(Bloomberg) -- Saudi Arabia recorded higher budget revenues than expected this year despite a sharp drop in oil prices and production. 

Still, a ramp-up in spending on Crown Prince Mohammed bin Salman’s multi-trillion-dollar plan to diversify the economy left the budget with a deficit of 82 billion riyals ($22 billion), according to official figures published on Wednesday.

“We intentionally decided to spend more and cause the deficit,” Finance Minister Mohammed Al Jadaan told reporters. “If you spend that money right, on productive assets, then it’s money well spent.”

The Finance Ministry also stuck with next year’s revenue forecast of 1.17 trillion riyals it first announced in October. That’s despite OPEC+ deepening supply cuts earlier this month to help bolster oil prices. 

Spending is forecast at 1.25 trillion riyals, according to the 2024 budget published Wednesday.

Revenues for 2023 are set to reach 1.19 trillion riyals, over 5% higher than estimated in the budget a year earlier. Spending accelerated at a faster rate, hitting 1.28 trillion riyals.

Read: Saudi Budget’s Back to Old Ways as Oil Habit Proves Hard to Kick

Following the first surplus in nearly a decade last year, the kingdom rewrote its medium-term spending plans and shifted from forecasting years of surpluses to deficits until at least 2026 as it accelerates spending. 

What Bloomberg Economics Says... 

“The fact that the kingdom ran a non-negligible deficit during a year when oil averaged around $82 per barrel suggests Riyadh needs to maintain high crude prices to fund its domestic spending. That may mean the maintenance or even deeper output cuts as the global economy weakens and as more oil supply comes into the market.”

— Ziad Daoud, chief emerging-markets economist. 

Under Prince Mohammed’s Vision 2030 plan, Saudi Arabia is pouring trillions of dollars into developing industries including logistics, tourism and manufacturing in a bid to break its reliance on oil income. That spending is expected to help maintain non-oil growth, the engine of job creation, at around 6% next year over the medium term, Al Jadaan said.

Aramco boosted its dividend, most of which goes to the government, by around $10 billion each quarter from the second quarter. The state-controlled oil producer said it was boosting payouts after profits soared in 2022 as a result of surging crude prices, even though profits have since fallen.

“Saudi budgets generally tend to be on the conservative side with their revenue forecast and there would have been an additional boost in 2023 from Aramco’s performance-linked dividends,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “We see the 2024 revenue assumption also being on the cautious side.”

Oil output has dropped this year as Saudi Arabia and its OPEC+ allies curb production in an effort to bolster prices. 

Concerns about the global growth outlook have seen prices fall to around $76 a barrel. In response Saudi Arabia has slashed oil output from a peak of around 11 million barrels a day last year to 9 million barrels a day. 

The kingdom’s move to unilaterally cut production by 1 million barrels a day can “absolutely” stay beyond the first quarter of next year, Saudi Energy Minister Abdul Aziz bin Salman said Monday in an interview with Bloomberg.

The International Monetary Fund said in October Saudi Arabia would need crude close to $86 per barrel to balance its budget, about $5 more than initially estimated in May. 

‘Very Conservatively’

Al Jadaan said authorities approached their revenue projections “very conservatively” a year ago when oil prices were higher. Capital expenditure “increased significantly this year compared to what was planned,” he said. 

If outlays by government-related entities such as the Saudi sovereign wealth fund are included, the break-even will likely rise to $110 in the second half of this year, according to Bloomberg Economics.

“The kingdom has dramatically diversified its revenue in the last five years as a result of the value-added tax and growth in the non-oil economy,” said Justin Alexander, director of Khalij Economics and Gulf analyst for GlobalSource Partners. 

The government tripled VAT to 15% in 2020 as the economy reeled from the impact of the coronavirus pandemic and a collapse in oil prices. The helped boost non-oil revenues, which have more than doubled since 2016 to 441 billion riyals.

Still, “oil remains the dominant source of revenue and a combination of a high utilization of its production capacity and a strong oil price is still needed to balance the budget,” Alexander said.

(Updates with Bloomberg Economics comment.)

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