Saudi Arabia suffers record deficit due to war costs

• SAR126bn in first quarter
• Spike in military spending
• Oil revenues expected to rise

Saudi Arabia saw its largest quarterly budget deficit on record in the first quarter of this year due to falling oil revenues and a sharp rise in spending linked to war costs.

The deficit between the state’s revenues and its expenditures reached SAR126 billion ($33.5 billion) in Q1, more than double that of the SAR59 billion reported for Q1 in 2025.

Expenditures were the highest of any previously reported start to the year, fuelled in part by a spike in military spending and a nearly three-fold increase in state subsidies amid supply chain disruptions.

The government also suffered a SAR5 billion drop in oil revenues compared to Q1 2025, with lower oil prices in January and February followed by export disruptions in March due to the effective closure of the Strait of Hormuz.

Economists had predicted that Saudi Arabia’s budget deficit could be slimmer in 2026 compared to predictions at the start of the year, with high oil prices compensating for lost crude exports. 

Government oil revenues are expected to increase in subsequent quarters as a result, according to Tim Callen, visiting fellow at Arab Gulf States Institute in Washington and former IMF mission chief to Saudi Arabia. 

“But the expenditure side is also going to be much higher,” he said.

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Expenditures were 20 percent higher in Q1 2026 compared to Q1 2025. Callen said that costs are likely to continue to increase, including military costs which rose 26 percent compared to last year in Q1.

“There is replacement of the interceptors and so on,” he said, “but there’s spending that is going to be aimed at strengthening the military. Particularly air defences.”

Analysts had previously speculated that defence costs are likely to rise by a fifth across the GCC due to the war.

The finance ministry has budgeted for a SAR165.4 billion deficit for the full year. Historically, expenditures have spiked in the final quarter of the year.

Saudi Arabia is now looking to maintain about 70 percent of its pre-war crude exports, following the re-routing of crude exports to its Red Sea ports.

Its ability to continue selling oil while prices are high should ensure higher revenues, Callen said, potentially allowing for a slimmer deficit in Q2.

“Beyond Q2, it becomes much more of a guessing game based on how the conflict evolves,” he said.