Saudi Arabia's new economic plan carries a considerable danger: while it may raise investment, it may also have a detrimental effect on the government's finances. Crown Prince Mohammed bin Salman wants the kingdom's biggest firms, including Saudi Aramco and Sabic, to slash their dividends, which are often paid to the government, and start investing locally instead. The concept is that their investment in new infrastructure and technology would be sufficient to boost the country's growth and create employment.

According to Karen Young, a resident researcher at the American Enterprise Institute in Washington, the de facto leader's policy amounts to "compromising existing income for potential investments." “There is a demographic shift: now is the time to develop and establish a post-oil age, but the government's resources will drain in the short term.”

Here's how the pandemic and the drop in oil prices affected the budget and the economy last year:

Oil Money:

Aramco, the world's largest oil producer, paid the government $110 billion in dividends, royalties, and income tax in 2020, a 30% decrease from the previous year. Lower dividends from the 98 % state-owned business will "carry on the government's finances," according to Capital Economics' James Swanston.

He is skeptical that increased economic activity would result in a significant increase in the government's tax income from other sectors, at least temporarily.

Aramco has stated that it will maintain its $75 billion dividends, which was the largest in the world last year. Brent crude has increased nearly 30% to $67 per barrel since December, aided by the lifting of economic sanctions in more countries. Last week, the company confirmed a $12.4 billion contract with a US-led group to invest in its pipelines. With a better balance sheet and more cash flow, it would be able to maintain the dividend while still investing more locally.

Wages and Settlements:

This year, state worker wages and pensions are projected to total 491 billion riyals ($131 billion), accounting for nearly half of the overall expenditure of 990 billion riyals. Saudi Arabia could be able to manage salaries exclusively from crude sales if oil prices remain above $60, according to Ziad Daoud, Bloomberg Economics' chief emerging markets economist. Whether or not this occurs is a critical component of 35-year-old Prince Mohammed's initiative. Non-oil revenue has increased from 166 billion riyals in 2015 to 358 billion riyals in 2020.

Most of the progress was due to agreements with some of the kingdom's wealthiest individuals, which started in 2017 with the so-called Ritz-Carlton arrests, which were part of the prince's anti-corruption campaign.

“Non-oil revenue growth in Saudi Arabia is only partly organic,” said Daoud. “The agreements compensate for a fifth of non-oil revenue,” according to the study. These deals will end soon. When they do, non-oil revenue will stop and will decrease. The kingdom must increase productivity and non-oil exports to attain long-term growth.”

Sovereign Fund:

If the budget, which had a shortfall of 12% of GDP last year due to lower payouts from Saudi firms, is strained, the $400 billion sovereign wealth fund will make up the shortfall. The Public Investment Fund is already preparing to move the local economy forward. By 2025, Prince Mohammed has promised to invest at least $40 billion a year domestically, developing new towns, hotels, and 1.8 million jobs.

“Instead of being an engine of economic growth, the budget is progressively focusing on regulating the government's day-to-day expenditures. Mainly, capital expenditure is moving to PIF and sister state institutions,” said Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes Holding.”

Lasting Impact:

The government forecasted revenue of 849 billion riyals for 2021, with a fiscal deficit of 4.9 % of GDP in December. Oil was just around $50 a barrel at the time. According to the International Monetary Fund, it has now reached a point where Saudi Arabia can manage its budget. According to Abu Basha, the kingdom's finances are also in jeopardy due to the pandemic's long-term effects on Saudi businesses and global energy demand.

“The dividends from all of these state-owned assets will be the future boost to non-oil revenues,” Abu Basha said. “This adds to the fiscal fragility.”