A May 2018 report by Jadwa Investment says the Saudi government’s 2018 first quarter budget statement shows the government’s efforts to raise non-oil revenue are beginning to work.
Total government revenue totaled SAR 166 billion ($44.27 billion) in Q1 2018, an increase of SAR 22 billion ($5.87 billion) or 15 percent year-on-year. Non-oil revenue (31 percent of total revenue) increased 63 percent year-on-year and was  the main driver behind the increase in total government revenue.
Oil revenue
Jadwa notes that the export price of crude and refined products increased 11 percent year-on-year to $64 per barrel in Q1 2018, with 9 million barrels per day (mbpd) of crude oil and refined products being exported during the quarter. Accordingly, oil export revenue is expected to have totaled SAR 190 billion ($50.67 billion) in Q1 2018, compared to SAR 162 billion ($43.2 billion) in Q1 2017. Historically speaking, on a quarterly basis, the implied transfer ratio (the difference between oil export revenue and government revenue) has averaged around 67 percent, whereas in Q1 2018 the implied transfer ratio was around 61 percent. However, the Ministry of Finance has said this will rise as the government receives the remainder of contributions in Q2 2018. Moreover, in preparation for a portion of Saudi Aramco’s shares being listed on the Saudi Stock Exchange and possibly another international stock exchange, the switch towards quarterly oil revenue transfers reflects, from Aramco’s perspective, closer alignment towards international financial reporting standards, making disclosures through interim financial statements much easiK.S.A.

A May 2018 report by Jadwa Investment says the Saudi government’s 2018 first quarter budget statement shows the government’s efforts to raise non-oil revenue are beginning to work.
er. Brent oil prices are currently above $75 per barrel as OPEC and some non-OPEC producers continue to comply with output targets. Rising geopolitical tensions, specifically as the United States reapplies sanctions on Iran, are likely to impact both oil output and prices in the months ahead. Jadwa therefore expects oil export revenue to show sizable improvements on a yearly and quarterly basis in Q2 2018.  Jadwa notes that the Saudi government’s efforts to raise non-oil revenue through structured economic reform is evident in the latest budget release, with this segment
increasing 63 percent year-on-year. Most of these gains came from taxes on goods and services which nearly tripled year-on-year to SAR 22.6 billion ($6 billion). This increase was due to a number of recent initiatives including the introduction of value added tax, expat levies and excise tax. According to the updated fiscal balance program, the government expects taxes on goods and services over 2018 to increase 82 percent year-on-year to around SAR 85 billion ($22.67 billion). Of this, value added tax is projected to generate SAR 23 billion ($6.13 billion),excise tax SAR 9 billion ($2.4 billion) and expat levies SAR 28 billion ($7.47 billion). Whilst taxes are expected to generate a total of SAR 142 billion ($37.87 billion) in 2018, other non-oil revenue of SAR 149
billion ($39.73 billion) is expected to be derived from investment returns from the Saudi Arabian Monetary Authority (SAMA) and the Public Investment Fund (PIF), the kingdom’s sovereign wealth fund.

Total government expenditure in Q1 2018 increased 18 percent year-on-year to a total of SAR 201 billion ($53.6 billion). Current expenditure was up 24 percent yearon-year, largely as a result of an increase in government employee compensation, the largest contributor to current expenses, which increased 20 percent over the same period. Expenditure on goods and services continued to decline, falling by 39 percent in Q1 2018 year-on-year. This is in line with initiatives outlined in the fiscal balance program. Social benefits on the other hand saw an increase in Q1 2018 of almost 200 percent to SAR 18 billion ($4.8 billion) largely as result of payments under the “citizen’s account program” which commenced on 20th December 2017. The annual budget allocates around SAR 30 billion ($8 billion) for this program in 2018. Around SAR 6.5 billion ($1.73 billion) was disbursed during Q1 2018, with around 3.5 million households in the kingdom benefitting.
Financing costs continued to increase year-on-year in-line with rising government debt. This segment was up SAR 2.8 billion ($746.7 million) or 229 percent year-on-year in Q1 2018. Public
debt totaled SAR 443 billion (118.13 billion) at the end of 2017 but had increased to SAR 483 billion ($128.8 billion) at the end of Q1 2018. More recently, the government announced the issuance of an SAR 42 billion ($11.2 billion) international bond and an SAR 4.9 billion ($1.3 billion) sukuk which brings Q1 2018 total current government debt to SAR 529 billion ($141 billion).
Capital spending was down by 11 percent year-on-year to SAR 26 billion ($6.93 billion) in Q1 2018. According to the annual fiscal budget, total capital spending in 2018 will total SAR 205 billion ($54.67 billion) up from SAR 180 billion ($48 billion) in 2017. Therefore, Q1 2018’s spending represents around 13 percent of the total. Taking into consideration the nature of payments related to government projects, with payment on completion, usually towards the end of the year, Jadwa expects capital spending to rise significantly in the second half of 2018.

A rise in expenditure at a faster rate than revenue meant the fiscal deficit increased by 31 percent year-on-year to SAR 34 billion ($9.07 billion). That said, the first quarter’s deficit only accounts
for 18 percent of the expected SAR 195 billion ($52 billion) deficit for the whole year. According to the Q1 2018 budget report, the SAR 34 billion ($9.07 billion) deficit was almost wholly financed
by external and domestic borrowing. Looking ahead, with oil prices continuing to remain firmly above $70 per barrel, and further borrowing expected to be limited to SAR 30 billion ($8 billion),
there may be more extensive use made of the reserve account to finance any deficits. According to data from the Saudi Arabian Monetary Authority government FX reserves declined by
SAR 20 billion ($5.4 billion) quarter-on quarter in Q1 2018. This decline came about despite the government not borrowing from the reserve account. Additionally, with oil prices at their highest since late 2014, it is likely that the trade balance registered a surplus in Q1 2018 and helped maintain a positive current account, as was the case in Q4 2017. This implies that the decline in FX reserves was probably due to a deficit in the Kingdom’s financial account.

Jadwa concludes its report by saying that the Q1 2018 quarterly budget shows that the government’s efforts to raise non-oil revenue are going according to plan. Concurrently, whilst expenditure
has increased, a significant proportion of this has been due to higher social benefits which have helped cushion the effects of taxes and higher energy prices on Saudi households. Looking
ahead, although Jadwa expects to see continued annual increases in tax revenue, investment income is likely to decline quarter-on-quarter, as was the case last year

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