Oil price falls force Saudi Arabia to cut contract spend in new austerity drive

Saudi Arabia's government, its finances strained by low oil prices, is opening a fresh austerity drive by ordering ministries to cut their spending on contracts by at least 5 percent, a document seen by Reuters shows.

The spending cuts could further slow economic growth in the world's top oil exporter and hurt the construction industry, where many companies are struggling with deteriorating cash flow and rising labor costs.

The document, sent by the central government to all ministries and state bodies, instructs them to reduce the value of outstanding contracts signed to support their operations, as well as construction contracts included in the 2016 state budget, by "not less than 5 percent of remaining obligations".

It says these measures were proposed by the minister of economy and planning to "rationalize spending and increase its efficiency", and were approved by the king.

Officials of the ministry could not immediately be reached for comment.

The document leaves ministries to decide how contracts should be revised to make the required savings. It does not explain how the ministries should renegotiate contracts with their suppliers.

Another clause in the document forbids ministries and government bodies from signing any contracts without the approval of the finance ministry. Previously, senior officials could agree small contracts without approval.

The Saudi government ran a record budget deficit of nearly $100 billion last year and has been seeking ways to narrow the gap. It is laying plans to boost non-oil revenues with taxes, but that will take years to have much impact, leaving spending cuts as the main way to bring state finances under control.

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