Saudi Arabia needs swift reforms to avoid $170 bln budget gap

Saudi Arabia’s fiscal gap may widen to $170 billion by 2030, accounting for 12 percent of its gross domestic product (GDP), if much-needed reforms are not implemented sooner, McKinsey Global Institute said in a new report.

Low oil prices flipped the kingdom’s surplus of 6.5 percent of GDP in 2013 to a 2.3 percent deficit in 2014. The International Monetary Fund (IMF) projects that trend to continue this year with a deficit of 22 percent. This trend is seen to continue as more competition threatens the kingdom’s main source of revenue.

“Even if the country responds to these challenging conditions with policy changes such as a budget freeze or immigration curbs, unemployment will rise rapidly, household income will fall, and the fiscal position of the national government will deteriorate sharply,” the report said.

McKinsey, which was among the consultancies hired to advise the Saudi government on fiscal reforms, suggests that the country has the potential to double its GDP over the next 15 years if it shifts to a market-led economy from the state-led system that is currently in place.

This holistic approach would involve a $4 trillion investment into key non-oil sectors with the most growth potential including petrochemicals, manufacturing, retail, and healthcare. Such a move could also create more than six million jobs for Saudi nationals, which would slash the unemployment rate to seven percent and boost household income by 60 percent.

“All stakeholders, including the private sector, foreign investors, and households, will need to be involved in this transformation,” McKinsey said. “The transition will be challenging, but the new era of economic growth and employment it could usher in would be more sustainable than the oil booms of the past.”

Write to Joumana Saad at joumana.saad@argaamplus.com

Write to Matthew Watson at matthew.w@argaamplus.com