Mohammed al-Jadaan
Finance minister Mohammed al-Jadaan insisted the state would maintain fiscal discipline as he pledged to break the oil-fuelled cycles of boom and bust © Ahmed Yosri/Reuters

Saudi Arabia plans to increase the firepower of its sovereign wealth fund and boost its reserves as it enjoys a huge windfall from high crude prices that will enable it to post its first budget surplus in almost a decade.

Finance minister Mohammed al-Jadaan told the Financial Times that the petrodollar surpluses could be used to accelerate Riyadh’s ambitious plans to modernise the conservative kingdom as the government pushes ahead with grandiose megaprojects.

The Public Investment Fund has been transformed into one of the world’s most active SWFs in recent years and become a magnet for global bankers keen to tap into its riches. Its high-profile investments include $45bn in SoftBank’s Vision fund, a $3.5bn stake in Uber and a majority holding in Lucid, the electric vehicle maker.

Jadaan insisted the state would maintain fiscal discipline as he pledged to break the oil-fuelled cycles of boom and bust that have dogged the economy.

“We need to make sure that we have predictable, sustainable expenditure that does not fluctuate with oil prices,” he said. “Otherwise we will go back to the previous [practices] when you have more revenues you spend more, and when you don’t have revenues you spend less, which is very difficult for the economy.”

He said surplus revenue in the world’s top oil exporter would be used to replenish reserves and be distributed between the PIF, which oversees many of the megaprojects, and the National Development Fund, another state entity that supports private sector investments.

Over the past seven years, Riyadh has raised its debt levels, tapped into its reserves, slashed energy and fuel subsidies and tripled VAT, while pushing ahead with a massive PIF-led spending programme despite successive budget deficits.

But this year, it has been one of the main beneficiaries of high crude prices, with its oil revenue in the first quarter soaring to $49bn, up 58 per cent compared with the same period in 2021.

That enabled the government to post a budget surplus of $15.3bn in the first three months of the year as Russia’s war in Ukraine pushed oil prices over $100 a barrel to their highest levels in a decade. It puts Riyadh on course to exceed its projections for 2022, with a forecast in its December budget that it would post a surplus of $24bn for the financial year.

In a sign of how the kingdom — which has not posted a surplus since 2013 — has changed the management of its petrodollar wealth, Jadaan said the government had put a floor and a ceiling on its reserves as it invests more aggressively through the PIF. A ceiling has also been put on government expenditure, he said.

Jadaan declined to reveal what levels had been set. He said they were intended to ensure the government had “enough of a buffer to deal with external economic shocks, but at the same time utilise excess revenues to generate better returns through allocation to the PIF and the NDF”.

“It’s a mistake to build reserves within the government that are not needed,” he said. “The debate will be: is there an opportunity that you have without overheating the economy? Can you expedite your programmes, allocate more to the NDF to finance private sector projects and the PIF?”

Traditionally, the economy’s health has tracked the volatility of oil prices with state spending, fuelled by petrodollars, the main driver of business activity. When prices were high, governments spent heavily and deposited surpluses in the central bank, which conservatively managed the reserves. When prices fell, governments halted projects, often delayed payments to contractors and tapped into the reserves.

The kingdom’s foreign reserves peaked at more than $700bn in 2014, but have since dipped to $453bn. The government also has about SR338bn in local currency reserves.

The main beneficiary of the changes has been the PIF, a $620bn fund that is chaired by Crown Prince Mohammed bin Salman, the kingdom’s day-to-day leader.

When coronavirus swept across the world, the central bank transferred $40bn to the PIF from its foreign reserves after the fund went on a spending spree during the global market turmoil in the first quarter of 2020. It has also pledged to invest at least $40bn in the kingdom annually through to 2025.

The oil windfall has also helped propel growth, with the IMF projecting that the economy will grow by 7.6 per cent this year.

Yet, two years ago the economy was in recession as Riyadh grappled with the economic headwinds of coronavirus, including a downturn in oil prices in 2020. Then, it tripled VAT to 15 per cent — just two years after the tax was introduced.

Jadaan said the government would consider reducing VAT “at the right time” but added that Riyadh needed to rebuild the reserves “before we reconsider the current policies”.

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