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Saudi Arabia Addressing Jobs, Housing as Economy Rebounds

Shopping mall in Riyadh: Saudi Arabia is looking beyond oil to create job opportunities for its growing population (photo: Ammar Abd Rabbo/ABACAUSA)

ANNUAL POLICY CONSULTATION

Saudi Arabia Addressing Jobs, Housing as Economy Rebounds

IMF Survey online

September 21, 2011

  • High oil revenues have created strong external and fiscal surpluses
  • Robust economy provides an opportunity to advance social priorities
  • Challenge is to ensure social initiatives do not compromise fiscal sustainability

Higher oil prices—together with strong support from public spending—have helped Saudi Arabia’s economy rebound strongly from the global economic crisis.

With GDP projected to grow 6.5 percent in 2011, Saudi Arabia is working to consolidate its gains, focusing on economic diversification and sustained growth while seeking to help stabilize the international oil market. The authorities are also initiating new measures to address the economic issues facing this fast-growing country, such as high youth unemployment and growing housing demand.

To mark the first time the IMF’s annual assessment of Saudi Arabia’s economy has been published, IMF mission chief David O. Robinson sat for an interview.

IMF Survey online: What is the near-term outlook for the Saudi economy?

Robinson: The near-term outlook is very strong. There is a positive impact from higher oil prices, which started recovering in 2010 from their sharp drop the previous year. In addition, as unrest erupted in Libya, Saudi Arabia announced that it would increase its oil production in order to offset any shortfall in the market, and production has increased substantially in recent months. So oil revenues are increasing from both price and volume effects.

These high oil revenues have translated into a strong surplus in the fiscal accounts and a current account surplus of 20 percent of GDP. With no official external debt and reserves that amount to nearly 2 years of import cover, the authorities can afford to invest in social initiatives.

IMF Survey online: What risks does the economy face?

Robinson: The key external risk to the economy is a large and sustained drop in oil prices. When oil prices fell sharply in the early 1980s and then remained low, Saudi Arabia ran fiscal deficits for almost twenty years, accumulating government debt of more than 100 percent of GDP. The economy is somewhat different now, with substantial buffers built up over the last several years. The authorities were able, for example, to respond in 2009 to the sharp fall in the price of oil as global demand fell by raising public spending levels, which provided important support for the private sector. But insofar as it accounts for 80-90 percent of fiscal revenues, oil will always remain a key risk.

More generally, there is also a risk of a pickup in inflation. Inflation has so far remained below 5 percent—despite pressures from imported food prices, which carry significant weight in consumer spending. Increased fiscal spending and high liquidity in the banking system also pose an inflation risk.

IMF Survey online: The government unveiled earlier this year a package of fiscal measures aimed at creating jobs for youth, strengthening the social safety net, and resolving the housing shortage. How serious a problem is unemployment?

Robinson: Unemployment has been around 10 percent among Saudi nationals for a number of years. And when you look at the structure of it, it is very much a youth issue with a gender dimension—there’s almost full employment of men aged 29 and older. High population growth rates—half the population is below the age of 15—and increasing participation of women in the labor force will only add to pressures to address the unemployment problem.

It is not that the economy has not created jobs. But Saudi Arabia—like many of the other Gulf Cooperation Council (GCC) economies—has a large expatriate labor component that has grown very rapidly over the past decade. While earlier in the country’s development, the reliance on expatriate labor reflected a shortage of skilled labor, this is less true now. Indeed, spending on education has risen sharply. There have been many initiatives to expand existing universities—particularly in the areas of science and technology—as a way of getting a higher skill set. The basic issue now is how to create growth in high-productivity, high-wage sectors that can absorb increasing numbers of educated Saudis.

IMF Survey online: The fiscal package also contains measures to address the country’s housing shortage, which has been a perennial problem.

Robinson: A growing population and other factors have exacerbated the housing shortage, especially for low-and middle-income households. Until very recently, access to housing finance has been tightly constrained with very little mortgage financing available. Some subsidized loans were available through the Real Estate Development Fund (REDF), a state-funded entity. But they had a very long waiting list, and loan amounts were not necessarily sufficient to cover construction costs. As part of the fiscal package that was introduced earlier this year, the funding to the REDF was increased, and the loan amount raised. In addition, new mortgage legislation is expected to be passed soon, which should significantly improve the housing finance framework.

The fiscal package is also trying to address shortages in the available stock of housing. A Ministry of Housing has also been created which will deal with housing issues in the Kingdom. So the housing issue is being addressed on both the demand and the supply sides. We hope that the combination of these initiatives helps resolve the issue.

IMF Survey online: Are energy prices an issue?

Robinson: Petroleum product prices in Saudi Arabia are not only among the lowest in the world, they are lower than those of other oil producers in the region. This is contributing to the very rapid increase in domestic consumption of energy products both for household and industrial use. Allowing prices to rise—with an appropriate mechanism in place to support lower income groups—would encourage greater energy efficiency and the government could use the additional revenue on something else, such as education or health.

IMF Survey online: Has there been progress on a GCC-wide value added tax (VAT)?

Robinson: The GCC-wide VAT has been under discussion for several years, and there is a strong rationale for such a tax. It would introduce a modern and efficient tax system, broaden the tax base, and provide an opportunity to remove some of the smaller taxes. It would also be an important step forward in creating a tax base that’s not directly linked to the oil sector.

The GCC countries are working closely together to study this issue. There are working-level agreements on items such as the list of exempt goods and the basic structure of the tax, but the implementation timeframe is as yet uncertain.

IMF Survey online: What is the country doing to encourage private sector development and lessen its dependence on oil?

Robinson: Saudi Arabia has—at the current pace of production and with current technology—proven reserves of another 70 to 100 more years of oil production. So oil will be a big part of the economy for the foreseeable future. But, in addition to concern about dependence on a single commodity, the oil sector does not create enough employment opportunities for the growing population.

Initiatives to encourage economic diversification have been under way for many years and Saudi Arabia’s business climate is generally ranked fairly high. We are seeing some expansion in areas such as services and, to a lesser degree, manufacturing. Trade patterns are also shifting, with strong growth in trade with Asia as well as with the Middle East that can add additional dynamism to the economy. Integration initiatives within the GCC can also provide opportunities for growth.


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