Saudi Arabia is facing a financial squeeze as weak oil prices put pressure on its ambitious spending plans. With Riyadh set to unwind crude production cuts starting Tuesday, a potential drop in oil prices could force the kingdom to reassess its multi-billion-dollar projects.
Budget Cuts on the Horizon
The Saudi government has already planned a 3.7% reduction in annual spending for 2025, but economists warn that deeper cuts may be necessary. Oil prices hovering around $70 per barrel fall well short of the level required to balance state finances, and with Saudi Aramco slashing dividends, the strain on public funds is growing.
Saudi Arabia’s 2025 budget outlines $342 billion in spending against projected revenues of $315 billion, leaving a deficit of $26 billion. The country, already the biggest issuer of emerging market debt this year, may need to adjust its fiscal strategy to avoid deeper financial stress.
Mega-Projects in Jeopardy
Crown Prince Mohammed bin Salman’s Vision 2030 initiative has led to the launch of several large-scale projects, including the futuristic Neom city. These developments, slated to cost hundreds of billions of dollars, are now facing delays and possible spending reductions.
- Neom, the flagship desert city project, has already seen funding recalibrations.
- The Red Sea tourism initiative, a key driver of non-oil revenue, could experience slower progress.
- Infrastructure upgrades, including transportation and energy investments, may also be scaled back.
“A sharper and sustained fall in the oil price would require a deeper retrenchment in government spending to contain the size of the shortfall and the building in government debt,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Fiscal Policy at a Crossroads
The Saudi government is walking a tightrope between sustaining economic growth and maintaining fiscal stability. Policymakers are considering several approaches to manage the situation:
| Strategy | Potential Impact |
|---|---|
| Increased borrowing | Adds to national debt but maintains project funding |
| Higher non-oil taxes | Could diversify revenue but may slow consumer spending |
| Further spending cuts | Eases budget strain but delays Vision 2030 initiatives |
While oil production cuts were previously used to support prices, Riyadh’s decision to ease these restrictions could flood the market with supply, driving prices down further. This strategy may be aimed at maintaining market share, but it comes at the risk of worsening the budget shortfall.
The Global Context
Saudi Arabia’s financial decisions are not happening in isolation. The global energy market remains volatile, influenced by economic slowdowns in key regions and geopolitical tensions. Demand from China, a major buyer of Saudi oil, remains uncertain, adding another layer of unpredictability to Riyadh’s fiscal outlook.
For now, Saudi Arabia is betting on long-term transformation rather than short-term stability. But with oil revenues under pressure, the kingdom’s ability to sustain its grand ambitions is being tested.
