IMF Executive Board Concludes 2019 Article IV Consultation with Saudi Arabia
July 18, 2019
On July 10, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Saudi Arabia.
Real non-oil growth is expected to strengthen to 2.9 percent in 2019 as government spending and confidence increase, but real GDP growth is projected to slow to 1.9 percent as real oil growth slows to 0.7 percent with the implementation of the OPEC+ agreement. Growth is expected to pick-up over the medium-term as ongoing reforms take hold. The unemployment rate among Saudi nationals has moved down but remains high at 12.5 percent.
The fiscal deficit is projected to widen to 6.5 percent of GDP in 2019 from 5.9 percent of GDP in 2018 as spending is projected to increase and exceed the budgeted amount and offset an increase in non-oil revenues. The deficit is then projected to decline to 5.1 percent of GDP in 2020. With oil prices implied by futures markets declining over the medium-term, the deficit is then projected to widen. The current account surplus is projected to narrow to 6.9 percent of GDP in 2019 from 9.2 percent of GDP in 2018 as oil export revenues moderates and import growth picks up.
CPI inflation has declined in recent months, mainly due to falling rents, and is forecast to decline by 1.1 percent in 2019, before turning positive in 2020 as further energy price increases are implemented. Credit growth is expected to strengthen with the stronger non-oil economy and bank liquidity should remain comfortable.
The authorities are continuing to implement their reform agenda. Fiscal reforms include lowering the registration threshold for the VAT, adjusting gasoline prices on a quarterly basis, and increasing fiscal transparency. Reforms to the capital markets, legal framework, business environment, and SME sector are ongoing.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the progress in implementing their economic and social reform agenda, including the introduction of the value-added tax and energy price reforms. Directors noted that reforms have started to yield results and that the outlook for the economy is positive; however, volatility in global oil prices poses uncertainty. They emphasized that continued commitment to prudent macroeconomic policies and appropriate prioritization of reforms will be key to promoting non-oil growth, creating jobs for nationals, and achieving the objectives of the authorities’ Vision 2030 agenda.
Directors underscored that fiscal consolidation is key to rebuilding fiscal buffers and reducing medium-term fiscal vulnerabilities. They encouraged the authorities to build on their fiscal reforms, including by continuing with the planned energy and water price reforms and increases in expatriate labor fees. Directors considered that additional fiscal measures would also be needed and highlighted that containing the government wage bill and a more measured increase in capital spending could yield fiscal savings. They also acknowledged that the authorities have committed to introduce further fiscal measures if needed.
Directors encouraged the authorities to continue to improve expenditure management and strengthen the fiscal framework, noting that, despite important reforms, spending has increased. They welcomed reforms to strengthen public procurement, which will help improve the efficiency of government spending and reduce the risks of corruption in procurement. Directors welcomed the efforts to enhance fiscal transparency. However, they considered that publishing more detailed budget and spending execution data would further increase fiscal transparency and viewed a robust asset-liability management framework as essential to guide analysis of the public sector balance sheet, cash flows, and risk/return tradeoffs.
Directors welcomed the authorities’ ambitious reforms to develop the non-oil economy. They noted the ongoing efforts to strengthen the business environment and considered that careful implementation of industrial policies could encourage the development of new sectors of the economy. Directors emphasized that any government support should be made available at the sectoral level, be time bound, and have strict performance criteria attached.
Directors considered that policies to develop new economic sectors will be successful if Saudi workers have the needed skills for the private sector and the incentives to offer them at competitive wages. They emphasized the need to ensure that wages and productivity are well aligned and that labor market policies should focus on setting clear expectations about the limited employment prospects in the public sector, strengthening education and training, and increasing female employment.
Directors underscored that reforms should be inclusive and vulnerable households protected from any negative effects. They welcomed the review of social assistance programs to ensure they provide adequate support to those in need and are well targeted.
Directors welcomed the continued resilience of the financial sector and ongoing capital market reforms. They agreed that the development of agency banking and Fintech could help broaden the channels of financial access. Directors agreed that improving financial access for young and growing companies, women, and youth are important, but emphasized that specific sector lending targets should be avoided. They welcomed Saudi Arabia’s ongoing strengthening of the AML/CFT framework and its recent membership of the Financial Action Task Force.
Directors agreed that given the current structure of the economy, the exchange rate peg to the U.S. dollar continues to serve the economy well.
Directors emphasized that further improving the quality and availability of data is important and were encouraged by the authorities’ commitment to subscribe to the Fund’s SDDS by the end of the year.
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Saudi Arabia: Selected Economic Indicators, 2017–20 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .
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