Public Information Notice: IMF Concludes 2002 Article IV Consultation with Saudi Arabia

October 25, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On October 9, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1


In 2001, overall real growth slowed down substantially. Oil output dropped following OPEC-mandated production cuts, and growth of real non-oil GDP fell to 2.9 percent from 3.9 percent in 2000 as private investment slowed. The world economic slowdown, together with the effects of the September 2001 events seemed to have temporarily affected confidence in 2001. Inflation, however, remained negative.

The macroeconomic position also weakened as oil export receipts fell. The overall central government budget shifted to a deficit of about 4 percent of GDP as oil revenues fell, non-oil revenues remained sluggish, and expenditures increased. The increased borrowing to finance the deficit led to a resumption in the buildup of government domestic debt, which rose to 92 percent of GDP by mid-2001. However, the external position remained comfortable. The external current account registered a large surplus equivalent to about 8 percent of GDP as the fall in oil export receipts was compensated by a sharp increase in non-oil exports and import growth fell reflecting economic slowdown. Saudi Arabian Monetary Agency's (SAMA) net foreign assets rose slightly to the equivalent of 11 months of prospective imports of goods and services.

Growth of domestic liquidity picked up modestly in 2001 as domestic credit increased by over 8 percent in terms of the beginning money stock, mainly to finance the fiscal deficit and an increase in consumer credit to the private sector. The financial sector continued to perform well and the stock market registered gains. The average riyal-U.S. dollar interest rate differential in 2001 remained virtually unchanged and, reflecting the appreciation of the U.S. dollar, the Saudi riyal appreciated in real effective terms by about 2 percent.

Progress on structural reforms during 2000-01 was focused mainly on building the legal and institutional foundations for a more market-based resource allocation. The state monopoly of telecommunications is ending, and rules governing foreign direct investment under the new Investment Law were liberalized. Steps were taken to improve the employability of Saudi workers through vocational training and the establishment of specialized educational facilities. In an important step to liberalize trade, and to facilitate the introduction of the common external tariff among GCC countries, the import tariff was reduced from 12 percent to 5 percent.

Oil prices have firmed up in 2002 and the macroeconomic position is expected to be better than initially anticipated. While the fiscal deficit would moderate, the external current account surplus is expected to remain lower than in 2001, and SAMA's net foreign assets could moderate to the equivalent of 10 months of prospective imports. With the expected pickup in real non-oil GDP growth to about 4 percent, domestic liquidity is projected to trend upwards, and credit to the private sector is expected to increase by about 10 percent.

Executive Board Assessment

Executive Directors commended the Saudi authorities for their skillful and consistent pursuit over the past several years of a comprehensive policy strategy encompassing structural reforms and sound macroeconomic policies. This strategy aims at accelerating the growth of non-oil sectors, which will be key to generating employment opportunities for the rapidly growing Saudi labor force and reducing the economy's vulnerability to oil price fluctuations. The strategy has appropriately focused on the development of legal and institutional foundations for market-based resource allocation by aiming to promote the role of the private sector, encourage foreign direct investment, privatize state enterprises, introduce labor market reforms, and widen and deepen the financial sector. Directors considered that the slowdown in economic growth and swings in the fiscal balance in recent years-against the backdrop of volatility in global oil markets and increased regional security concerns-further underscore the importance of determined pursuit of the Saudi policy strategy in order to encourage investment, promote economic diversification, and accelerate job creation. They therefore welcomed the authorities' plans to tighten demand management and expedite structural reforms in the period ahead, notwithstanding the recent increase in oil prices.

Directors commended the authorities' resolve to strengthen fiscal policy, which will be key for sound macroeconomic management going forward. In this regard, they welcomed the authorities' plans to gradually achieve budget balance or a small budget surplus by 2005. Directors recommended that these plans be implemented as part of an overall medium-term macroeconomic strategy, and be governed by explicitly defined fiscal rules to protect against downward rigidity in expenditure. They also welcomed the ongoing and planned steps being taken to achieve the medium-term fiscal objectives, but urged the authorities to stand ready to take further measures, if necessary. Directors encouraged the authorities to examine the usefulness of introducing a specific mechanism to save and appropriately allocate any temporary unanticipated increases in oil revenues in order to smooth out shortfalls. In addition, improving the structure of the budget will be crucial for increasing the effectiveness of demand management and reducing the volatility of fiscal outcomes, and Directors urged the authorities to take early concrete steps in this direction.

Directors stressed that the reduction in the budget deficit will require both a broadening of the non-oil revenue base and a reduction in expenditure. On the revenue side, they urged the authorities to expedite the implementation of the proposed income tax. Some Directors suggested that the introduction of a sales tax might be useful as an interim measure pending the implementation of the VAT. Directors also urged the authorities to accord continued high priority to strengthening and modernizing revenue administration.

Directors welcomed the authorities' strong commitment to reduce expenditure and improve budget management through a series of measures, including the merger of various ministries and departments. They endorsed the view that public expenditure and budget management reform should be expedited through increased focus on performance contracts and accountability, targeted reductions in government employment under a well-defined civil service reform, introduction of time-specific and targeted subsidies, rationalization of social expenditures, and better planning of capital outlays. Directors also supported the call to identify the sources of extrabudgetary spending and to take steps to eliminate such spending, and welcomed the authorities' determination to avoid any further occurrence of late payments.

Directors commended the authorities' articulation of a comprehensive privatization strategy, and were encouraged by the recent cabinet approval to divest 30 percent of government ownership in the telecommunications company. They urged the authorities to underpin the strategy by establishing a clearer timetable of steps required to execute it, as this would contribute to catalyzing private investment, including foreign direct investment (FDI). Directors supported the authorities' decision to use part of the proceeds from privatization to reduce the public debt.

Directors also welcomed the specific steps being taken to reduce the barriers to inflows of FDI, and urged the authorities to continue moving in this direction, including by narrowing the "negative list" for FDI, streamlining administrative procedures, and finalizing agreements under the Gas Initiative. The planned reduction in the corporate income tax rate and the introduction of accelerated depreciation of assets will be helpful in encouraging FDI. Directors suggested that the authorities consider introducing a simple, nondiscriminatory, and broad-based tax on both domestic and foreign businesses, which, combined with liberalization of rules governing access to the domestic financial and capital markets, should provide a further boost to FDI.

Directors commended the authorities for their effective supervision of the banking system, which has resulted in well-capitalized, well-provisioned, and financially sound institutions. They noted that the banking system has continued to diversify its asset portfolio in line with evolving market conditions, and stressed the importance of continued financial sector reform in promoting private sector investment. In this regard, Directors welcomed the authorities' commitment to continue opening up the financial sector to foreign competition in order to help ensure efficient mobilization and allocation of resources for private sector development. Early implementation of plans to strengthen banks' credit risk assessment and introduce broadly uniform standards of loan classification will help to enhance the efficiency of the banking system. They also welcomed the ongoing steps to remove legal constraints on the introduction of longer term financing instruments-notably mortgage finance-which, given the rapidly growing population, should help spur non-oil growth. Directors also emphasized that early approval and implementation of the Capital Market and Insurance laws will be crucial for clarifying the legal and regulatory framework for the growth of the financial sector and the development of secondary markets. They welcomed the authorities' decision to undertake an FSAP exercise, which will help to identify vulnerabilities, if any, in the financial sector. Directors commended the authorities for developing a comprehensive framework to combat money laundering and the financing of terrorism, and welcomed the additional steps taken by the authorities in this area, including regulation of the informal flows of funds.

Directors supported the authorities' decision to address the unemployment problem through training and education to increase job opportunities for Saudi nationals, while applying the Saudiization policy flexibly. They recommended that this strategy be supported by measures aimed at bridging the gap between local and expatriate labor costs as well as between costs in the government and private sectors. Steps such as the proposed transfer of benefits between the pension fund and the social security system as well as the extension of the social security system to small enterprises in the private sector should be helpful in this regard. In addition, reforming the civil service and realigning public sector benefits to those in the private sector should help promote mobility of workers to the private sector and reduce labor market segmentation. Some Directors cautioned that the introduction of the proposed income tax on expatriate workers should not erode private sector competitiveness.

In the absence of inflationary pressures, Directors endorsed the authorities' intention to pursue an accommodative monetary policy to support private sector activity. They also endorsed the authorities' policy of maintaining a pegged exchange rate arrangement within an open exchange and trade system, but stressed that a strong fiscal position and a sound banking system will remain the essential foundations in support of this arrangement. Directors welcomed the significant progress toward economic and financial integration among members of the Gulf Cooperation Council (GCC), noting that the target date for introducing the customs union has been brought forward to 2003. They noted the initiatives toward the planned monetary union among GCC members by 2010, and suggested that the many challenges relating to policies and policy frameworks associated with monetary union will require considerable further reflection and analysis. With regard to trade policy, Directors expressed the hope that the remaining bilateral agreements with trading partners will be reached soon to enable Saudi Arabia's early accession to the World Trade Organization (WTO). They welcomed the authorities' commitment to an open trade regime and their recent lowering of import tariffs, which they considered helpful for promoting the development of a competitive non-oil sector.

Directors commended the constructive role Saudi Arabia has played in helping to maintain stability in the international oil market. They supported the authorities' continued efforts to enhance cooperation between the oil-producing and oil-consuming countries to ensure that the inherent uncertainty in the oil market is not amplified.

Directors welcomed the continued progress in the compilation, development, provision, and dissemination of economic data, and looked forward to further improvements, particularly with respect to oil sector data and consolidation of public sector accounts. They encouraged the authorities to start compiling data on the international investment position of the nonfinancial private sector. Directors also encouraged Saudi Arabia to participate in the IMF's General Data Dissemination System.

Directors endorsed the view that Fund technical assistance will have an important role to play in supporting Saudi Arabia's reform efforts, particularly in the areas of tax administration, the financial sector, and data collection.

Directors expressed their appreciation to the Saudi authorities for their generous development assistance to low-income countries, which has consistently exceeded the United Nations target of 0.7 percent of GNP and under the Initiative for Heavily Indebted Poor Countries.

It is expected that the next Article IV consultation with Saudi Arabia will take place on the standard 12-month cycle.

Saudi Arabia: Selected Economic Indicators, 1998-2001







(Percent change)

Production and prices


Real GDP





Real oil GDP





Real non-oil GDP





Nominal GDP (in billions of U.S. dollars)





Consumer price index






(In percent of GDP; unless otherwise indicated)

Financial variables 1/


Total revenue





Of which: oil revenue





Total expenditure





Fiscal balance (deficit -)





Change in broad money (in percent)





Interest rates (in percent) 2/






(In billions of U.S. dollars; unless otherwise indicated)

External sector







Of which


Oil and refined products










Current account





In percent of GDP





SAMA's net foreign assets 3/





In months of imports of goods and services





Real effective exchange rate (percent change)





Sources: Data provided by the authorities; and IMF staff estimates.

1/ Public finance data are on a fiscal year basis, which coincides with the calendar year.

2/ Three-month Saudi Arabian riyal deposits.

3/ Includes liquid assets, gross official reserves, and other foreign assets.

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. 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.


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