The hike in gasoline prices in Saudi Arabia is evidence that the country's programme of economic reforms is 'on track', according to a note from analysts at Riyadh-based Al Rajhi Capital.

Fuel prices in Saudi Arabia increased substantially yesterday, partly as a result of the government's plan to improve the state of its finances, but also as an incentive to rationalise consumption. The introduction of a 5 percent value-added tax on certain goods and services in the kingdom yesterday has also contributed to the price increase. VAT came into effect in the kingdom on January 1. (Read more here).

Fuel prices (inclusive of VAT) have increased by 83 percent to 1.37 Saudi riyals ($0.37) for 91-Octane fuel, while 93-octane fuel has increased by 127 percent to 2.04 riyals ($0.54), according to Al Rajhi Capital's note.

"Though this could weaken consumption, this was expected (to) and should reaffirm government's resolve on driving the growth of non-oil economy," Al Rajhi Capital said.

In the note, Al Rajhi’s analysts said that preliminary data showed that gross domestic product (GDP) in the kingdom contracted by 0.74 percent in 2017, but that non-oil growth increased by just over 1 percent.

It said that this trend in non-oil growth should continue this year, following the government's announcement last month of an expansionary budget of 978 billion riyals for 2018, a 5.6 percent increase on the 926 billion riyal preliminary spending estimate (against a proposed budget of 890 billion riyals) for 2017. (Read more here).

The kingdom also pushed back its target date for achieving a balanced budget to 2023 from an initial target of 2020, heeding an earlier warning in May last year from the International Monetary Fund that the country was in danger of heading for recession if fiscal policy was tightened too quickly. (Read more here).

Further reading:

(Writing by Michael Fahy; Editing by Shane McGinley)
(Michael.fahy@thomsonreuters.com)

Our Standards: The Thomson Reuters Trust Principles



Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2017