RIYADH: Saudi Arabia’s decision to increase its planned spending by 18 percent will reduce windfall savings from oil, but the move could help the Kingdom accelerate its economic diversification, said global rating agency Moody’s.

On Sept. 30, the Saudi government announced that it plans to revise its spending upward to around SR175 billion ($46.5 billion) in 2022-24, compared to the targets previously published at the end of 2021.

The increase amounted to around 4-4.5 percent of the Kingdom’s gross domestic product. 

The upwardly revised spending targets point to smaller fiscal surpluses in the coming years, moderating prospects for the sovereign’s balance sheet improvement, Moody’s noted.

It said that the government’s decision to increase spending may contribute to reducing the Kingdom’s economic reliance on hydrocarbons, provided the spending is deployed to advance government-sponsored diversification projects, the report added. 

Earlier, Moody’s had predicted a robust fiscal surplus of nearly 6 percent of GDP this year, a fall in the debt burden below 2 percent of GDP, due to strong nominal growth driven by higher oil prices and an increase in government reserve deposits held with the central bank.

In June, Credit rating agency Moody’s Investors Service affirmed Saudi Arabia’s rating at ‘A1’ with a stable outlook, primarily driven by the government’s fiscal policy effectiveness.

The Saudi national debt management center said in a press release citing Moody’s that the latter expected Saudi Arabia’s GDP to grow at an average rate of 5 percent in 2021-2023. This will be supported by further post-pandemic recovery, progress on economic diversification, capital and development projects, and a further unwinding of oil production cuts.

Moody’s added that the growth of financial institutions in the Kingdom highlights the positive impact of the structural measures and reforms taken by the government in the past five years.

The report further noted that Saudi Arabia’s government demonstrates an increasingly more effective fiscal policy framework even during the time of rising oil prices.