Saudi Arabia’s Fiscal Challenge: Deficits and the Oil Price Dilemma

Saudi Arabia’s economic diversification ambitions under Vision 2030 face a critical test as the kingdom’s fiscal health deteriorates even before the recent oil price collapse. With a 2024 budget deficit of SAR116 billion ($31.2 billion)—the highest since 2020—Saudi Arabia is grappling with structural fiscal strains long before the 2025 oil price slump exacerbated its challenges. This article examines how the kingdom’s reliance on hydrocarbon revenues, rising borrowing needs, and the looming oil price crisis are reshaping its financial landscape.

The Pre-Slump Fiscal Strain

The 2024 deficit of 2.8% of GDP marked a stark reversal from the kingdom’s average deficit of just 0.67% of GDP since 1969. Despite Vision 2030’s push to reduce oil dependency, hydrocarbons still accounted for 60% of state revenue in 2024, underscoring the limits of diversification. Even before the 2025 oil price plunge, fiscal pressures were mounting:

• Aramco Dividends Decline: Aramco’s payouts to the government and Public Investment Fund (PIF) fell by ~$40 billion in 2025 compared to 2023, squeezing fiscal resources.
• Spending Growth: Expenditures rose across sectors like municipal services (doubled vs. 2021) and social programs, with total spending exceeding budgeted amounts by 22% in 2022 alone.

The Oil Price Collapse of 2025

The fiscal stress deepened in early 2025 as oil prices plummeted. By April 2025, Brent crude fell to $58.62/barrel—the lowest since 2021—amplifying Saudi Arabia’s breakeven pain. Key factors driving the decline:

1. OPEC+ Policy Reversal: A 411,000-barrel-per-day production hike in April 2025, reversing prior cuts, flooded the market.
2. Geopolitical Tensions: U.S.-Saudi relations strained as President Trump’s tariffs and calls for lower oil prices collided with Riyadh’s fiscal needs.
3. Economic Slowdown: Weak demand from trade wars and a U.S. GDP contraction (0.3% in Q1 2025) further depressed prices.

The 2025 Fiscal Crossroads

The oil price slump has pushed Saudi Arabia’s 2025 deficit to alarming levels. Projections show:
- At $60/barrel: Deficit jumps to $62 billion (6% of GDP), up from the initial $27 billion forecast.
- Borrowing Surge: External debt issuance could double to $32 billion by year-end, raising the debt-to-GDP ratio to 29%.
- Spending Cuts: A planned 6.5% reduction in 2025 spending may not suffice, risking delays to Vision 2030 projects like NEOM and the 2034 World Cup.

Market and Social Implications

Investor confidence is waning:
- CDS Spreads: Credit default swap rates hit a 54-month high of 99.5 basis points in April 2025, signaling rising default risks.
- Equity Markets: The Tadawul All-Share Index fell 4.2% year-to-date as doubts about diversification efforts grew.
- Labor Market: Expatriate workers—up by 1.4 million in 2024 due to infrastructure projects—face job cuts as spending declines.

Conclusion: Navigating the Fiscal Tightrope

Saudi Arabia’s fiscal dilemma is a stark reminder of the risks of hydrocarbon dependence. With an IMF breakeven oil price of $92/barrel and 2025 prices averaging just $68, the kingdom must choose between deeper borrowing, austerity, or asset sales to stabilize its finances. While its $2.5 trillion in public assets (including Aramco) offers a buffer, sustained low oil prices could force painful trade-offs:

• Debt Sustainability: A debt-to-GDP ratio under 30% remains manageable, but rising borrowing costs could erode fiscal flexibility.
• Structural Reforms: Raising non-oil revenue—via VAT hikes or property taxes—remains politically fraught but economically necessary.
• Vision 2030 Revisited: Delayed infrastructure projects and scaled-back public spending may become inevitable if oil prices stay depressed.

The kingdom’s path forward hinges on balancing immediate fiscal needs with long-term economic goals. Without bold reforms or a rebound in oil prices, Saudi Arabia’s fiscal resilience—and its ambitious transformation plans—will face unprecedented strain.