The Saudi budget process has come a long way
Saudi Arabia’s 2022 budget will be released soon and there will undoubtedly be plenty of commentators analyzing the country’s positive fiscal position, given the quarterly trends recorded over the past year.
What many may overlook are the important steps that have evolved over time in the budgeting process to get to where we are today, as this reflects some of the fundamental pace of reform that the Kingdom has witnessed. . Ensuring a more transparent and timely budgeting process that is a guide for businessmen and national and international citizens is of paramount importance, as well as a critical process for a positive sovereign rating of a country.
Each country has its own system for formulating and announcing its budgets. The current Saudi budget system bears little resemblance to that used a few years ago when the budget announcement was an annual event monotonously read on state television in a robotic fashion, mostly made up of tiny royal decrees read in full spelling out the following year. budget allocation for different expenditure entities.
The excitement generated by these bland statements came from the entities involved waiting to see if there was an increase or decrease in their budget allocations. There has been little discussion of why discrepancies have occurred in overspending or under-spending, assessments of oil price trends, detailed breakdowns of non-oil revenues, or government plans for spending. national or international loan.
Worse yet, the annual exercise took place on the first day of Rajab in the Hegirian calendar since 1932, when the kingdom was established, and you had to wait for the next Rajab to know the budget changes and allocations for the following year. Another feature of the old budget system was that the Ministry of Finance required all entities that received state budgets to reimburse all unused expenses, resulting in a sharp increase in disbursing these unspent funds in a short time. time lapse, potentially leading to inefficient spending and the potential for corruption. contract award practices.
As business people recognize from their own budget and financial planning, a one-year assessment is not an effective tool, especially when external factors affect budget balances. Given the importance of oil revenues in the Saudi budget forecast, any volatility in oil prices significantly affects these annual budget forecasts. Budgeting on an annual basis goes against the premise that the budget is a viable tool to help businessmen get a clearer picture of the state of the economy and take action. consequence in their investment decision, not to mention foreign investors and rating agencies.
The old budget system was also marked by a lack of close coordination between different ministries, with an apparent reluctance or inability to share real-time data with the finance ministry except to inform the ministry of their planned spending for the. next exercise. In a system that naturally placed higher hierarchical importance on government entities that received higher budget allocations, those ministries or entities had little incentive to reduce their budget requirements because of potential efficiency gains and reduction programs. costs, and the Ministry of Finance could not impose them, except to question requests for significant budget increases. While the Ministry of Finance published the annual budget statements, the Ministry of Economy and Planning, as it was then called, also had an important forecasting role to play, which created some confusion and overlap as to to the ministry that led the whole process.
Gradually, changes have taken place to get to where we are today, especially in the new era of economic and administrative reforms launched by Crown Prince Mohammed bin Salman with the launch of Vision 2030 and coordination and closer reporting between ministries. The first change introduced in October 2016 was to have the annual budget process coincide with the Gregorian year, from January 1 to the end of December, as many Saudi companies applied this accounting calendar as well as foreign companies operating in the Kingdom. With more emphasis on attracting foreign direct investment to the Kingdom, aligning the Saudi annual budget with the new Gregorian calendar was a logical and welcome exercise compared to the previous Hijri Rajab calendar, which changed every year because it was based on the lunar cycle. One of the consequences of this change was that Saudi officials lost 11 days of salary as the Gregorian calendar was longer, with a welcome tax saving for the Treasury, especially since the period coincided with prices of the volatile and low oil and sharp cuts in Saudi reserves. .
However, the most significant budget change has been the introduction of more frequent budget updates on a quarterly basis, with an abundance of information on actual deviations from the budget, and forecasts of key economic assumptions such as value added tax and sovereign borrowing as well as national and global economic conditions assessments. Budget breakdowns have been provided with explanatory footnotes to facilitate comparisons. This was warmly welcomed by all those interested in assessing the health of the Saudi economy and far from the days when businessmen, not to mention analysts and researchers like this author, carried out unsuccessful missions in an attempt to obtain provisional data from the ministries concerned. .
More transparency has now become the key word, and this could only have happened through a coordinated ministerial effort to ensure that the finance ministry obtains timely data from government agencies and becomes the focal point for oversight. Saudi budget. This was aided by a new group of talented finance ministry employees who also learned from their peers about modern budgeting methods and comfortably presented the Saudi fiscal situation to international organizations like the International Monetary Fund and the World Bank, and rating agencies, and on committees at the recent G20 Riyadh 2020 summit. The creation of specialized ministerial units like the Debt Management Office only added to the professional changes underway, as the National and international debt issuance level has increased both in terms of maturity, duration and variety – sukuks, conventional and green bonds – compared to the old budget system.
Further reforms of the budget process should not be ruled out, in particular the decentralization of budget allocation expenditure on a regional basis according to the demographic and economic assessment needs agreed for each region. This will democratize the budget process and ensure greater accountability in the more efficient management of the financial resources allocated by those in different regions, as they are likely to know the needs of their region better than anyone. Many governments apply a mix of state or federal budget allocations as well as local or state budgets, with some local bodies even setting their own tax rates to attract investment. Who knows but maybe one day the various Saudi regional budgetary entities could also do the same?
In summary, for seasoned budget watchers awaiting the next round of budget data for 2022, they shouldn’t forget the significant changes that have taken place since Crown Prince Mohammed bin Salman began his comprehensive reforms to get to where we are at it today.
â¢ Dr Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.
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