IMF Executive Board Concludes 2010 Article IV Consultation with Saudi Arabia

Public Information Notice (PIN) No. 10/117
August 27, 2010

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 12, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1


Saudi Arabia was well prepared in confronting the global crisis, reflecting lessons learnt from the mid-1980s when oil prices collapsed and the country experienced a severe banking crisis. Prudent fiscal policy provided the fiscal space to respond forcefully to the global crisis. Good supervisory and regulatory frameworks also enhanced significantly the financial sector’s resilience. In particular, countercyclical macroprudential policy became a standard feature of the central bank’s approach to risk management.

The sizeable fiscal stimulus supported economic activity and had positive spillovers as remittances increased by 20 percent to US$25 billion. Non-oil growth held up remarkably well at 3.8 percent in 2009, only ½ percentage point lower than in 2008 despite global headwinds. Lower oil prices and the large fiscal stimulus resulted in the overall fiscal balance turning from a surplus of 32½ percent of gross domestic product (GDP) in 2008 to a deficit of 6.1 percent in 2009 for the first time since 2002. Also reflecting lower oil revenues, the external current account surplus declined from 28 percent of GDP in 2008 to about 6 percent in 2009. Inflation fell substantially from its peak in 2008 (11.1 percent) reflecting lower import prices despite the large fiscal stimulus and accommodative monetary conditions.

The central bank’s operations were directed toward shoring up confidence in the banking system and stimulating credit growth. The banking system continued to show resilience by weathering the crisis. Banks remained profitable although profits declined by 10 percent in 2009, owing to an increase in loan-loss provisioning. Despite an increase in 2009, non-performing loans remain relatively low. The capital adequacy ratio at 16.5 percent provides a large buffer against adverse shocks. Despite ample liquidity, banking credit to the private sector stabilized in 2009 but this did not significantly constrain growth, owing to alternative sources of financing.

The listed corporate sector balance sheets were healthy at end-2009. Profitability (excluding the multi-investment sector) was, however, lower than in the pre-crisis years, declining by about 30 percent in 2009 compared to 2008.

The outlook remains broadly positive. Although unlikely, the key risk is a sharp decline in oil prices. Non-oil GDP is projected to increase to 4¼ percent in 2010, with continued support from an expansionary fiscal stance and a pick-up in credit. Both the fiscal and external accounts are projected to improve, reflecting an improvement in oil revenues. Inflation should remain around 5 percent in 2010, reflecting persistence in rent and food inflation, and an expansionary fiscal and accommodative monetary stance. Beyond 2010, inflation would gradually decline in line with the expected rise in global interest rates and the gradual exit from the fiscal stimulus. The impact of the sovereign debt problem in Europe has been limited so far.

Executive Board Assessment

Executive Directors noted that Saudi Arabia was well prepared to confront the global crisis owing to the adoption of good supervisory and regulatory frameworks and the pursuit of prudent macroeconomic and financial policies in previous years. Directors commended the authorities for the strong and timely policy measures, particularly the large and well-targeted fiscal stimulus and the skillful conduct of monetary policy that limited the impact of the crisis, supported solid growth of the non oil sector, and contributed to reviving global demand. The outlook for the economy is positive although vulnerabilities remain, especially from the volatility of oil prices.

Directors supported the authorities’ plans to unwind the fiscal stimulus and return spending growth to sustainable levels once economic growth becomes self-sustaining. They welcomed efforts to modernize revenue collections. Directors recommended reviewing periodically the efficiency of spending and implementing reforms aimed at casting spending in a medium term framework. They welcomed the authorities’ request for technical assistance for establishing a macro-fiscal unit. Directors supported efforts to slow the growth in domestic consumption of oil products, noting that a comprehensive reform of the subsidy system would contribute to lower fiscal costs.

Directors considered that monetary policy should continue to carefully balance supporting economic activity and controlling inflation. While the current monetary stance is appropriate, excess liquidity will need to be mopped up in case inflationary pressures emerge.

Directors supported the authorities’ decision to maintain the dollar peg which has provided a credible and stable nominal anchor and contributed to macroeconomic stability. They encouraged the authorities to continue developing their technical and operational capacity to conduct a more effective monetary policy, which could be valuable in the context of the planned monetary union. Directors noted the staff assessment that the level of the exchange rate is broadly aligned with its fundamentals, while recognizing the methodological limitations of such assessment in the case of oil exporters.

Directors considered that the banking system is fundamentally sound. Key lessons from the crisis are the importance of continued improvements in credit appraisal by banks and more transparency and disclosures, especially by large conglomerates. While public specialized credit institutions played a key role during the crisis, their activities should be reviewed post-crisis. Directors welcomed the recent improvement in the credit outlook, which is critical for future economic growth. They viewed the development of a local bond market as important for diversifying the economy’s sources of funding and enhancing its resilience.

Directors commended the authorities for their leadership role in stabilizing oil markets and for persevering with their capacity expansion plans despite record low prices and production of oil.

Directors acknowledged that providing jobs for a fast growing population through high and sustainable growth in the non-oil sector is the main medium-term challenge. Achieving this goal will involve a multifaceted approach with structural reforms in various sectors of the economy, including the labor market, continued progress with education reform, training, and improving the business climate. Addressing gaps in the framework governing insolvency and creditor rights would help ease small and medium-sized enterprises’ financing constraints.

Directors welcomed the authorities’ determination to continue to improve the quality and coverage of statistical data and supported their request for IMF technical assistance.

Directors commended the authorities for their strong efforts in combating money laundering and the financing of terrorism and encouraged them to continue these efforts in light of the recommendations of the recent assessment by the Financial Action Task Force.

Saudi Arabia: Selected Economic Indicators, 2006–10

        Prel. Proj.
  2006 2007 2008 2009 2010
  (Percentage change)

Production and prices


Real GDP

3.2 2.0 4.2 0.6 3.7

Real oil GDP

-0.8 -3.6 4.2 -6.7 2.3

Real non-oil GDP

5.1 4.7 4.3 3.8 4.3

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

357 385 477 376 434

Consumer price index

2.3 4.1 9.9 5.1 5.2
  (In percent of GDP)

Fiscal and Financial variables


Central Government revenue

50.8 44.6 61.6 36.2 39.8

Of which: oil revenue

45.3 39.0 55.1 30.8 35.0

Central Government expenditure

29.8 32.3 29.1 42.3 41.0

Fiscal balance (deficit -)

21.0 12.2 32.5 -6.1 -1.2

Non-oil primary balance (in percent of non-oil GDP)

-48.2 -55.8 -57.7 -68.7 -71.0

Change in broad money (in percent)

19.3 19.6 17.6 10.7 9.2
  (In billions U.S. of dollars)

External sector



211.3 233.5 313.9 192.6 228.9

Of which: Oil and refined products

188.5 205.6 281.4 163.3 195.6


-63.9 -82.7 -101.6 -87.2 -108.6

Current account

99.1 93.5 132.5 22.8 29.0

Currrent account (in percent of GDP)

27.8 24.3 27.8 6.1 6.7

SAMA’s net foreign assets

221.4 301.3 438.5 405.9 429.8

SAMA's net foreign assets (in months of imports

18.1 20.1 32.2 25.3 24.8

of goods and services)


Real effective exchange rate (percent change)

-0.4 -2.9 2.3 8.2

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

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. An explanation of any qualifiers used in summings up can be found here:


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