Press Release No. 18/304

On July 16, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Saudi Arabia.

Real GDP growth is expected to increase to 1.9 percent in 2018, with non-oil growth strengthening to 2.3 percent. Growth is expected to pick-up further over the medium-term as the reforms take hold and oil output increases. Risks are balanced in the near-term. The employment of Saudi nationals has increased, especially for women, but the unemployment rate among Saudi nationals rose to 12.8 percent in 2017.

CPI inflation has increased in recent months with the introduction of the value-added tax (VAT) and higher gasoline and electricity prices, and is forecast at 3 percent in 2018, before it stabilizes at around 2 percent over the medium-term. The fiscal deficit is projected to continue to narrow, from 9.3 percent of GDP in 2017 to 4.6 percent of GDP in 2018 and then further to 1.7 percent of GDP in 2019. With oil prices implied by futures markets declining over the medium-term, the deficit is then projected to widen. The deficit is expected to continue to be financed by a combination of asset drawdowns and domestic and international borrowing.

The current account balance is expected to be in a surplus of 9.3 percent of GDP in 2018 as oil export revenues increase and remittance outflows remain subdued. The Saudi Arabian Monetary Authority’s (SAMA) net foreign assets are expected to increase this year and over the medium-term.

Credit and deposit growth remain weak, but both are expected to strengthen due to higher government spending and non-oil growth. Bank profitability should increase as interest margins widen, and banks remain well capitalized and liquid.

The authorities are continuing with their fiscal reforms including through the introduction of the value-added tax and further energy price increases at the beginning of 2018. Reforms are also ongoing to improve the business environment, develop a more vibrant small and medium enterprises (SME) sector, deepen the capital markets, increase the involvement of women in the economy, and develop new industries with high potential for growth and job creation.

Executive Board Assessment [2]

Executive Directors commended the authorities for the progress made in implementing their reform agenda. Directors welcomed the broadly positive outlook and emphasized that higher oil prices should not slow the reform momentum. They agreed that continued commitment to implementing wide‑ranging reforms will help achieve the fiscal objectives and promote non-oil growth.

Directors welcomed the ongoing fiscal consolidation efforts and agreed that aiming for a balanced budget by 2023 is appropriate. They emphasized the importance of fully implementing the revenue reforms and limiting the future growth of government spending to achieve this objective. In the event oil prices exceed those assumed in the budget, most Directors recommended saving the additional revenues to begin to rebuild fiscal buffers.

Directors welcomed the new revenue measures, particularly the introduction of the VAT. They encouraged the authorities to continue their preparations to lower the VAT registration threshold in 2019. Directors welcomed the authorities’ intention to continue to gradually increase energy prices, but saw scope for more communication about the future price increases. They emphasized the importance of ensuring that the payments through the citizens’ accounts are adequate to compensate low and middle-income households for the impact of the price increases.

Directors encouraged the authorities to anchor fiscal spending in a medium-term expenditure framework. They supported the ongoing civil service review, which should help identify reforms to contain the wage bill. Directors welcomed recent efforts to strengthen the medium-term fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis, and encouraged further progress in these areas. They emphasized the importance of an integrated asset-liability management framework to guide the government’s borrowing and investment decisions.

Directors welcomed the progress in implementing structural reforms, and emphasized that these should continue in consultation with the private sector. They noted the progress with the privatization and public-private partnerships plans and believed this program should be accelerated. Directors agreed that the public sector could be a catalyst for the development of new sectors, but emphasized that this should not crowd-out the private sector.

Directors highlighted that policies to create jobs for nationals in the private sector should focus on leveling the playing field between Saudis and expatriates. In addition to the ongoing reforms, they believed that setting clear expectations about employment prospects in the public sector, reforming the visa system for expatriate workers, strengthening education and training, and addressing remaining constraints to female employment would be key.

Directors welcomed the authorities’ focus on financial development and inclusion. They agreed that increasing SME finance, improving financial sector access, particularly for women, and developing the debt market are priorities. They welcomed SAMA’s efforts to strengthen liquidity management. Directors encouraged the authorities to continue to strengthen the effectiveness of their Anti-Money Laundering/Countering the Financing of Terrorism framework.

Directors agreed that the exchange rate peg to the U.S. dollar continues to serve Saudi Arabia well given the structure of the Saudi economy.