Budget deficit widens to eight-year high in 1Q

Saudi Arabia’s fiscal deficit hit SAR 125.7 bn in the first quarter of 2026, a significant jump from the SAR 58.7 bn deficit recorded in 1Q 2025, according to the Finance Ministry’s quarterly budget performance report (pdf). The quarterly deficit — the highest since 2018 — is already nearing the entire full-year shortfall of SAR 165.4 bn projected in the FY 2026 government budget, as the Kingdom contends with the impact of the US-Iran war on its resources.

“It is hard to draw too much of a conclusion on spending from one quarter, [...] but 1Q is usually quite modest, whereas this was the second highest quarter on record,” Director of Khalij Economics and GCC analyst for GlobalSource Partners Justin Alexander tells EnterpriseAM.

The culprit: The widening gap was driven by a massive 20% y-o-y surge in total expenditures, which reached SAR 386.7 bn, far outstripping a marginal 1% y-o-y decline in total revenues, which came at SAR 261 bn.

The breakdown

Oil income drifts lower, non-oil growth stays the course: Oil revenue slightly fell 3% y-o-y to SAR 144.7 bn, still making up about 56% of total revenues. Meanwhile, non-oil revenue grew steadily but slowly, logging a modest 2% increase to SAR 116.3 bn. Taxes on goods and services rose 5%, though the increase was offset by a 12% decrease in income and profit taxes, and a 19% drop in other taxes.

Subsidies skyrocket: Employee compensation made up 39% of total spending, or SAR 151.1 bn, rising only 3% y-o-y. Meanwhile, expenditure on subsidies jumped 170% to SAR 17.5 bn, and expenditure on grants surged 249% to SAR 956 mn.

“It is unclear to what extent the higher spending was related to the war,” Alexander says, projecting that recurrent spending is “likely to remain well above budget through this year.”

Defense spending is now a priority: Military expenditure jumped 26% y-o-y to SAR 64.7 bn, as the Kingdom counters a sustained campaign of drone and missile threats amid the US-Israel-Iran conflict. Pundits see this as the likely trend for most Gulf states as they navigate through the war shock of direct Iranian attacks on GCC soil.

The debt situation

Hefty borrowing: For the second consecutive quarter, the government left its reserves untouched, maintaining a closing balance of SAR 400.9 bn. Instead, it financed the entire 1Q deficit through the debt markets. Total public debt climbed to SAR 1.67 tn by the end of the quarter, up from SAR 1.52 tn at the start of the year.

Hurrying with the 2026 plan? The National Debt Management Center already announced on Tuesday that it is done with its annual borrowing plan for 2026, with 90% of financing needs secured before the war erupted.

Still leaving the door open: “Should the ongoing coordination with the Ministry of Finance identify a need for additional financing, NDMC intends to leverage private channels and local markets as the primary funding sources,” the statement said.

REMEMBER- The NDMC lined up USD 13 bn (SAR 48.8 bn) in January — a seven-year syndicated loan to fund utility and infrastructure projects, covering around 30% of the projected SAR 217 bn deficit in 2026.