Stung by low oil prices, Saudi Arabia makes unprecedented cuts

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Riyadh | Published: December 29, 2015 8:29:09 PM

Long accustomed to cheap utilities and some of the lowest petrol prices in the world, Saudis woke to a shock today as authorities made massive subsidy cuts after falling oil prices caused a record deficit.

Long accustomed to cheap utilities and some of the lowest petrol prices in the world, Saudis woke to a shock today as authorities made massive subsidy cuts after falling oil prices caused a record deficit.

In a clear departure from its decades-old generous welfare system, Riyadh announced prices would rise on fuel, electricity, water and even plane tickets and cigarettes.

Residents of the oil-rich Gulf kingdom have long enjoyed cheap prices on basic goods and services, but officials made clear that was no longer sustainable after the stunning drop in crude prices over the last 18 months.

“We have to rationalise unnecessary spending… This requires changes to focus on essential expenditures,” Finance Minister Ibrahim al-Assaf was quoted as saying Tuesday by the Al-Eqtisadiah newspaper.

After years of high spending, authorities moved swiftly to impose unprecedented cuts after announcing yesterday a 2015 budget deficit of USD 98 billion — the largest in Saudi history and a whopping 15 per cent of Gross Domestic Product (GDP).

Prices on fuel products were raised by up to 80 per cent as of midnight, including a 50 per cent jump in the price of the most commonly sold petrol to 0.90 riyals (USD 0.24) per litre.

Vehicles thronged petrol stations in Saudi Arabia last evening to fill up tanks at the old rates.

Abu Othman, a 63-year-old motorist, said that despite the increase, petrol prices remained “reasonable”.

“It is natural to expect such measures in these circumstances,” he told AFP while filling his car.

The swift action to cut subsidies was unexpected, even if there had been no doubt Saudi Arabia would post a deficit this year as oil prices have dropped below USD 40 a barrel since mid-2014.

The dive in oil prices is largely due to Saudi Arabia’s own policies and those of other OPEC nations, who are refusing to cut oil production as they seek to drive less-competitive players, including US shale producers, out of the market.

With oil prices expected to remain low, Saudi authorities also projected a shortfall of USD 87 billion in the 2016 budget.

Revenues in 2015 dropped to USD 162 billion, the lowest since the global financial crisis in 2009, due to a massive USD 123 billion fall in oil revenues.

The contribution of oil income to revenues dropped to just 73 per cent in 2015, from an average of 90 per cent in the past decade.

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