Low oil prices force Saudi Arabia to borrow heavily
- 10th August 2015
- Business & Economy
Although often seen as a country of limitless wealth, budget deficits are forcing Saudi Arabia to borrow more capital from both local and international creditors.
The situation has arisen after oil prices fell from June 2014's $107 a barrel to $50 at current levels.
Foreign currency reserves
Saudi Arabia's spending has exceeded budget projections by 20% over the past ten years and Riyadh has been dipping into its foreign currency reserves. This has led to the current deficit.
The country is more accustomed to surpluses, but income from the oil trade has declined and outlays for defence budgets have increased. It all adds up to Saudi Arabia facing a deficit of 20% of its gross domestic product (GDP) this year.
So far, almost $62bn of Saudi Arabia's foreign currency reserves have been used in 2015. On top of this, $4bn was borrowed from local banks in July.
Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said: "We will see increased borrowing in the coming months."
Government revenues are expected to fall by 8% of GDP ($82bn) this year, and the bleak outlook could continue for some time as The International Monetary Fund (IMF) warns the country can expect budget deficits until 2020.
As a prominent member of the Organisation of the Petroleum Exporting Countries (OPEC), Saudi Arabia insists that it will not cut back on oil production even if the prices continue to fall.
The oil industry makes up 80% of government revenue, as it is responsible for around 50% of the country's entire economic output.
However dire the situation may seem, international students should not expect to be impacted.
One tactic, which could be utilised, includes further issues of $5bn of government bonds per month being made available to investors, including those based overseas.
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