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25th July 2016

KSA Announces Transformation Plans

The Government plans to achieve long-term economic change in an era of cheap oil and plans to more than triple its non-oil revenue by 2020 to SAR530 billion ($141.33 billion). The changes, focused on generating revenue from sources other than oil, aim to revamp the country’s economy by rolling back the role of the state.

The NTP follows on from long-term reform roadmap Vision 2030, announced by Deputy Crown Prince Mohammed bin Salman in April. The overall goal is to both diversify the economy away from oil and implement social reforms after the country posted a nearly $100 bln deficit last year linked to tumbling crude prices.

Developing industries like mining and tourism and the creation of some 450,000 private sector jobs by 2020 are part of the NTP, which will cost around SAR270 billion to implement in its initial five-year phase.

One key element of the plan is to increase government debt to gross domestic product to 30 per cent from 7.7 per cent today.

Non-oil revenues will be boosted by value-added tax, taxes on tobacco and sugary drinks and fees on the private sector. VAT is the only tax commitment approved so far.

Other major initiatives of the NTP will be the reduction of public salaries as a proportion of the budget to 40 per cent, from 45 per cent by 2020, and an SAR 200 bln cut to water and electricity subsidies.

A prolonged period of cheap oil has made diversifying the economy a priority for the government. Efforts to reduce oil dependence have been tried before with little success, but some analysts have said the new urgency means there is greater political will to support the current plan.

The kingdom’s Council for Economic and Development Affairs, a body headed by Crown Prince Mohammed bin Salman, drafted the plan, dubbed NTP. The vision also includes plans to sell under 5% of state-owned oil giant Saudi Arabia Oil Co. and to transfer ownership of the company, known as Saudi Aramco, to the kingdom’s sovereign-wealth fund.

The kingdom will look to install 3.5 Gigawatts of renewable power by 2020 and spend SAR 300 mln on identifying locations for nuclear electricity plants. Other spending plans include SAR 4.7 bln on improving hospital emergency rooms and intensive care units, SAR 2.1bn to restructure the postal sector, SAR 5 mln to set up an intellectual property authority, SAR 8 mln to improve civil service performance and SAR 3.5 bln to maintain cultural heritage.

The plan sees the country’s oil-production capacity maintained at 12.5 million barrels a day until 2020. Output capacity of dry gas would reach 17.8 billion cubic feet per day versus 12 billion currently. The country will produce 4 per cent of its power from renewable energy by 2020.

The mining sector is to contribute SAR 97 bln to economic output from SAR 64 bln presently.

A total of 24 government entities were involved in preparing the NTP. Top government officials will outline what the NTP means for their respective departments in coming days. The shift away from fossil fuel presents a formidable challenge to the ruling monarchy, which has long relied on oil revenue to provide its citizens with generous welfare benefits and cushy government jobs. Last year, oil revenue accounted for more than 70% of overall government revenue.

Two years of low oil prices have strained the kingdom’s finances, resulting in a record budget deficit of about $98 billion in 2015. It has also drawn down its foreign-exchange reserves, which fell to about $581 billion at the end of April from a peak of $746 billion in August 2014.

The government has taken some steps to address this, issuing domestic bonds, cutting spending and raising the domestic cost of fuel, water and electricity. It borrowed $10 billion from a consortium of global banks in April and could raise as much as $15 billion by selling bonds for the first time to international investors, some bankers said.

The kingdom’s debt is likely to grow further: The NTP document says the nation’s ratio of debt to gross domestic product is expected to widen to 30% by 2020, from 7% today.

As part of the plan, Saudi Arabia aims to boost its credit rating to Aa2 by 2020, after several rating agencies downgraded the kingdom in recent months. Moody’s Investors Service in May cut Saudi Arabia’s long-term issuer ratings to A1 from Aa3.

The International Monetary Fund said in May that it expects Saudi economic growth to slow this year as cheap oil continues to weigh on the kingdom’s economy, but the IMF also praised the country’s efforts to promote changes and reduce its dependence on crude sales.
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