On July 10, 2019, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV Consultation
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
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
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
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