Public Information Notice: IMF Concludes 2003 Article IV Consultation with Saudi Arabia

December 5, 2003

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 10, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1


In 2002, overall real growth slowed. Oil output dropped following OPEC-mandated production cuts, and real non-oil GDP growth picked up modestly to 3.6 percent as private investment continued to be weak. Inflation, however, remained negative and involuntary unemployment stood at about 9 percent.

The fiscal position weakened despite some strengthening of fiscal effort. The overall central government budget deficit increased to 6 percent of GDP as oil revenues fell and non-oil revenues showed only a small increase. However, the non-oil primary deficit fell in 2002. Government domestic debt rose to 97 percent of GDP by end-2002. Further, although the external current account registered a comfortable surplus equivalent to 6 percent of GDP, reflecting larger export receipts and little import growth, Saudi Arabian Monetary Agency's (SAMA) net foreign assets fell to the equivalent of nine months of prospective imports of goods and services due to larger private capital outflows.

Domestic liquidity grew strongly in 2002. Broad money grew by 15 percent as compared with 5 percent in 2001, partly on account of an increased monetization of the fiscal deficit, as well as loans to the private sector and public enterprises. The financial sector continued to perform well and the stock market, bucking the trend in international equity markets, registered gains. The average riyal-U.S. dollar interest rate differential widened in 2002 due to the faster drop in the rates on dollar-denominated assets. In addition, reflecting the depreciation of the U.S. dollar against other major currencies, the Saudi riyal depreciated in real effective terms by about 4 percent.

Progress on structural reforms during 2002 was focused mainly on the establishment of the legal and institutional framework, for promoting private sector investment including foreign direct investment. Thirty percent of the shares of the Saudi Telecommunication Company (STC) were sold to private investors last December, the privatization strategy listing 20 activities targeted for privatization was approved in June 2002, and the "negative list" for FDI was shortened. Further, the Capital Markets Law was approved in June 2003. In an important step to streamline implementation of reforms, several ministries were merged and restructured in May 2003. Steps continue to be taken to improve the employability of Saudi workers through vocational training and the establishment of specialized educational facilities, while the Saudiization policy was clarified to ensure maintenance of competitiveness. Following the introduction of the Gulf Cooperation Council common external tariff, rates were reduced from 12 percent to 5 percent for 92 percent of imported items; progress continues to be made toward a currency union by 2010, including by formally pegging the currencies of GCC countries to the U.S. dollar at the start of 2003.

Oil prices have firmed in 2003 and Saudi oil output in the first -half of 2003 has been higher than in recent years; and the macroeconomic position is expected to be better than in 2002. The fiscal accounts would likely be in balance and public debt is projected to decline. The external current account surplus is expected to be higher than in 2002, and SAMA's net foreign assets could rise to the equivalent of 10 months of prospective imports. Real non-oil GDP growth is expected to show a pickup, domestic liquidity is projected to fall towards more normal levels with the improving fiscal balance, and credit to the private sector is expected to moderate.

Executive Board Assessment

Executive Directors broadly agreed with the thrust of the staff appraisal. They commended the Saudi authorities for continuing to implement a comprehensive structural reform and fiscal consolidation strategy, aimed at fostering economic diversification and private sector-led growth, alleviating unemployment, and reducing the vulnerability to oil price fluctuations. They welcomed the strengthening of the legal and institutional foundations for the growth of the financial and capital markets, in particular the approval of the Capital Markets and Insurance Laws. Directors encouraged the authorities to continue to pursue structural reforms, supported by tight demand management policies.

Directors endorsed the authorities' plans to eliminate budget deficits and reduce public debt over the medium term, by taking decisive measures on both the revenue and expenditure fronts, in particular by mobilizing non-oil revenues. In this context, they welcomed the early implementation of the new corporate income tax as an important step toward tax system modernization. Directors noted that introducing excises on selected consumer goods could compensate in part for the loss of customs revenues arising from the adoption of the common external tariff of the Gulf Cooperation Council.

Directors emphasized that achieving a balanced budget over the medium term will call for comprehensive expenditure restraint and skillful expenditure management. They supported the authorities' intention to reduce discretionary expenditures, further reduce subsidies in a transparent and coherent framework, enforce a cap on the wage bill, and reduce government employment.

Directors supported the authorities' commitment to continue to implement fiscal policy in the context of a medium-term macroeconomic framework, which is flexible and robust enough to weather unforeseen shocks and incorporating realistic oil price assumptions, thus able to minimize the procyclicality of fiscal policy. In this connection, Directors considered that securing a declining trend in the non-oil primary deficit relative to non-oil GDP should be a key goal, as it will help cushion the impact of oil revenue volatility and foster a more diversified revenue base. A few Directors also recommended that the authorities consider implementing a mechanism aimed at preserving the oil wealth for future generations. However, a few other Directors pointed to the mixed success of similar mechanisms in other countries, and noted that a prudent and consistent program of national savings and investment could be more effective and simpler to administer.

Directors commended the authorities for speeding up the implementation of the structural and institutional reforms that are needed for a sustained increase in private investment, including foreign direct investment. Implementation of the Capital Markets Law and the Insurance Law, together with steps to reform and privatize state enterprises, will lay the legislative and regulatory foundations for capital market deepening. Directors welcomed recent steps to give greater autonomy to, or privatize, state enterprises; they encouraged the authorities to make further progress in this area.

Directors commended the authorities for their effective supervision of the banking system, which has resulted in the development of well-managed, profitable, and financially sound institutions. The ongoing Financial Sector Assessment Program (FSAP) will help identify a framework for any further needed reform. The improved legal framework, the development of new instruments, and the opening of the market to foreign banks should help to deepen the financial market and stimulate financial sector growth. Directors welcomed the establishment under the supervision of the Saudi Arabian Monetary Agency of a framework for combating money laundering, and the commissioning of a Financial Intelligence Unit in the Ministry of Interior and an inter-ministerial committee to coordinate anti-money laundering measures.

Directors commended the authorities' commitment to address unemployment through a flexible application of the Saudiization process and greater focus on training. Improvements in the skills of local workers should go hand-in-hand with greater market-based flexibility in wages, so as to integrate the currently segmented labor market. In this respect, the envisaged revised Labor Law, providing for greater flexibility in employer-employee relationships, will be helpful. Some Directors encouraged the authorities to strengthen female participation in the labor market.

Directors endorsed the peg of the riyal to the U.S. dollar under the prevailing open exchange and trade system. A continued prudent monetary policy, supported by a sound financial system and tight fiscal policy will help to ensure the stability of the peg and orderly private sector credit growth without inflation. Directors welcomed the considerable progress that has already been made toward economic and financial integration among GCC countries. In that vein, they encouraged the authorities to develop the policy coordination mechanisms and convergence criteria for key macroeconomic variables in order to ensure a smooth transition to monetary union by 2010. They also welcomed the recent trade agreement with the European Union, and looked forward to Saudi Arabia's early accession to the World Trade Organization. They noted with appreciation Saudi Arabia's role in promoting stability in the international oil market.

Directors commended the authorities for improving the coverage, quality, and timeliness of real sector, external sector, and monetary statistics, and the compilation, provision, and dissemination of economic data. They encouraged the authorities to participate in the Fund's General Data Dissemination System. Some Directors observed that consolidation of the fiscal accounts would help strengthen the fiscal policy framework, and that greater dissemination of information to the public would improve transparency, promote better decision-making by economic agents, and enhance resource allocation. Directors supported Fund technical assistance to improve Saudi Arabia's database.

Directors expressed their appreciation to the Saudi authorities for their significant development assistance to low-income countries, including through the Heavily Indebted Poor Countries Initiative.

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

Saudi Arabia: Selected Economic Indicators, 1999-2002









(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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