely, but it will be in line with EU standards, say Saudi ministers keen to keep investing in the Kingdom’s economic diversification away from oil and towards Vision 2030

Reuters

The Saudi capital, Riyadh, on November 15, 2024.

Saudi Arabia’s 2025 budget balances spending with stability

Maher Chmaytelli

last update on 11 Dec 2024

Continued spending is the name of the game in Saudi Arabia’s 2025 budget, announced in late November, as the Kingdom continues its journey away from fossil fuel reliance.

For the year ahead, the Saudi government has earmarked $342bn in expenditure while booking $315bn in revenue, leaving a deficit of around $27bn, which represents 2.3% of the country’s gross domestic product (GDP). Last year, the deficit was $30.6bn.

Although expenditure is slightly down on 2024 levels, the budget nevertheless reflects an effort to continue investment spending to diversify economic resources while maintaining financial stability to withstand any fall in the price of oil—still by far the government’s most important revenue source.

Gently does it

Saudi officials say the 2025 budget has been designed to shield the economy from any global crises while still fostering growth through the investments required to implement Crown Prince Mohammed bin Salman’s Vision 2030, which seeks to develop the state’s non-carbon industries like tourism, transport, technology, manufacturing, and sports.

Speaking to Asharq News, Saudi Finance Minister Mohammed Al-Jadaan said the government considered “global economic conditions, geopolitical events, and unpredictable crises” when crafting next year’s budget. “Saudi Arabia’s economy has shown its ability to handle different scenarios, as seen during the past five years, including external shocks like wars, supply chain disruptions, and pandemics,” he said.

Saudi Arabia's economy has shown its ability to handle different scenarios, as seen during the past five years

Saudi Finance Minister Mohammed Al-Jadaan

According to the International Monetary Fund (IMF), Saudi Arabia needs oil prices to hit $90 per barrel to balance its budget. They currently hover around $70 per barrel, and 2025 forecasts are not wholly optimistic of an uplift.

China, the world's second-largest economy and a major oil consumer, is slowing its demand, not least because of the country's shift towards electric vehicles (EVs). At the same time, supply is increasing from states like the US, Canada, Brazil, Guyana, and Kazakhstan, with US President-elect Donald Trump promising to "drill, baby, drill".

The Saudi government had factored this in and anticipates that it will record its third deficit since 2022, when it achieved a surplus thanks to high oil prices of $120 per barrel.

Managing the deficit

Speaking to Bloomberg, Saudi Minister of Economy and Planning Faisal Al-Ibrahim said the government recognised "a stable deficit margin of 2-3% as optimal for investing in the right economic sectors." Keeping the deficit within this range reflects caution and is in line with other big economies. The European Union, for instance, allows member states to maintain deficits of up to 3% of GDP, although many often exceed this ceiling.

Al-Jadaan said: "One of the main reasons for capping the deficit at SAR 100bn ($26.6bn) and not exceeding it significantly is to avoid risks of overspending," which could lead to "inflation, resource leakage, or both." He highlighted plans to leverage reduced interest rates to finance the deficit through borrowing rather than dipping into central bank reserves estimated at around $103bn.

The government recognises a stable deficit margin of 2-3% as optimal for investing in the right economic sectors

Saudi Minister of Economy and Planning Faisal Al-Ibrahim

The upcoming budget allocates $72.5bn to the military, $69.3 to healthcare and social development, $53.6bn to education, $32.2bn to security and regional administration, and $23.2bn to economic resources. Another $51.2bn is allocated to 'general provisions', including government contributions to pensions, welfare, international organisations, servicing debt, and contingencies.

Growth and diversification

According to official data, the Saudi economy is expected to grow by 4.6% next year, in line with IMF forecasts predicting 1.5% growth for 2024. Moody's recently upgraded Saudi Arabia's credit rating to Aa3, putting it on par with the UK.

Authorities have shown pragmatism when needed, such as by adjusting the timeline for ambitious projects such as The Line, a linear urban and residential hub powered by renewable energy in NEOM, a sustainable city being built along the Red Sea coast that could eventually cost $1.5tn.

The IMF and credit rating agencies have welcomed the Kingdom's realistic approach, given that NEOM is a generational investment unlikely to yield returns in just a few years. The Public Investment Fund (PIF), Saudi Arabia's sovereign wealth fund managing $925bn in assets, also got a green light with a ratings upgrade.

Al-Jadaan recognised that the Kingdom was now at an important stage in the process of economic diversification and financial stability, as it seeks to boost the role of non-oil activities in enhancing the growth of total real GDP. If the private sector's contribution to GDP keeps increasing, this will become the main engine of economic growth that ministers hope it will be.

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