(Bloomberg) -- Saudi Arabia has rewritten its budget forecast for next year, saying it expects a deficit instead of a surplus as it ramps up spending and tackles uncertainty in oil markets.

The Finance Ministry also revised its previous forecast of surpluses every year until 2025, now projecting deficits until at least 2026, according to a preliminary budget statement published Saturday.

The $1.1 trillion economy will narrowly avoid a contraction this year, according to Finance Ministry forecasts. By contrast, Bloomberg Economics expects the Saudi government’s oil supply cuts to shrink gross domestic product by about 0.7% this year, a major swing from being the fastest-growing economy in the Group of 20 club of countries in 2022.

Under Crown Prince Mohammed bin Salman, the country’s de facto ruler, Saudi Arabia is pushing to diversify its oil-dependent economy, building up new domestic industries including electric car-making, tourism and logistics. But the plans are hugely expensive, putting strain on government finances.

Spending in 2024 is projected at 1.25 trillion riyals ($333 billion), 10% more than estimates made last year, the ministry said. Although the new forecasts put outlays in 2024 at slightly lower levels than in 2023, the government tends to overshoot expenditure targets.

Read: Saudi Oil Cuts Throw Last Year’s Standout Economy Into Slow Lane

Inflation and supply chain disruptions have dampened global growth. In response, Saudi Arabia is “working to expand government spending that has a transformative effect, while maintaining fiscal sustainability in the medium and long-term,” according to the preliminary budget statement.

The government is expecting revenue next year at 1.18 trillion riyals, a slight decrease from this year based on what it called “conservative estimates of oil and non-oil revenue.” That could be a reflection of continued uncertainty over oil demand, with fears of a recession continuing to haunt the US and disappointing economic data from China.  

As a result, the kingdom faces a fiscal deficit in 2024 of 79 billion riyals, equal to about 1.9% of economic output. This year’s shortfall is projected at 82 billion riyals, equal to about 2% of GDP. The economy is forecast to grow 4.4% next year. 

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A recent rise in crude prices will give the world’s biggest crude exporter more room to sustain high levels of government spending and power the non-oil sector, the main engine of job creation.

Breaking the boom-bust cycle of previous years has been a key driver for Prince Mohammed’s plan to overhaul the economy. Despite the diversification push, oil and petrochemicals are still critical, accounting for around 90% of the country’s exports. 

Oil revenue is expected to be higher than previously forecast this year due to state-controlled Saudi Aramco announcing a new dividend policy that will involve it making additional payouts from cash left over once it has accounted for outlays like capital expenditure and its $19.5 billion quarterly base dividend.

Higher payouts from Aramco “imply the deficit could be slightly lower” than the government’s projections, Mazen Al-Sudairi, head of research at Al Rajhi Capital, said in a note. The budget is likely based on oil prices of around $82 a barrel, he said.

According to the preliminary statement, the country’s increasing debt stock will remain sustainable. “It is expected that the size of the debt portfolio will increase as a result of the expansion in spending,” it said. 

The kingdom has been one of the most active bond issuers in emerging markets in 2023, according to data compiled by Bloomberg. The country’s total debt is expected to reach 1 trillion riyals, equivalent to about 25% of economic output, by the end of this year.

--With assistance from Fahad Abuljadayel.

(Updates with oil revenues in 11th paragraph.)

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