Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Saudi Arabia

September 27, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the Article IV consultation with Saudi Arabia may be made available at a later stage if the authorities consent.

Public Information Notice (PIN) No. 06/108
September 27, 2006

On August 28, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1


Saudi Arabia's economic performance in 2005 was impressive as a result of record high oil prices, increased oil production, sustained structural reforms, and continued macroeconomic stability. Real GDP growth was strong (6.6 percent) with oil and non-oil GDP growing at 5.9 percent and 6.8 percent, respectively. Inflation remained very low at 0.7 percent, reflecting mainly the very open and flexible labor market and the open trade system. The Saudi authorities continued to respond constructively to alleviate the pressures created by the fast growing global demand for oil by increasing oil production, implementing an ambitious investment plan to expand the country's sustainable gross production capacity to 12.5 million barrels per day by 2009, and expanding its refining capacity by 44 percent over the next five years.

External and fiscal developments were dominated by the high world market oil prices. The external current account surplus increased by 8.6 percentage points to reach 29.3 percent of GDP in 2005. The central government overall surplus almost doubled to 18.4 percent of GDP, despite a sharp increase in expenditures. A part of the surplus was used to reduce central government debt by 25 percentage point to 39.6 percent of GDP. The Saudi Arabian Monetary Agency's (SAMA) net foreign assets increased by $66 billion to $150.5 billion, an equivalent of around 16 months of imports of goods and services.

Strong economic fundamentals, high investor optimism, and a rapid expansion of credit to the private sector (39 percent) helped sustain the stock market boom in 2005. The Tadawul All Share Index increased by 104 percent in 2005, and further by 24 percent to reach its peak on February 25, 2006. Thereafter, the index declined by about 45 percent through end-May 2006 (33 percent below the beginning of the year level), but still remained at 3½ times above its end-2002 level. The banking sector performance strengthened further in 2005, partly due to income from stock market-related activity. SAMA introduced measures to limit bank credit exposure to the equity market and strengthened oversight. Despite increases in international interest rates, SAMA did not revise the benchmark interest rates from February to June 2006, but increased the repo and reverse repo rates by 20 basis points on June 29, 2006, broadly in line with the latest increase in the Fed funds rate. The Saudi riyal appreciated by 3.4 percent in real effective terms during the 12-month period through March 2006, reflecting the movement of the U.S. dollar against other major currencies.

Prospects for 2006 are very favorable in light of the expected sustained increase in global demand for oil. Real GDP growth is expected to remain robust at almost 6 percent despite lower oil sector growth (1.6 percent). Inflation in the first quarter of 2006 was about 2 percent (on an annual basis) but is projected to be 1 percent for 2006 as a whole. Both the external current account and the central government overall fiscal balances are expected to register substantial surpluses of 31.1 percent of GDP and 17.2 percent of GDP, respectively. Reflecting the government policy to use a part of the fiscal surplus to reduce public debt, central government debt is projected to decline by around 23 percentage points to 17 percent to GDP. SAMA's net foreign assets are projected to increase further to $167 billion, equivalent to 15 months of imports of goods and services.

Steady implementation of structural reforms has improved the investment climate and paved the way for Saudi Arabia's accession to the WTO in December 2005. In order to sustain the momentum, privatization of government activities is being advanced steadily and a large number of mega projects in the non-oil sector are being implemented through public-private partnerships. The Saudiization policy, aimed at creating private sector employment for Saudi nationals, continued to be applied in a flexible manner, thus contributing to wage and price stability in an environment of accelerating economic growth.

Executive Board Assessment

Executive Directors commended the Saudi authorities for maintaining sound macroeconomic policies that, along with the structural reforms implemented over the past several years, have invigorated private sector growth. Large fiscal and current account surpluses have contributed to a rapid reduction of public debt and build up of a large external assets position, reducing Saudi Arabia's vulnerability to oil price fluctuations. Building on these impressive achievements, Directors encouraged the authorities to sustain the broad-based expansion of the non-oil economy in order to create sufficient employment opportunities for the rapidly growing Saudi labor force. This will involve effective utilization of the growing oil revenues to further promote private sector growth by increasing expenditure in areas where social and private returns are high, along with continued structural reforms.

Directors commended the authorities' constructive role in support of oil market stability by increasing oil production and implementing an ambitious investment plan to expand production and refining capacity. They also welcomed Saudi Arabia's active participation in the Joint Oil Data Initiative as part of international efforts in providing accurate and up-to-date petroleum production and consumption data.

Directors encouraged the steadfast implementation of the authorities' growth-promoting initiatives, including public social and infrastructure investment plans and public-private partnerships in developing mega projects, noting that these are also contributing to moderating global current account imbalances. Going forward, they welcomed the plan to increase further the resources directed to social sector and investment priorities, while underscoring the importance of efficient resource utilization by strengthening implementation, evaluation, and monitoring capacity. At the same time, the authorities' balanced approach in utilizing higher oil revenues for both higher spending and maintaining a fiscal surplus, with the surplus used for reducing government debt, will strengthen private sector confidence and create fiscal space that will help to sustain higher social spending in the long run. Directors encouraged the authorities to work toward introducing a market-based mechanism for the domestic pricing of petroleum products.

To enhance further fiscal transparency and the efficient use of fiscal resources, Directors recommended that the authorities formalize a medium-term fiscal framework and include all future allocations within the annual budgets. They welcomed the authorities' request for Fund technical assistance in the areas of expenditure management and broadening of the non-oil revenue base. They also looked forward to the consideration of options for establishing a fund for future generations or an asset management company to help ensure the efficient management of the large fiscal surpluses and long-term fiscal sustainability.

Directors commended the authorities for their sound financial sector policies. These include the preventive tightening of prudential regulations and effective supervision of the banking system; efforts to strengthen market practices and enhance transparency and accountability of market participants; and a firm commitment to leave stock prices to market forces without direct intervention from the government. The steady liberalization of the financial system through granting of licenses to foreign banks and securities companies is a keystone to improve competition and financial innovation, and the Saudi financial system has responded positively to meet the financing needs of the large projects under consideration. Directors nevertheless encouraged efforts to deepen further the capital market through increasing the supply of corporate bonds and modifying the legal framework to allow for the development of a mortgage market. They also encouraged the authorities to keep up their commendable efforts in strengthening further the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework.

Directors noted that monetary policy continues to be consistent with the pegged exchange rate regime and has contributed to Saudi Arabia's remarkable degree of price stability. They saw merit in the authorities' decision to keep the current pegged exchange rate regime unchanged in the period leading to the Gulf Cooperation Council (GCC) monetary union in 2010, while keeping an open mind about the choice of the exchange rate regime under the prospective monetary union. Given the large terms-of-trade improvement, some Directors pointed out that the authorities should allow for adjustments in the real exchange rate.

Directors welcomed the improvements in the investment climate, which have helped promote record high foreign direct investment inflows and a large number of new projects, as well as Saudi Arabia's accession to the WTO. The significant progress under the authorities' diversification strategy is having a positive impact on job creation. Sustained structural reforms to support non-oil private sector expansion will nevertheless remain key to solving the unemployment problem. In this context, Directors encouraged the authorities to further focus on improving the quality of the national labor force by strengthening education and training programs for nationals. In view of the booming private sector and the massive infrastructure projects, continued flexibility in the implementation of the Saudiization policy will also be needed.

Directors welcomed the authorities' decision to participate in the Fund's General Data Dissemination System. They encouraged the authorities to address the outstanding weaknesses in the statistical area with the help of Fund technical assistance, and to accelerate the technical work toward harmonization of the new regional statistics for the successful implementation of the planned GCC monetary union by 2010.

Directors expressed their appreciation for Saudi Arabia's significant development assistance to low-income countries, including through the Heavily Indebted Poor Countries Initiative and their contribution to the Exogenous Shocks Facility.

Saudi Arabia: Selected Economic Indicators, 2002-05

2002 2003 2004 2005

  (Percent change)

Production and prices


Real GDP

0.1 7.7 5.3 6.6

Real oil GDP

-7.5 17.2 6.7 5.9

Real non-oil GDP

3.7 3.6 4.6 6.8

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

189 215 251 310

Consumer price index

0.2 0.6 0.4 0.7
  (In percent of GDP; unless otherwise indicated)

Fiscal and Financial variables


Central Government revenue

30.1 34.5 41.8 48.6

Of which: oil revenue

23.5 28.7 35.2 43.5

Central Government expenditure

36.1 33.3 32.1 30.2

Fiscal balance (deficit -)

-5.9 1.2 9.6 18.4

Change in broad money (in percent)

15.2 8.2 19.1 11.4

Interest rates (in percent) 1/

2.2 1.6 1.7 3.8
  (In billions of U.S. dollars; unless otherwise indicated)

External sector



72.4 93.1 125.8 181.2

Of which: Oil and refined products

63.7 82.1 110.6 162.2


-29.7 -33.9 -41.1 -54.6

Current account

11.9 28.1 52.0 90.8

Current account (in percent of GDP)

6.3 13.1 20.7 29.3

SAMA's net foreign assets

42.0 59.6 86.5 150.5

SAMA's net foreign assets (in months of imports of goods and services)

8.5 10.1 11.9 16.3

Real effective exchange rate (period average percent change)

-2.8 -8.5 -6.7 -2.5

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

1/ Three-month Saudi Arabian riyal deposits. Period average.

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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