RIYADH/DUBAI (Reuters) - Saudi Arabia has asked state agencies to submit proposals for cuts of at least 20% to their budgets in a fresh austerity drive to cope with a sharp drop in oil prices, four sources familiar with the matter said.

FILE PHOTO: A car drives past the Kingdom Centre Tower in Riyadh, Saudi Arabia, November 12, 2017. Picture taken November 12, 2017. REUTERS/Faisal Al Nasser

The requests were made more than a week ago due to concerns about the impact of the coronavirus epidemic on crude markets, and ahead of the collapse of an oil output deal between OPEC and its allies on Friday, according to the sources.

One of the sources told Reuters that when the budget requests were sent, Saudi officials had been anticipating difficult talks with Russia over the need for deeper output curbs to stabilise markets. Moscow did reject the proposal, triggering a war for market share between the two countries which has sent crude prices plummeting.

The finance ministry instructed government agencies to submit proposals for cuts of between 20% and 30% in their 2020 budget, according to the four sources, who declined to be identified as the reductions have not been made public.

The foreign ministry has already implemented a 20% cut, one of the sources said, adding that the cuts will not impact salaries but projects could be postponed and contracts yet to be awarded could be delayed.

The Saudi foreign ministry referred Reuters requests for comment to the finance ministry which did not respond.

Saudi Arabia, OPEC’s de facto leader and the world’s top oil exporter, relies heavily on crude revenues. The International Monetary Fund has said Riyadh needs oil at $80 a barrel to balance its 2020 budget, which carries a deficit of 187 billion riyals ($50 billion).

Crude prices LCOc1 stood at $38.48 a barrel at 0418 GMT Wednesday. [O/R]

Economists expect Saudi Arabia’s budget deficit to climb from 4.7% of GDP in 2019 to double-digit percentage territory this year. In December, the government projected a deficit of about 6.5% for 2020.

“Saudi Arabia needs an oil price of about $85 per barrel to balance the government’s budget deficit, but only $50 per barrel to balance the current account,” Capital Economics said in a research note on Tuesday. “Both will be in deficit at the current oil price, but the budget deficit will be much larger at 15% of GDP.”

Thanks to ample foreign reserves, Saudi Arabia can live with lower crude prices if the face-off with Russia continues, but may need to increase borrowing in addition to spending cuts, analysts have said.

Riyadh ratcheted up the standoff with Moscow on Tuesday by announcing it would raise its crude supply to a record high in April and appeared to reject Russian overtures for new talks.

Even before the directive, the kingdom had reduced spending in its 2020 budget, reversing three years of expenditure increases intended to spur growth. It has also taken measures to narrow the gap by diversifying revenue streams with taxes and economic reforms.

Saudi Arabia has been running a budget deficit since oil prices plunged in 2014, when it scrapped a strategy of supporting prices in favour of a drive for market share.

Mohammed al-Suwayed, a Saudi asset manager and financial commentator, said that with oil prices falling, additional spending cuts were to be expected.

“For Vision 2030 to work, the government has to stop relying on an irresponsible increase in spending and rely more on organic growth from the economy itself,” he said, referring to the reform agenda championed by Crown Prince Mohammed bin Salman.