Saudi Arabia announced plans on Monday to reduce its state budget deficit cutting its spending cuts and introducing plans to raise revenues from sources other than oil. The decision comes on the heels of a dramatic drop in oil prices over the last 18 months that have hit its oil revenues hard.
Experts predict that crude prices will drop further and the gulf nations have begun to feel the pinch. Saudi Arabia ran a deficit of 367 billion riyals ($97.9 billion) or 15 per cent of GDP in 2015 and the IMF warned the country in October that it could run out of money within five years unless it adopts drastic measures of reform.
Abandon the Dollar Peg?
Revenues next year are forecast at 514 billion riyals, down from revenues of 608 billion riyals in 2015, Saudi Arabia's currency has been pegged to the dollar since 1986 and it had afforded the country a certain amount of credibility and stability. But now, analysts are considering whether Saudi Arabia could decide to abandon its currency peg against the dollar.
The severe drop in oil prices and a strengthening dollar have made the peg less attractive and Riyadh has been using its foreign exchange reserves to prop up its budget and support the peg. Oil is denominated in dollars and the government relies on the commodity for the bulk of its revenue.
Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA) told the Telegraph that Riyadh does not have strong enough reserves to cushion losses suffered from lower oil prices for too long and that “if the reserves keep going down as they are now, they will not be able to keep the peg.”