Fiscal Outlook

The Ministry of Finance estimates that the 2026 fiscal deficit will narrow to 165 billion riyals ($44 billion; 3.3% of gross domestic product) from 245 billion riyals ($65 billion; 5.3% of GDP) in 2025. This is based on a 5.1% increase in revenue and a 1.7% decline in spending relative to 2025. The fiscal deficit is expected to narrow further to 125 billion riyals (2.2% of GDP) by 2028.

The assumptions made on oil prices, oil production, and oil revenue are not disclosed. However, if it is assumed that oil production averages 10.1 million barrels per day in 2026 (consistent with current OPEC+ production plans) and that the dividend paid by Saudi Aramco to its shareholders increases by 5%, the assumed oil price in the budget is likely around $72 per barrel. Oil revenue would then be 4.5% higher in 2026 than in 2025. Non-oil tax revenue is budgeted to increase by 5% in 2026, which is reasonable given the growth prospects for the economy.

The projected decline in spending in 2026 is due to lower outlays on goods and services and investment projects, which more than offset higher spending on wages and salaries. Spending, however, usually exceeds the budget estimate, and while such overruns have been reduced in recent years, spending was still 4% higher than budgeted in 2025. Given this history, it is unlikely that spending will be lower in 2026 than in 2025.

In terms of financing, the budget notes that the government will use domestic and external financing through public and private channels in 2026 and will also expand its use of alternative funding sources, including project financing and export credits. Government debt is seen rising to 32.7% of GDP in 2026 from 31.7% of GDP in 2025.

Oil to Determine Budget Path

The Saudi government has made significant progress in broadening its revenue sources in recent years. Non-oil revenue now accounts for 46% of total government revenue. Nevertheless, oil revenue remains the key driver of the budget. Unfortunately, this revenue is inherently difficult to forecast because of the volatility of the global oil market and the uncertainty about Aramco’s future dividend policy.

Whether the 2026 budget numbers look reasonable largely depends on the path of the global oil market. The budget appears to take a relatively optimistic view on the oil market outlook, consistent with OPEC’s well-established position that the demand for oil remains robust. However, if oil prices were to average $65/bbl in 2026, oil revenue would be around 40 billion riyals (about $10 billion) lower than in the budget. If this were combined with a spending overrun, relative to the budget, of 4% (same as in 2025), the fiscal deficit in 2026 would be around 260 billion riyals ($69 billion; 5.2% of GDP), little changed from 2025.

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$1 Trillion in Perspective

There is little doubt that trade and investment ties between the United States and Saudi Arabia will increase over the next few years. The question is whether the scale of Saudi Arabia’s $1 trillion commitment is achievable given the size of its economy and its current financial situation.

Source: Author calculations

Saudi Arabia is a rich country, but $1 trillion is a lot of money to come up with. While it is not clear over what period the commitment is expected to be met, the scale of the commitment relative to the size of the Saudi economy means that it will be extremely difficult to achieve even over a number of years. To put the commitment in perspective, it represents:

• 80% of Saudi Arabia’s annual economic output (nominal gross domestic product is forecast by the Ministry of Finance to be $1.23 trillion in 2025).
• Three times the annual capital investment in the Saudi economy ($370 billion over the past year).
• Nearly five times Saudi Arabia’s annual oil exports ($210 billion during the past year).
• 40 times annual U.S. exports of goods and services to Saudi Arabia ($26 billion over the past year).
• About two-thirds of Saudi Arabia’s total foreign asset holdings ($1.6 trillion).
• The Public Investment Fund’s assets under management (expected to be around $1 trillion at the end of 2025).
• More than twice the Saudi central bank’s foreign exchange reserves ($450 billion).

Low Oil Prices a Barrier to Large Investments

The Saudi fiscal and current account balances are both in deficit and will remain there while oil prices remain at current levels. The financing of new trade and investment commitments will therefore need to come from the sale of existing assets or increased borrowing. Both are likely. Relatively low public sector debt means that investor appetite for Saudi paper remains robust while the PIF has some attractive assets to sell. Nevertheless, demand for Saudi debt is not unlimited, and asset sales may be complicated by the relatively poor recent performance of the domestic equity market.

The current low oil price environment means that a smaller pot of money is available to meet a broadening list of demands on Saudi financial resources. It appears that several domestic projects are now being reviewed and potentially scaled back. While oil prices remain low, the Saudi authorities will continue to face difficult choices, as they seek to balance their own domestic investment priorities under Vision 2030 with the financial commitments they have made to the United States and the likely requests they will receive for financial support from countries in the region.

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Main Points in the Concluding Statement:

• Non-oil growth is expected to slow in 2025 to 3.4% (4.2% in 2024), but overall real gross domestic product growth will accelerate to 3.5% (2% in 2024) given the oil production increase under the OPEC+ agreement. The fiscal and current account balances will both be in deficit – 4.3% of GDP for the fiscal deficit in 2025 and 3.9% of GDP for the current account deficit in 2027 (no numbers given for 2025 and 2026 in the statement).
• The IMF endorsed the government running a larger-than-budgeted fiscal deficit in 2025 given the expectation of lower oil revenue. Allowing for a higher fiscal deficit is seen as a more appropriate fiscal policy response to lower oil revenue than cutting spending further. The latter would negatively affect economic growth, and the government has plenty of room to borrow given its low debt level.
• The fiscal deficit will need to be reduced in the coming years. The IMF recommends higher taxes on land and property, a broadening of the value-added tax to include e-commerce transactions, the removal of remaining energy subsidies, and limiting growth in spending in areas such as the wages and salaries of government employees.
• The IMF continues to view the peg to the U.S. dollar as the best exchange rate option for Saudi Arabia.
• Strong credit growth is leading to funding pressures for Saudi banks. The IMF noted that the Saudi Central Bank has raised the countercyclical capital buffer by 1% (meaning that banks will need to hold more capital) but also called for lower loan-to-value, debt burden, and loan-to-deposit ratios to slow credit growth and limit financial vulnerabilities.
• The IMF noted that efforts to reduce the economy’s reliance on oil should continue, including by improving educational outcomes and maximizing the benefits of artificial intelligence. The IMF also noted that interventions by the Public Investment Fund and other public sector entities should be carefully targeted so as not to displace private and foreign investment.

Positive Outlook, but Beware of Fiscal and Financial Risks

The economic projections in the IMF statement foresee continued robust growth with larger but manageable fiscal and external deficits. These projections are broadly in line with those of most other forecasters. Risks to the outlook are viewed as coming largely from trade and political tensions around the world that could affect the demand for oil.

The endorsement by the IMF of a larger-than-budgeted fiscal deficit in 2025 may be seen as surprising, but this advice is in the context of a budget that already targets a large reduction in spending. The IMF is not suggesting that government spending should increase relative to 2024 but rather that there is no need to seek additional savings to meet the budget deficit target in the face of lower-than-expected oil revenue. It is anyway doubtful that the government will even be able to meet its ambitious 2025 spending target given the outcome in the first quarter of the year. A bigger question is how fiscal policy should respond to a larger and more extended drop in oil prices. Here the IMF’s advice that in these circumstances a “more aggressive fiscal consolidation” would be needed is appropriate.

The IMF raised concern about the implications of the continued strong growth in bank credit for financial stability. Banks are increasingly resorting to short-term external financing to meet credit demand and are also reliant on deposits from public sector entities to shore up their funding base. However, having raised the countercyclical capital buffer, the central bank may be reluctant to take the IMF recommendations to lower loan-to-value, debt limit, and loan-to-deposit ratios as it seeks to balance financial sector risks with the demands of Vision 2030. Any slowdown in credit growth could undermine the Vision 2030 objectives of boosting home ownership rates and developing new sectors of the economy.

Last, the long-term success of the Vision 2030 reforms will depend on raising the productivity of workers. Here, the calls for reform of the education system and policies that make for a conducive environment for foreign direct investment are particularly pertinent. To date, there is no evidence that reforms have improved educational outcomes, while FDI needs to increase substantially over the next five years to meet the Vision 2030 target.

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Source: International Monetary Fund

The current account balance swung from a surplus of $35 billion in 2023 to a deficit of $6 billion in 2024. The decline in the oil price from $82/bbl in 2023 to $80/bbl in 2024 is estimated to have contributed about $5 billion to this $41 billion swing. The rest of the change is due to three factors:

• Lower oil export volumes. Crude oil export volumes (the number of barrels of oil exported) were considerably lower in 2024 than in 2023 (an average of 6.1 million barrels per day compared to 6.7 mb/d) because of the effects of the OPEC+ production agreement. Lower oil export volumes are estimated to have accounted for $19 billion or close to half of the deterioration in the current account balance between 2023 and 2024.
• Surging imports. Imports of goods grew by $13 billion or 12% between 2023 and 2024, accounting for close to one-third of the current account deterioration. The strong import growth reflected the significant spending on the Vision 2030 projects, which are import intensive, and robust private consumption growth.

• Increased worker remittance outflows. Outflows of worker remittances increased by $8 billion or 20% in 2024, accounting for about 20% of the current account deterioration. Expatriate workers tend to remit a high share of their wages to relatives in their home country. Over the past two years, there has been a large inflow of expatriate workers into Saudi Arabia, and this was reflected in higher worker remittance outflows.

Small offsets to these three big areas of current account deterioration were provided by the travel and the government services balances. The surplus on travel increased by $1 billion in 2024 as tourism credits (spending by nonnationals on tourism activities in Saudi Arabia) grew by 14%. The deficit on the government services balance improved by nearly $2 billion in 2024 as government spending on services provided by nonresidents declined, continuing a trend that has been evident in recent years.

What Happens Next?

The small current account deficit in 2024 is of little concern given the large stock of foreign exchange reserves held by the Saudi Central Bank. Nevertheless, a larger deficit can be expected this year, and the International Monetary Fund has recently forecast that Saudi Arabia will run current account deficits of $40 billion to $50 billion a year (3% to 4% of gross domestic product) out to 2030. With oil prices falling in recent months, oil export revenue will be lower in 2025 than in 2024 even allowing for an increase in the number of barrels of oil exported as OPEC+ moves to ease its production cuts. Much, however, will depend on the reaction of the government and the Public Investment Fund to the drop in oil revenue. If they pare back spending, it is likely that imports and the employment of expatriate labor will decline, with the latter implying lower remittance outflows. This will help reduce the extent of the deterioration in the current account deficit but will not reverse it. A return to surplus will require a rebound in oil prices and increased oil exports, an unlikely combination at this time.

A period of current account deficits will limit Saudi Arabia’s ability to make large new investments overseas. The current account surpluses generated during 2021-23 were used to make new foreign investments. Without these surpluses, the acquisition of new foreign investments will become more dependent on raising debt or equity capital overseas, the liquidation of existing foreign assets, or the willingness to allow reserve assets of the central bank to decline, all of which have their limits. At current oil prices, the world should expect that Saudi capital invested overseas will be less abundant than it has been in recent years.

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Larger Fiscal Deficit

If sustained, the decline in oil prices will have significant implications for the Saudi fiscal position. The 2025 government budget expected a fiscal deficit of $27 billion or 2.3% of gross domestic product. If oil prices were to average $65/bbl in 2025, the deficit would likely be around $56 billion or 5.2% of GDP. At $60/bbl, the deficit would be $62 billion or close to 6% of GDP. Both these calculations assume that oil production averages 9.2 million barrels a day in 2025 and that the ambitious spending cuts outlined in the budget (which have spending declining by 6.5% relative to the 2024 outcome) are achieved.

More Borrowing

A higher deficit will mean more government borrowing. The 2025 “Annual Borrowing Plan” published by the National Debt Management Center set out a 2025 borrowing need of $37 billion. This comprised financing to meet the budget deficit plus the replacement of outstanding debt that is maturing this year. The broad guidance given in the plan was that borrowing would come from domestic debt capital markets (up to 25%), international debt capital markets (up to 45%), and private funding sources, such as loans from banks (up to 30%). Assuming that international bond issuance was targeted at the full 45% allocation, this would have implied issuance during 2025 of $17 billion. The government issued $14.5 billion of international bonds in the first two months of the year and so had appeared well on the way to meeting its 2025 financing needs.

With a higher deficit now likely, financing needs have increased. Total financing needs would be $72 billion at a $60/bbl oil price. Sticking to the 45% share from international debt capital markets, this would imply issuance of close to $32 billion in 2025 and issuance during the rest of the year of around $18 billion. Given Saudi Arabia still has a strong fiscal position, financing a larger deficit will not be a problem, although in a lower oil price environment it is likely that lenders will require a higher interest rate to buy the debt than they did earlier this year.

Other Options

Rather than borrowing more, the government could try and compensate for lower oil revenue by cutting spending more than budgeted or by raising additional non-oil revenue. As mentioned, the budget already assumes a spending cut of 6.5% relative to 2024. Achieving more than this will be challenging but could perhaps be achieved by further scaling back capital expenditure ambitions this year. New non-oil revenue measures could also be considered, including introducing taxes on property or personal incomes or raising the value-added tax rate. None of these, however, are likely to be introduced in the near term, particularly if the government views the recent drop in oil prices as temporary.

Economic Impact

The Saudi economy has been growing strongly in the first months of 2025. If lower oil prices result in cuts in government spending (and lower investment by the Public Investment Fund), this will likely lead to slower growth in the non-oil economy. In turn, employment is likely to decline, with expatriates particularly affected. Expatriate employment rose by 1.4 million in 2024 as Vision 2030 projects moved ahead, but any slowdown in spending will see some of these job gains reversed.

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Source: General Authority for Statistics

Strong job creation continued in 2024. While most of the employment growth was concentrated among nonnationals (a 1.4 million or 17.8% increase), the employment of Saudi nationals also increased by 160,000 (5.7% growth). Women accounted for half of the increase in the employment of nationals (7.2% growth). Around 40% of the jobs created in 2024 were in the construction sector, consistent with the emphasis on the development of infrastructure, real estate, and gigaprojects in the kingdom. There was also significant job creation in the manufacturing and transportation sectors.

Average wage growth remained subdued during 2024. For Saudi nationals, average wages grew by less than 1% in the year to the fourth quarter of 2024. Interestingly, wages for Saudi women grew by 4.4% while for Saudi men they remained basically flat. Nonnationals saw their average wage fall by 3% during 2024.

Saudi Women are Driving the Labor Market

Over the past year, Saudi women have seen stronger increases in their employment and participation rate, a larger drop in their unemployment rate, and a bigger increase in their average wage. This outperformance relative to Saudi men is likely to continue given the still large gaps in most gender-based labor market statistics will likely keep narrowing given the easing of restrictions on the participation of Saudi women in the labor market and the broader economy and their higher education levels relative to men.

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Higher-Than-Budgeted Fiscal Deficit in 2025

The lower dividend has important implications for the government budget. Oil revenue’s contribution to the budget in 2025 could be $40 billion lower than in 2024. In addition to the $32 billion drop in dividends received from Aramco, royalty and tax payments could be $5 billion to $10 billion lower in 2025 if oil prices are in the low $70 per barrel range and oil production increases modestly. If non-oil revenue grows in line with nominal non-oil gross domestic product (about 5.5% in 2025), total government revenue would be around $304 billion, below the budget target of $316 billion. Even if the government achieves its ambitious target of cutting nominal spending by 6.5% (spending overruns in recent years suggest this target is optimistic), lower revenue would imply a government budget deficit of 3.3% of GDP in 2025 compared to the budget estimate of 2.3% of GDP. If spending is not cut from 2024 levels, the fiscal deficit could be as high as 5.4% of GDP, while if the recent drop in oil prices to below $70/bbl is sustained, the above revenue calculations could prove overly optimistic.

More Borrowing Ahead

Saudi Arabia has been active in global capital markets in early 2025. This is likely to continue. Unless the government can cut spending further than planned in the 2025 budget or new revenue can be found, additional borrowing will be needed to finance the budget deficit. The PIF will also be seeking additional financing as the $6 billion drop in the dividends it receives from Aramco comes at a time when the PIF is intending to scale up its investments from $40 billion a year to $70 billion a year. All in all, the government, the PIF, and Aramco are likely to tap domestic and international banks and capital markets for funding during the remainder of 2025.

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Sources: General Authority and Statistics; Saudi Arabian Monetary Authority; Ministry of Investment; author calculations.

Sources of FDI Data 

The preliminary quarterly FDI data published by the General Authority for Statistics is based on a survey of foreign companies engaged in investment activities in the kingdom. The data is not comprehensive because the response rate to the survey is low. The annual FDI data comes from a different source. It is calculated by the Ministry of Investment and is based on the year-end financial statements of foreign investment companies operating in the kingdom. This data is more comprehensive and should be more accurate, but unfortunately it is only available on an annual basis and is also published with quite a long lag (data for 2023 was published in October 2024). Once the annual data is available, a revised quarterly data series that is consistent with the annual series is constructed. This revised series replaces the preliminary quarterly data in the balance of payments statistics and elsewhere. 

Preliminary Quarterly Data Is of Little Value 

The bottom line is that the preliminary quarterly data for 2024 is likely underestimated and is therefore of little value in tracking actual FDI inflows. Taking the quarterly data at face value and drawing the conclusion that FDI fell in 2024 is almost certainly wrong. When the Ministry of Investment publishes its annual FDI estimate for 2024, FDI inflows during the year will almost certainly be higher than the quarterly General Authority for Statistics data indicated. It is also likely that FDI inflows in 2024 will be higher than those in 2023.  

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The revised data suggests that FDI into the kingdom has been on an upward trend since 2020 once Saudi Aramco’s sales of stakes in an oil and gas pipeline to foreign investors in 2021 and 2022 are excluded (the exclusion of these transactions gives a rough estimate of FDI into the nonhydrocarbon sector). The previous data had indicated that FDI into the nonhydrocarbon sector had been little changed in 2023 relative to 2022.  

About one-third of the FDI inflows in 2023 were into the manufacturing sector, with most of the rest going into financial services, construction, and retail/wholesale trade. The United Arab Emirates, France, and the United Kingdom were the three biggest source countries for FDI into Saudi Arabia in 2023, while the United States, the UAE, and the U.K. were the three biggest investors in terms of the outstanding stock of FDI at the end of the year. Interestingly, China does not rank highly either in terms of the 2023 inflow (13th) or outstanding FDI stock (10th). 

Given the improvements that have been made in the investment environment in recent years and the incentives that are being provided to foreign investors, the upward trend in FDI into the nonhydrocarbon sector in recent years is not surprising and is likely to continue. However, in the absence of an explanation from the Ministry of Investment, it is difficult to have full confidence in the revised data. Given the size of the revisions to the data and the importance that the government and investors attach to trends in FDI, the ministry should move quickly to explain the reasons for the revisions. 

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Aramco introduced a new performance-linked dividend in the third quarter of 2023. This is in addition to the usual base dividend the company has paid since 2018. The performance-linked dividend is set at 70% of Aramco’s “free cash flow” (defined as the cash flow from operations after capital expenditures and base dividend payments) in 2022 and 2023 and is to be paid on a quarterly basis through the fourth quarter of 2024. Dividend payments are expected to be $124 billion in 2024 compared to $98 billion in 2023 (and $75 billion in 2022). What will happen in 2025 and beyond is unclear.

The higher dividend payout is good news for the government and Public Investment Fund, the company’s two largest shareholders. Both need funds to cover growing spending commitments in pursuit of the Vision 2030 reforms.

Is the High Dividend Sustainable?

Cash from Aramco’s operating activities declined by nearly 12% in the first half of 2024 relative to the first half of 2023 as lower oil production more than offset higher oil prices. Despite this, capital investments and dividend payments increased, resulting in a $28 billion drawdown in liquid assets (defined as cash and short-term investments).

Source: Aramco

At $74 billion, liquid assets are still at comfortable levels, but the rate at which they are declining (from $135 billion at the end of 2022) suggests that it will be difficult to sustain the dividend at current levels in the absence of a strong rebound in oil revenue. Additional borrowing, further asset disposals, or a reduction in capital spending could help sustain the high dividend for some period, but none are longer-term solutions.

It is unclear how Aramco plans to proceed with its dividend policy in 2025 and beyond. Aramco President and CEO Amin Nasser wrote in the financial report that “we continued to deliver a base dividend that is sustainable and progressive, and a performance-linked dividend that shares the upside with our shareholders.” The performance-linked dividend may remain in 2025 but perhaps at a lower level that reflects the less favorable oil market environment the company is experiencing compared to 2022.

Any reduction in Aramco’s dividend will have implications for the government budget and PIF. To cover any drop in the dividend, either new sources of revenue will need to be found, spending plans adjusted, or borrowing increased.

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