Saudi Arabia's state finances could fall into the red next year and the country could start running down its huge foreign reserves if it does not rein in the growth of government spending, the International Monetary Fund said.
The IMF has been urging the world's top oil exporter to moderate its rapid spending growth for years - warnings which have been publicly dismissed by Saudi officials as alarmist.
But an IMF report released this week, following annual consultations with the government, painted the most ominous picture yet of looming financial pressures on the kingdom.
The government has launched huge and costly infrastructure projects, while falling oil prices threaten to shrink state revenues. Meanwhile, Saudi Arabia is spending heavily on aid to other Arab countries in order to maintain geopolitical stability in the region.
The wealthy kingdom could easily handle any one of those pressures, but the IMF report suggested that even Saudi Arabia's oil wealth might not be enough to cope with all of them at once.
The government may post a budget deficit of 1.4 percent of gross domestic product in 2015 instead of the 4.0 percent surplus which the IMF forecast as recently as April, the report said.
Previously, the IMF had predicted Saudi Arabia would fall into deficit only in 2018. Its latest report said the fiscal shortfall was likely to widen to as much as 7.4 percent of GDP in 2019. Riyadh last posted a budget deficit in 2009, when oil prices briefly plunged because of the global financial crisis.
"The fiscal consolidation that (IMF) staff had expected to take place in 2013 did not materialise, and it is important that the government now moves ahead and implements fiscal adjustment," the IMF said.
"An adjustment that reduces the non-oil fiscal deficit by about 3 percent of non-oil GDP a year during 2014-19 relative to the 2013 budget outcome would ensure that government deposits remain sufficient to manage a large drop in oil prices."
State spending has soared over the last few years as the government has spent more on welfare to ensure social peace in the wake of the Arab Spring uprisings. Since 2010, annual spending has risen 52 percent to 994.7 billion riyals ($265.2 billion) in 2013.
The government is now embarking on infrastructure projects that will boost spending further. In 2014-2018, capital expenditure is projected to rise above 16 percent of GDP from 11 percent in 2012 because of railway construction and other projects in big cities, while housing loan disbursements are likely to reach up to 25 billion riyals a year, the IMF estimated.
This could erode the reserves which the government has built up at the central bank, the Saudi Arabian Monetary Agency (SAMA), during the past several years of high oil prices, the report warned.
"Government deposits at SAMA are projected to drop by about 55 percent between 2013 and 2019 and in 2019 would be sufficient to cover six and a half months of spending," the IMF said. Its report implied that the deposits would sink by roughly 896.5 billion riyals by 2019 from 1.6 trillion riyals in 2013.
The central bank usually invests government deposits in foreign assets such as U.S. Treasuries because of the country's currency peg to the dollar. So if Riyadh wants to draw on its deposits, this is likely to involve selling foreign securities.
SAMA's net foreign assets are projected to rise to $768.5 billion in 2014 from $716.7 billion last year, the IMF said.
Because of rising state spending, the oil price which the government needs to balance its budget has risen to $89 a barrel in 2013 from $78 in 2012, the IMF said. But oil prices have been moving adversely for Saudi Arabia in the last few months and the IMF thinks - contrary to the public forecasts of Saudi officials - that the downtrend may continue.
The report predicted the country would sell its crude oil for $101.6 per barrel in 2015 but only $91.8 in 2019.
Meanwhile, Saudi Arabia's foreign aid commitments have become a significant cost. It pledged $22.7 billion in financial assistance between January 2011 and April 2014 and disbursed $10.9 billion of that amount, mostly to Egypt, the report showed. There have been other pledges since then; in August, King Abdullah granted the Lebanese army $1 billion to help it battle militants.
The IMF expects a budget surplus of 2.5 percent of GDP in 2014 but some economists think the aid commitments could push the government into the red as soon as this year.
"It is in particular the financial aid that is going to push the budget into deficit this year," said Fahad Alturki, head of research at Jadwa Investment in Riyadh.
Running deficits would not be disastrous for the government; economists believe that in addition to using its reserves, it could easily borrow money from the markets, as most other governments around the world do. State debt fell to a mere 2.7 percent of GDP in 2013, one of the lowest levels in the world.
However, the IMF recommended that Saudi authorities reduce the public wage bill by identifying public sector jobs that could be abolished when they became vacant.
"In addition, with capital spending projects making up a large part of fiscal spending, a careful prioritisation of these projects would help identify any that could be delayed or cancelled, and a review of project processes could yield cost savings," it said.
On the revenue side, Riyadh should consider imposing a tax on high-end property or vacant land, increasing fees and charges for government services, and raising ultra-low energy prices, the report said. The OPEC member has developed few sources of budget income beyond crude oil exports.
During the consultations, Saudi authorities broadly agreed with the IMF's fiscal projections, but saw limited scope for fiscal consolidation at present, the IMF said.
"The authorities also saw little scope to raise additional revenues at present, although over the medium term when alternate modes of transportation become available, increases in energy prices could be considered," it said.