Saudi Arabia: IMF Staff Completes 2016 Article IV Mission
“The decline in oil prices is affecting the Saudi Arabian economy. Real GDP growth is projected by IMF staff at 1.2 percent this year, down from 3.5 percent in 2015. Lower oil revenues have resulted in current account and fiscal deficits which are projected by IMF staff at around 9 and 14 percent of GDP, respectively, in 2016. Nevertheless, the financial assets held by the government remain high, providing a substantial cushion. The decline in bank deposits and the resulting tightening of liquidity conditions and rise in interbank interest rates have not yet impacted credit growth.
“Since the 2015 Article IV consultation, there has been a significant acceleration in reforms in Saudi Arabia. Vision 2030 sets out the goal of an appropriately bold and far-reaching transformation of the Saudi Arabian economy to diversify growth, reduce the dependence on oil, increase the role of the private sector, and create more jobs for nationals. The supporting policies that will be announced in the coming months are expected to set out how these goals will be achieved. To ensure their success, the reforms will need to be properly prioritized and sequenced, and the appropriate pace of implementation carefully assessed.
“To increase the role of the private sector in the economy, as envisaged in Vision 2030, privatization and PPPs and reforms to further strengthen the business environment, attract foreign investment, and encourage the development of the capital markets will be important. The recent measures announced by the Capital Market Authority and Tadawul are welcome. Reforms will also need to focus on increasing the attractiveness of private sector jobs and entrepreneurship for Saudis and the attractiveness of national workers to private sector employers.
“Fiscal policy is appropriately adjusting to the drop in oil prices. IMF staff welcome the control of government spending that is underway and the energy price adjustments that have been implemented. Staff also welcome actions by the government to put in place mechanisms to strengthen accountability and improve the efficiency of its spending through the introduction of key performance indicators for ministries, the setting up of a National Projects Management Office, and increased scrutiny of new capital projects.
“A gradual, but sizeable and sustained fiscal adjustment needs to continue with the aim of achieving a balanced budget over the medium-term. Such fiscal consolidation should include further adjustments in domestic energy prices, firm control of expenditures, and further increases in non-oil revenues. The planned introduction of a value-added tax and other tax measures are important.
“The government policy of using a combination of deposit drawdowns and international and domestic debt issuance to finance the fiscal deficit is appropriate. The establishment of a Debt Management Office (DMO) is a positive step and should be accompanied by the introduction of an efficient and market-based process for debt issuance.
“Further reforms to the fiscal framework that sets the annual budget in a medium-term framework and clearly establishes fiscal policy goals would support fiscal adjustment. Staff welcomes the establishment of the macro-fiscal unit (MFU). Given the plans for the sale of a stake in Aramco and for a greater role for the Public Investment Fund, it will be appropriate to enhance their transparency and integrate them into the fiscal framework.
“The banking sector is strong and well-positioned to weather a slowing in the pace of growth. SAMA continues to strengthen its regulation and supervision, including by introducing D-SIB and countercyclical capital buffer charges. A deposit insurance scheme has also been introduced. A formal and transparent macroprudential framework should be introduced to further enhance coordination among the key financial regulators.
“The exchange rate peg to the U.S. dollar continues to serve Saudi Arabia well given the structure of the economy.
“We would like to thank the authorities for their warm hospitality, cooperation, and discussions during our visit.”