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Saudi Arabia could run out of financial assets within five years, IMF warns

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Ali Jarekji/Reuters/File

(Read caption) The Kingdom Tower stands in the night in Riyadh, Saudi Arabia's capital. Saudi Arabia risks running out of financial assets in less than five years amid a drop in oil prices, the International Monetary Fund has warned.

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The Middle East’s biggest economy, Saudi Arabia, could burn through its financial assets within five years, amid a drop in oil prices, the International Monetary Fund (IMF) has warned.

In its latest Middle East economic outlook report, the IMF said it expects Saudi Arabia to run a budget deficit of 21.6 percent in 2015 and 19.4 percent in 2016.

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If oil prices remain as low as they are, and the government maintains current economic policies, Saudi Arabia "would run out of buffers in less than five years," the Washington-based lender said.

Other Middle Eastern oil exporting countries, such as Kuwait, Qatar, and the United Arab Emirates, have relatively more financial assets that will last more than 20 years, according to the IMF.

Saudi Arabia is currently facing a budget deficit for the first time since 2009 caused by the slump in oil prices and a sharp rise in military spending. Its 2015 budget released earlier this year shows a $38.6 billion deficit.

The decline in crude oil prices, which accounts for about 80 percent of revenue, has caused significant fiscal pain for the Kingdom. Earlier this week, Bloomberg reported that Saudi Arabia delayed payments to some government contractors.  

Saudi Arabia is responding to its financial struggles by “tapping foreign reserves, cutting spending, delaying projects, and selling bonds,” according to Bloomberg. 

“It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall,” Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc, told the financial news outlet. “Cuts are coming – the budget deficit is too large to ignore and pretend it’s business as usual.”

Al Jazeera reports that the Saudi Arabian Monetary Agency has withdrawn $70 billion in funds managed by overseas financial institutions and its foreign reserves have fallen by almost $73 billion, since oil prices slumped, leaving it with $654.5 billion.

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The IMF report said reforms in Gulf Arab countries that create more jobs and diversify economies outside the oil sector are "all the more urgent," as low oil prices are likely to persist.

As this IMF report was being released in Dubai on Wednesday, Masood Ahmed, IMF director of the Middle East and Central Asia, said,

"There are difficult decisions that will need to be made in terms of cutting spending. You could try to postpone some capital projects...you could look at energy prices, which are still subsidized or below international prices in most of the countries in the region."