The world’s largest oil exporter is trying to cope with numerous challenges. It is worth noting that, Saudi Arabia’s economy shrank 7% in the second quarter of 2020, from the same period in 2019. According to the government figures, unemployment jumped to a record high and this fact once more underlines the severity of the problem.
Interestingly, the oil shrank 5.3% from April to June. The coronavirus pandemic had a huge impact on the global crude oil demand. This is a serious problem for the world’s largest crude oil exporter.
However, the coronavirus pandemic was the only problem for the oil sector. Importantly, an oil price war initiated by Crown Prince Mohammed bin Salman was another factor, as prices of global benchmark crude fell below $20 a barrel in April.
People should take into account that, Saudi Arabia’s non-oil sector shrank by 8.2% in the second quarter. It worth noting that, the development of the non-oil sector is very important for Crown Prince Mohammed bin Salman. The country depends on the income from fossil fuels, but Crown Prince wants to change the situation. However, lockdown restrictions brought business activity to a halt. As a result, it is not surprising that the non-oil sector shrank by 8.2% in the second quarter.
Hopefully, Saudi Arabia started to remove restrictions. Moreover, a truce among the world’s top producers lifter the price of global benchmark crude above $40 a barrel as of September 30.
Saudi Arabia and the International Monetary Fund
Saudi Arabia is struggling to get its economy back on track. Importantly, oil prices are far short of the $76.01 barrel Saudi Arabia needs to balance its state budget in 2020. This information comes from the International Monetary Fund.
People should keep in mind that, the kingdom derives roughly 80% of its revenues from oil. However, apart from low oil prices, there are other problems as well.
Saudi Arabia’s unemployment rate in the second quarter reached an all-time high of 15.4%. Moreover, it won’t be easy to recover from this crisis due to the budget squeeze that constricts government spending. Moreover, austerity measures including a tripling of value-added tax (VAT) from 5% to 15% is another factor.
Austerity measures represent a huge pressure on the less well-ff Saudi households. Importantly, when after-tax incomes shrink, people spend less, and this issue can influence economic recovery. It is worth noting that, due to harsh fiscal austerity in recent months, the recovery will be weak.
The International Monetary Fund expects the Saudi economy to contract 6.8% in 2020. However, the International Monetary Fund expects the country’s economy to grow by 3.1% in 2021.
The state of the local economy is far from being ideal. This fact once underlines the severity of the problems. Saudi Arabia should take additional measures to boost the local economy. Moreover, it would be more difficult to achieve this goal without the international community. Countries in the region should work together to deal with the economic impact of the coronavirus pandemic. The world’s largest oil exporter has the potential to support its economy.