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Saudi King Salman bin Abdulaziz heading the Council of Ministers meeting in the capital Riyadh. Saudi Arabia projected a deficit of $87 billion as it issued its 2016 budget, the kingdom's third annual shortfall in a row due to the oil price slump. (HO/AFP/Getty Images)
Saudi King Salman bin Abdulaziz heading the Council of Ministers meeting in the capital Riyadh. Saudi Arabia projected a deficit of $87 billion as it issued its 2016 budget, the kingdom's third annual shortfall in a row due to the oil price slump. (HO/AFP/Getty Images)

Saudis plan unprecedented subsidy cuts to counter oil plunge Add to ...

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defence and security.

Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added taxation as well as a levy on tobacco.

The biggest shakeup of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shia rebels. In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move political analysts had considered risky after the 2011 revolts that swept parts of the Middle East.

“This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.”

This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman. In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the cabinet, merging ministries and realigning the royal succession.

The new measures are the beginning of a “big program that the economic council will launch,” Economy and Planning Minister Adel Fakeih told reporters in Riyadh. The subsidy cuts won’t have a “large effect” on people with low or middle income, he said.

The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade. The government recorded a budget deficit of 367 billion riyals ($136-billion) in 2015. That’s about 16 per cent of gross domestic product, according to the National Bank of Abu Dhabi, but below the 20 per cent forecast by the International Monetary Fund.

For 2016, the government expects the deficit to narrow to 326 billion riyals. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion riyals. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals.

Oil made up 73 per cent of this year’s revenue, according to the Finance Ministry. Non-oil income rose 29 per cent to 163.5 billion riyals.

Brent crude prices have plunged more than 35 per cent over the past year, straining the public finances of producers from Venezuela to Iraq. The foreign-reserve assets of the Saudi central bank dropped more than $95-billion (U.S.) in the first 11 months of this year to $627.7-billion.

Significant progress in economic diversification relies largely on policies put in place before the price shock, according to an IMF study released in December, 2014. It cited Dubai, the business hub of the United Arab Emirates, as the main successful example among Gulf Arab monarchies.

“Next year will see continued administrative and fiscal reforms,” said Mr. Fakeih, the Economy Minister. He said 20 billion riyals of this year’s spending overshoot was due to increase military and security spending related to the operation in Yemen.

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