Sustainability of fiscal deficit in an oil rich economy: the case of Saudi Arabia

Most of the oil rich nations are experiencing volatile economic conditions impacting financial stability and Saudi Arabia, as the largest contributor, is by no means an exception. This study investigates the sustainability of Saudi Arabia’s budgetary deficits from the period 1969-2014. Using the ARDL technique, we find strong evidence of the existence of a cointegrating relationship between revenue and expenditure. Our results indicate that Saudi Arabia may face difficulty in managing its long-term debts because the size of the slope parameter is below unitary, signaling weak deficit sustainability. In particular, we provide evidence of both short and long-run Granger causality while supporting the fiscal synchronization hypothesis. Our findings highlight some key policy implications specifically relating to the sustainability of future deficits in the country.