In October, the IMF released a report projecting that by 2020 Saudi Arabia may get a budget boost of more than $90 billion from new taxes and the planned reform of fuel subsidies and prices.

This fiscal boost is expected to come as a result of the Kingdom’s efforts to restructure its economy,  away from oil to improve its income statement after a plunge in crude prices triggered a budget deficit of more than 16% of GDP last year.

According to the IMF’s calculations, non-oil revenue from a value-added tax and excises on tobacco and energy drinks is forecast to reach 4.8% of gross domestic product — estimated by the IMF to be $722 billion in 2020. Meanwhile, gains from energy price reforms could yield an additional $56 billion.

These efforts are expected to help the country reduce its fiscal deficit substantially in the years ahead. It is expected to decline to 9.3% of GDP in 2017, and to just under 1% of GDP by 2022 assuming reforms are brought in on schedule.

So far, there has been limited progress in the Kingdom’s transition away from oil as its primary income source. The non-oil primary deficit declined to 44.7% of non-oil GDP (gross domestic product) in 2016 from 49.8% in 2015. A contraction in spending of 6.4% was led by a sharp fall in capital expenditures which helped offset a higher wage.

However, according to HSBC, this transition has stalled in recent months.

Higher Oil Prices Slowing Saudi Reform?

According to HSBC economist Simon Williams, even though Saudi’s budget deficit has continued to contract this year, falling to around 6% of estimated GDP on an annualized basis for Q3, around 90% of the fiscal recovery has come from higher oil prices.

“Although there was a modest improvement in non-oil receipts, for example, well over 90% of the y-o-y budget improvement reflects increases in oil revenues, which rose more than 30% to account for 68% of total income, 5ppts higher than in 2016. Underscoring the Kingdom’s continued reliance on hydrocarbon receipts, the data show that the non-oil balance was just USD1.7bn narrower than the record shortfall generated last year.”

What’s more, further analysis shows that the progress of reforms appears to have ground to a halt:

“There is also a sense from the data that appetite for fiscal consolidation is waning not building. After falling in the first half of the year, for example, data show total spending rising by more than 5% in Q3, driven by strong gains in the wage bill. While this may reflect the one-off reinstatement of benefit cuts initially introduced last year, officials have already begun to speak of an expansionary budget for 2018. Subsidy spending and outlays on social benefits also rose y-o-y in Q3.”

This is still early stage data, so drawing conclusions about what this means for the future of Saudi Arabia’s fiscal policy should not be drawn. However, it does point to the idea that the Kingdom is happy to relax some of its possibly more unpopular policies thanks to higher oil prices, which have given it more fiscal headroom.