Regardless, Saudi Arabia
has never funded its budget directly off of oil revenue and has, over the years, adjusted Aramco’s tax burden.
Keep in mind, also, that the oil company, Aramco, has the lowest cost of production of any oil company in the world – between $2 and $10 per barrel. The oil in Saudi Arabia is comparatively easy to access. Since Saudi Arabia purchased the company, Aramco always has been able to fund its own budget and capital expenditures. For Aramco—not the Kingdom—the breakeven number is quite low and even lower since the tax rate was dropped.
Saudi Arabia has the cash reserves to withstand its budget deficit, as is. At the end of 2016, Saudi Arabia’s cash reserves stood at $547 billion. In the first half of 2017, the Saudi deficit was cut in half, to only $19.38 billion.
Even with no return on the cash reserves, Saudi Arabia could continue a deficit at that rate for more than a decade.
Running a deficit is not alarming, especially compared to countries that operate in a perpetual state of severe debt like the U.K., the U.S., France and Japan.
Saudi Arabia is changing where its government spends money. The government is moving away from a welfare state model and is spending more on programs intended to promote economic growth.
The goal is to diversify the economy so that in coming years the government and the people will rely less and less on the price of oil. Even if these plans fall short of their ambitions, new business is moving into the country and bolstering new and ignored sectors of the economy.
As a stable country, Saudi Arabia has no difficulty finding parties to finance debt, including bonds and lines of credit. Thanks to global central banks and the U.S. Federal Reserve, interest rates are very low. It has proven worthwhile for Saudi Arabia to take on debt over the last few years even while maintaining large amounts of cash. This is normal for a modern country.
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