IMF Executive Board Concludes 2009 Article IV Consultation with Saudi Arabia

Public Information Notice (PIN) No. 09/109
August 18, 2009

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.

On July 13, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1


Saudi Arabia confronts the current global crisis with stronger fundamentals compared with previous downturns. In recent years, the authorities consolidated their macroeconomic position, strengthened the financial sector, and implemented structural reforms to boost private-sector led growth. The consolidation of Saudi Arabia’s economic position has not gone unnoticed: Saudi Arabia was ranked first among Arab countries for four consecutive years and 16th globally by the latest World Bank’s Doing Business Report.

Against this backdrop, the economy delivered another strong performance in 2008 despite global headwinds. Real GDP, buoyed by a sustained broad-based expansion in the non-oil sector (4.3 percent) and higher oil production, grew by 4.4 percent. Inflation, after accelerating in the first half of the year (11.1 percent in July year-on-year), subsided to 5.2 percent y/y in April 2009 owing to weaker demand and lower import prices.

High oil prices contributed to record fiscal and external current account surpluses in 2008, despite an expansionary fiscal stance and a surge in imports. Part of the fiscal surplus was used to repay domestic debt, which fell by about 5 percentage points to about 13½ percent of GDP. Foreign direct investment (FDI) inflows remained high at about US$23 billion despite the global crisis and SAMA’s NFA rose to US$438.5 billion (93 percent of GDP).

Monetary policy contended with rising inflation in the first half of 2008 and the fallout from the intensification of the global crisis in the second half. The authorities responded forcefully by lowering reserve requirements, cutting policy rates, and providing liquidity and deposit guarantees. Despite a slowdown in credit in the fourth quarter, broad money and private sector credit grew by 18 percent and 27 percent, respectively.

The banking system has weathered the global crisis. It remains profitable and well capitalized with low nonperforming loans. However, the stock market tumbled by 46 percent in the last quarter of 2008, shedding half its value.

The outlook remains broadly positive. Non-oil GDP growth—the appropriate measure of job-creating economic activity in oil-exporting countries―is projected to grow by 3.3 percent in 2009 supported by an expansionary fiscal stance. However, lower oil production would lead to a contraction in overall GDP of almost 1 percent for the first time since 1999. Inflation is expected to retreat to about 4.5 percent. The fiscal and external accounts are projected to be in surplus, albeit at a much lower level, owing to a fall in oil revenues and the expansionary fiscal stance. There are some downside risks associated with the speed and depth of the global recovery and the normalization of global financial markets.

Executive Board Assessment

Executive Directors noted that Saudi Arabia confronts the current global crisis from a position of strength, reflecting a track record of prudent macroeconomic policies and structural reforms that have enhanced the economy’s resilience. Although overall real GDP is projected to contract slightly in 2009 owing to lower oil demand, the non-oil sector expansion continues to be robust and inflation is declining. Directors considered that the most important short-term challenges are to preserve financial sector stability and mitigate the domestic impact of the global recession.

Directors welcomed the measures taken to enhance bank liquidity and stabilize the inter-bank market. They commended efforts to strengthen further the financial regulatory and supervisory frameworks, including measures to improve banks’ risk management systems, implement remaining Financial Sector Assessment Program (FSAP) recommendations, and assess the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework. These measures have helped the banking system to remain profitable and well-capitalized. Nevertheless, Directors encouraged continued vigilance in identifying and responding to any evolving risks. They underscored the importance of regular stress testing of the banking system, and encouraged the authorities to update the resolution framework for financial and non-financial institutions, further enhance transparency and disclosure by the corporate sector, and review institutional mechanisms for cross-border and cross-sector supervision.

Directors considered that the exchange rate peg to the U.S. dollar has provided a credible and stable nominal anchor and contributed to macroeconomic stability. Directors noted the staff’s view that the likely undervaluation of the Saudi riyal in 2008 was temporary and expected to close over the medium term. Some Directors encouraged the authorities to consider a more flexible exchange rate regime for the Gulf Cooperation Council (GCC) monetary union, in consultation with other members of the union. Directors encouraged progress toward the monetary union by developing operational responsibilities and the governance structure of the future central bank, harmonizing macroeconomic statistics, and establishing an efficient payments system.

In view of the policy constraints posed by the peg to the U.S. dollar, Directors saw fiscal policy as key to macroeconomic stability and non-oil growth. They commended the authorities for their decisive fiscal response to mitigate the impact of the global recession on economic activity. The fiscal stimulus package, which was the largest relative to GDP among G-20 countries, appropriately focused on capital spending and would contribute both to diversified domestic growth and the global recovery. At the same time, Directors stressed that fiscal policy would need to be managed flexibly to safeguard medium-term sustainability, and that spending should be adjusted once the recovery has taken firm hold.

Directors commended the authorities for their leadership role in stabilizing world oil markets by maintaining their capacity expansion plans despite lower oil prices. They encouraged the authorities to continue basing their capacity expansion decisions on medium to long-term demand conditions.

Directors supported the authorities’ efforts to implement second-generation reforms in the judicial, education, and financial sectors, aimed at further improving the environment for private sector development. They welcomed the continued liberalization of the trade regime, consistent with the authorities’ commitment to a free and open trade system. Directors commended the authorities for the substantial assistance extended to developing countries, including their active support for the Heavily Indebted Poor Countries (HIPC) initiative and their contributions to the “energy for the poor” initiative.

Saudi Arabia: Selected Economic Indicators, 2005–09

  2005 2006 2007 2008 2009
  (Percentage change)

Production and prices


Real GDP

5.6 3.2 3.3 4.4 -0.9

Real oil GDP

6.2 -0.8 0.5 4.8 -10.3

Real non-oil GDP

5.2 5.1 4.7 4.3 3.3

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

316 357 384 469 377

Consumer price index

0.6 2.3 4.1 9.9 4.5
  (In percent of GDP)

Fiscal and Financial variables


Central Government revenue

48.0 50.8 44.7 62.6 40.6

Of which: oil revenue

42.7 45.3 39.1 55.9 35.0

Central Government expenditure

29.6 29.8 32.4 29.6 40.2

Fiscal balance (deficit -)

18.4 21.0 12.3 33.0 0.4

Non-oil primary balance

-46.2 -48.2 -55.8 -58.3 -63.6

Change in broad money (in percent)

11.6 19.3 19.6 17.6 8.5

Interest rates (in percent) 1/

3.8 5.0 4.8 3.1 1.1
  (In billion U.S. dollars)

External sector



180.8 211.3 233.5 313.9 188.0

Of which: Oil and refined products

161.8 188.5 205.6 281.4 159.1


-54.6 -63.9 -82.7 -101.6 -89.5

Current account

90.1 99.1 93.5 134.2 14.1

Currrent account (in percent of GDP)

28.5 27.8 24.3 28.6 3.7

SAMA’s net foreign assets

150.5 221.4 301.3 438.5 475.1

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

15.7 18.1 20.1 31.6 32.4

of goods and services)


Real effective exchange rate (percent change)

-2.7 -1.6 -2.8 2.3

Sources: Data provided by the authorities; and IMF staff estimates and projections.
1/ Three-month Saudi Arabian riyal deposits. Period average at June 25, 2009.

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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