## cr17316 — Saudi Arabia: 2017 Article IV Consultation (excerpt)

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### Executive Board assessment — macro and policy stance
- Non-oil growth expected to pick up in 2017; overall GDP growth near zero in near term with medium-term strengthening as structural reforms are implemented.
- Directors endorsed ambitious reform agenda; emphasized proper calibration and sequencing of reforms.
- Fiscal stance and revenue reforms:
  - Large, sustained, and well-paced fiscal adjustment needed over the medium term.
  - Most Directors: fiscal space exists to allow more gradual consolidation than in the Fiscal Balance Program (FBP); a few warned backloading risks.
  - Welcomed excises on tobacco and carbonated/energy drinks and authorities’ commitment to introduce VAT at the beginning of 2018; timetable potentially challenging.
  - Recommendation: keep exemptions and zero-rated items to a minimum.
- Energy price reform:
  - Welcomed planned further energy price reforms; supported planned household allowance to cushion low- and middle-income households.
  - Several Directors suggested more gradual phasing of price increases.
- Fiscal framework and spending composition:
  - Welcomed improvements in fiscal framework and transparency; supported planned public expenditure review.
  - Emphasized gradually reducing the wage bill, strengthening social safety nets, and improving capital spending efficiency.
- Structural reforms, privatization, and labor market:
  - Progress in removing obstacles to private sector growth; privatization and PPP plans welcomed with caution to guard fiscal risks.
  - Increasing Saudi nationals’ employment in private sector essential; need to strengthen education and training and clearly communicate limited public sector employment prospects.
  - Called for further steps to boost female labor force participation and employment.
- Financial sector and external policy:
  - Banks are well regulated and supervised; SAMA steps to strengthen regulatory/supervisory frameworks and develop macroprudential framework and financial safety net welcomed.
  - Scope to strengthen SAMA liquidity management framework.
  - Welcomed AML/CFT strengthening and finalization of risk assessments.
  - Exchange rate peg to the U.S. dollar remains appropriate; continued fiscal adjustment crucial to support the peg; merit seen in periodic review.
  - Encouraged authorities to address data gaps and subscribe to the Special Data Dissemination Standard.

### Key issues, outlook, and risks
- Context and reform program:
  - Vision 2030 launched April 2016 to diversify away from oil, raise private sector jobs for Saudis, and improve government effectiveness and accountability.
  - National Transformation Program 2020 (NTP) launched June 2016; Fiscal Balance Program 2020 (FBP) launched December 2016; governance with KPIs and National Center for Performance Management (Adaa) established.
- Oil production and external developments:
  - Cut to around 10 mb/d during January–April 2017, a decline of 3.4 percent from same period in 2016; OPEC+ agreement extended through first quarter of 2018.
- Outlook and risks:
  - Non-oil growth expected to pick up in 2017; overall GDP growth close to zero due to decline in oil production; medium-term strengthening with reforms.
  - Main risks: uncertainty about future oil prices and economic impact of ongoing reforms.
- Staff policy priorities:
  - Fiscal: large, sustained, well-paced adjustment; introduce VAT successfully; gradually raise energy and water prices with protection for the less well-off; improve spending composition; strengthen fiscal framework.
  - Growth/employment: reduce obstacles to private sector growth and exports; create private sector jobs for Saudis; increase female participation; use well-targeted fiscal measures to support structural reforms.
  - Financial sector: banks well positioned; develop domestic capital markets.
  - External: exchange rate peg remains appropriate.

### Fiscal and macro-financial developments — selected findings and key statistics
- Fiscal outcomes and balance:
  - Non-oil primary deficit declined to 44.7 percent of non-oil GDP in 2016 from 49.8 percent in 2015.
  - Spending contraction of 6.4 percent in 2016 led by sharp fall in capital expenditures; included settlement of arrears from 2015 equal to 3.3 percent of GDP.
  - Fiscal deficit increased to 17.2 percent of GDP in 2016 from 15.8 percent in 2015 due to sharp fall in oil revenues despite increased non-oil revenues.
  - Government net financial assets declined to 17.1 percent of GDP in 2016 (35.9 percent of GDP in 2015).
  - 2017Q1 deficit shrank considerably relative to 2016Q1 due to higher oil revenues and lower spending; government employee allowances reinstated in April 2017 after cuts in October 2016.
- Real sector and non-oil growth:
  - Real GDP growth slowed to 1.7 percent in 2016 from over 4 percent in 2015.
  - Non-oil growth near-zero in 2016 compared to 3.2 percent in 2015; non-oil output estimated below potential; construction, wholesale, and retail most affected.
  - Profits of listed non-financial companies fell by 6 percent (y/y) in 2016.
- Financial conditions and reforms:
  - Debt Management Office established; 2016 deficit financed by asset drawdown and debt issuance (domestic and external).
  - SAMA relaxed loan-to-deposit ratio and eased LTV for first home mortgage lending (from 70 to 85 percent).
  - National Financial Stability Committee set up; SAMA publishing Financial Stability Reports.
  - Reforms to develop equity and debt markets: foreign investment limits relaxed, Tadawul settlement moved to T+2, Nomu parallel equity market established, government listed bonds to increase liquidity.

- Selected indicators (as presented in source)
  - Real GDP (annual percent change): 5.4 2.7 3.7 4.1 1.7 0.1
  - Real oil GDP (annual percent change): 5.1 -1.62.1 5.3 3.8 -1.9
  - Real non-oil GDP (annual percent change): 5.5 6.44.9 3.2 0.2 1.7
  - Nominal GDP (US$ billions): 736 747756 654 646 692
  - Central Government revenue (percent of GDP): 45.2 41.3 36.8 25.0 21.4 25.0
  - Of which: oil revenue (percent of GDP): 41.5 37.0 32.2 18.2 12.7 17.5
  - Central Government expenditure (percent of GDP): 33.2 35.5 40.2 40.7 38.6 34.3
  - Fiscal balance (deficit - , percent of GDP): 12.0 5.8 -3.4-15.8-17.2-9.3
  - Non-oil primary balance (percent of non-oil GDP): -60.1-59.4-63.6-49.8-44.7-39.6
  - Broad money (annual percent change): 13.910.911.92.50.81.7
  - Exports (US$ billions): 388.4 375.9 342.5 203.5 182.3 208.2
  - Current account (US$ billions): 164.8 135.4 73.8 -56.7 -24.9 1.3
  - Current account (percent of GDP): 22.4 18.1 9.8 -8.7-3.90.2
  - SAMA’s net foreign assets (US$ billions): 647.6 716.7 724.3 608.9 528.6 472.6
  - SAMA's net foreign assets (months of imports): 33.8 33.2 35.1 37.5 31.7 28.2
  - Real effective exchange rate (percent change) (Latest 2017 data is for end-May): 3.2 3.0 9.4 8.4 4.8 0.8

### Staff recommendations and policy implications — fiscal, energy, growth, financial
- Fiscal policy and revenues:
  - Implement large, sustained, well-paced fiscal consolidation.
  - Introduce VAT as planned (authorities committed to introduce VAT at the beginning of 2018).
  - Keep VAT exemptions and zero-rated items to a minimum.
  - Strengthen tax administration and establish effective and efficient tax system.
  - Strengthen fiscal framework: move toward a MTFF, publish quarterly budget performance reports, continue to improve fiscal transparency and data.
  - Conduct public expenditure review; improve composition of spending; gradually reduce wage bill; strengthen social safety nets; improve capital spending efficiency.
- Energy and household protection:
  - Continue energy and water price reforms to international/cost recovery levels by 2020 as set out in FBP.
  - Provide household allowance to protect lower- and middle-income households; consider more gradual phasing where warranted.
- Financial sector and markets:
  - Strengthen SAMA liquidity management and macroprudential framework.
  - Finalize AML/CFT risk assessments and continue strengthening related framework.
  - Deepen domestic capital markets.
- Growth, private sector, and labor market:
  - Advance privatization and PPPs while mitigating fiscal risks.
  - Remove regulatory obstacles to private sector growth; continue consultations with business community.
  - Increase employment of Saudi nationals in private sector; strengthen education and training; communicate limited public sector prospects to incentivize private search.
  - Boost female labor force participation.

### Employment, inflation, and banking sector developments
- Employment and unemployment:
  - Total employment grew by 1.4 percent in 2016, down from 3.8 percent in 2015.
  - Employment for Saudi nationals broadly unchanged in 2016.
  - Unemployment rate of Saudi nationals rose to 12.3 percent from 11.5 percent at end-2015.
  - Youth (age 15–24) unemployment rate: 40.5 percent.
  - Female unemployment rate: 34.5 percent.
- Inflation (CPI):
  - CPI inflation peaked at 4.3 percent (y/y) in March 2016 due to energy and water price reforms.
  - CPI fell by 0.7 percent (y/y) in May 2017.
  - Staff projection: headline CPI projected at 1.7 percent in 2017, to peak at 5 percent in 2018, then ease to 2 percent over the medium-term.
- Banking sector, liquidity, and financial markets:
  - 3-month SAIBOR rose to 2.4 percent in mid-October 2016 (spread to U.S. LIBOR widened to 150 basis points).
  - SAMA kept repo rate unchanged at 2 percent and raised reverse repo rate in line with the Fed.
  - NPLs increased marginally to 1.4 percent; capital and provisioning ratios remained high.
  - Since late 2016: payment of arrears, external sovereign bond issue, and SAMA measures eased liquidity pressures; PMI increased to highest level since 2015Q3 in 2017Q1; bank deposits stabilized.
  - Consumer spending remains weak; credit growth near zero; real estate prices declining.

### Fiscal consolidation plans and non-oil revenue reforms — figures and timing
- FBP and 2017 budget aim to reduce fiscal deficit to 7.7 percent of GDP in 2017, balance budget by 2019, and generate surplus in 2020.
- Staff projection: fiscal deficit declines to 9.3 percent of GDP in 2017 and to just under 1 percent of GDP in 2022 (difference from authorities’ projection largely due to lower oil revenues).
- Projections assume major non-oil revenue and energy price reforms introduced as scheduled and VAT reaches full collection efficiency in 2020.
- Box: Non-Oil Revenue Reforms (selected figures)
  - Excise taxes introduced in June 2017: rates on tobacco and energy drinks are 100 percent; rate on carbonated drinks is 50 per cent.
  - Expected revenues from excises: 0.4 percent of GDP by 2020.
  - VAT planned at 5 percent beginning of 2018. VAT registration threshold: SAR 375,000 ($100,000).
  - Expected revenues from VAT: projected to reach about 1.6 percent of GDP by 2020.
  - Expatriate levy phased-in through 2020: current SAR 200 to be raised to SAR 800 per month by 2020 for companies where foreign labor exceeds Saudi employees; lower levy for companies where expats do not exceed nationals—initially SAR 300 rising to SAR 700 by 2020. Levy will cover dependents at lower rates.
  - Expected revenue from other reforms (fees/fines, subsidy removals, tourism and telecom license fees): less than 1 percent of GDP.
  - Total additional non-oil revenue: 4.8 percent of GDP (2020); 6.6 percent of non-oil GDP (100.0 percent share). VAT 1.6 percent of GDP (2020); Excises 0.4 percent of GDP (2020); Expat Levy 2.2 percent of GDP (2020); Other revenue reforms 0.7 percent of GDP (2020). 1/ Phased gradually over 2017-20.

### Energy and water price reforms — fiscal impact and compensation
- Early 2016 price increases across major energy and water products ranged from 10 to 134 percent.
- Energy consumption growth declined from 4.6 percent in 2015 to 0.2 percent in 2016.
- Second wave in 2017: reaching international/cost recovery prices would imply a 70–80 percent increase in price of gasoline and electricity for households; bringing diesel to 75 percent of international benchmark implies a 195 percent increase.
- Household compensation:
  - Online portal opened early February; families covering 12 million Saudi nationals have registered.
  - Annual cost of household compensation estimated at around SAR 33 billion by 2020 once price adjustment complete.
- Industry support:
  - Estimated total overall cost SAR 26 billion during 2017–20 (mostly temporary funding of operational losses and subsidized loans for energy efficiency).
- Fiscal savings:
  - Staff estimates gross fiscal savings of around SAR 254 billion by 2020 from energy price reforms.
  - Net fiscal saving, after household and industry compensation, estimated at SAR 210 billion by 2020.
- Revenue Gains from Energy Price Reform (selected figures)
  - Gross revenue gains (US$): 8.8 (2016–2020) and 67.7 (2020).
  - Gross revenue gains (SR): 33.1 (2016–2020) and 253.8 (2020).
  - Household Allowance (SR): 33.0.
  - Industry Support (SR): 11.0.
  - Net revenue gains (SR): 33.1 (2016–2020) and 209.8 (2020).

### Growth outlook and scenarios
- Staff projections:
  - Non-oil GDP growth: 1.7 percent in 2017.
  - Oil output: contract by 1.9 percent in 2017 due to OPEC+ production cuts.
  - Overall real GDP growth: 0.1 percent in 2017.
  - Growth projected at 1.1 percent in 2018 as real oil GDP turns positive and non-oil growth slows with faster fiscal consolidation.
  - Medium-term: oil output projected to grow around 1 percent a year; medium-term non-oil growth expected to accelerate to around 3 percent with structural reforms.
- GFASR scenario (staff alternate):
  - Combines gradual fiscal adjustment with structural reforms to raise productivity and labor force participation and boost non-oil growth.
  - Staff baseline assumes recent structural reforms boost non-oil growth by around ¼ pp by 2022.
  - GFASR assumes broader reforms could add an additional ¾ pp to non-oil growth by 2022.

- Staff quantitative non-oil growth contributions if structural variables reach benchmarks by 2022:
  - Financial Market Development: 0.5
  - Trade Openness: 0.1
  - Worker Talent: 0.7
  - Competitive Business Environment: 0.3
  - Raising Female Labor Participation Rate: 0.4
  - Total: 2.1

### Fiscal financing and public debt indicators — selected figures
- Fiscal financing table excerpts (Percent of GDP):
  - Cumulative Fiscal Deficit: 0.4 (2016) and 20.6 (2017–22)
  - Financing: 0.3 (2016) and 70.6 (2017–22)
  - Deposit drawdown at SAMA: 0.3 (2016) and 0.2 (2017–22)
  - Domestic debt issuance: 0.1 (2016) and 0.3 (2017–22)
  - Foreign borrowing: 0.1 (2016) and 0.3 (2017–22)
  - Memorandum items: Gross government debt 13.1 (2016) and 24.9 (2022); Deposits at SAMA 30.1 (2016) and 17.2 (2022); Net Financial assets 17.1 (2016) and -7.7 (2022).

### Credit, banking outlook, and NPLs
- Credit growth projected to recover gradually as higher oil revenues and pick-up in non-oil activity support moderate growth in bank deposits.
- Narrowing fiscal deficit and more financing from non-bank and external sources expected to reduce banks’ investment in government bonds, creating room for private sector credit.
- NPLs, currently very low, could increase given weak growth; loan losses can be absorbed given capital and provisioning buffers.

### Risks and spillovers — main downside and upside scenarios
- Downside risks include:
  - lower oil prices;
  - slippages in structural reform agenda;
  - tighter global financial conditions;
  - further escalation of regional tensions.
- Fiscal consolidation risks:
  - Too rapid consolidation would hurt growth.
  - Insufficient consolidation would increase debt and interest rates and pressure the exchange rate peg.
- Other risks: domestic security issues and cyber-attacks.
- Upside risks: successful implementation of broad structural reforms, credible and well-paced consolidation, higher oil prices, planned privatization of Aramco, and possible inclusion in MSCI index.

### Structural reforms, labor market, and private sector
- Macro-structural constraints identified:
  - Skills of Saudi workforce, relative cost of Saudi and expatriate labor, low female participation, business regulations, and credit availability for some sectors.
- Removing obstacles to private sector growth, SMEs, privatization, and PPPs:
  - Measures: full automation and simplification of commercial registration; new companies law; Kafala loan guarantee revamp; procurement law amendments; establishment of SEMA and SME strategy.
  - Authorities considering privatizations in 16 sectors and PPPs in education, health, and infrastructure.
  - Staff caution: design legal/regulatory frameworks carefully to minimize contingent risks.
- Labor market measures:
  - Over 1 million Saudis expected to enter labor force next 5 years.
  - Planned increase in labor fees phased in through 2020; better-targeted wage subsidies; education and training reforms; refinements to Nitaqat; sectoral Saudization pilots.
  - Staff recommends clear communication about limited public sector prospects and visa/ mobility reforms for expatriates.
- Female labor participation:
  - NTP target: increase female participation to 28 percent by 2020 (from 19 percent in 2016).
  - Policies: subsidize transportation and childcare, expand childcare facilities, encourage teleworking.
  - Staff: support female entrepreneurs via SME programs and offer fiscal incentives to firms to accommodate female employment.

### Financial sector resilience and SAMA actions
- Bank resilience:
  - Stress tests: most banks, including systemically important banks, meet regulatory capital requirements under severe shocks; all banks pass severe liquidity tests.
- SAMA policy measures (Jan 2016–Jun 2017) highlights:
  - Raised reverse repo rate from 50 to 125 basis points; repo rate left at 200 basis points.
  - Introduced 90, 28, and 7-day repos; provided SAR 20 billion of government entity deposits to banks; offered SAR 15 billion to banks; raised loan-to-deposit ratio from 85 to 90 percent.
  - Mortgage risk-weight reduced from 100 percent to 75 percent (April 2017); LTV cap increased from 70 percent to 85 percent for first home (January 2017).
- Supervisory and resolution framework:
  - Introduced aggregate large exposure limit (6 times eligible capital); reducing single borrower exposure limits to 15 percent of capital by 2019.
  - Commercial bank-funded Deposit Protection Fund (DPF) introduced; Draft Resolution Law under legislative approval.
  - Staff: continue attention to Islamic/hybrid bank prudential tools and mapping to Basel, loan classification, IFRS9 implementation in 2019.
- Macroprudential and liquidity management:
  - NFSC activated; agreed to refine tools such as EWE, address data gaps, broaden debt service-to-income definitions, and use macroprudential policy countercyclically.
  - Staff: scope to strengthen liquidity management (liquidity forecasting, regular short-term operations, require collateral on lending to commercial banks).

### Correspondent Banking Relationships (CBRs) and exchange rate
- CBRs:
  - SAMA welcomed global discussion on CBRs; Saudi banks have not experienced a decline in CBRs per authorities; SAMA stressed vigilance and robust AML/CFT compliance with banks.
- Exchange rate and external stability:
  - Government committed to exchange rate peg to U.S. dollar at rate of 3.75 since 1986; staff view peg remains appropriate.
  - Reserves remain comfortable despite decline; staff: fiscal consolidation is central to supporting the peg and external position.
  - Staff estimated REER gap in range of 15–25 percent.

### Statistical issues and data gaps
- Improvements noted:
  - GASTAT publishing quarterly real GDP and quarterly labor market data; introduced real estate price index and industrial production index.
- Remaining weaknesses:
  - Fiscal data not yet fully reported in GFS format; financial account data weak with large errors and omissions.
  - Need more transparency on SAMA balance sheet "other liabilities" and more disaggregated bank credit/deposits data; household and corporate balance sheet data lacking.
- Recommendation:
  - Authorities should aim for SDDS subscription as soon as possible.

### Appendix highlights — nonfinancial corporate sector and external sustainability
- Nonfinancial corporates (sample of 122 listed firms):
  - Profits declined by 6 percent in 2016 (after nearly 17 percent decline in 2015).
  - Total operating revenue (sample): $159.2 billion (2014), $141.1 billion (2015), $136.9 billion (2016); 2015–16 growth: -3.0 percent.
  - Total operating profit (sample): $26.5 billion (2014), $22.1 billion (2015), $20.8 billion (2016); 2015–16 growth: -5.9 percent.
  - Total debt of sample: $144 billion in 2016 (30 percent of non-oil GDP), up 5 percent from 2015.
  - Short-term debt increased by 25.7 percent in aggregate from 2015 to 2016; cash and cash equivalents fell by 18 percent in 2016.
  - Interest Coverage Ratio declined in 2016 but remains higher than 2 in most sectors.
  - Debt-at-risk (ICR < 1.5) increased from 30 percent of total debt in 2015 to 40 percent at end-2016.
- Stress scenarios (selected):
  - Scenario 1: Operating Income Decrease by 6 percent; Increase in Borrowing Cost 70 bps.
  - Scenario 2: Operating Income Decrease by 20 percent; Increase in Borrowing Cost 150 bps.
  - Scenario 3: Operating Income Decrease by 39 percent; Increase in Borrowing Cost 300 bps.
  - Under scenarios debt-at-risk increases to between 46 and 64 percent of total debt.
- External sustainability and reserves:
  - Current account deficit narrowed to 3.9 percent of GDP in 2016 from 8.7 percent in 2015.
  - CA projected to move into small surplus in 2017 and about 1.2 percent of GDP by 2022.
  - SAMA’s total net foreign assets: 716.7; 724.3; 608.9; 528.6; 472.6; 442.0; 419.2; 393.5; 360.4; 335.1 (selected series across years).
  - Foreign reserves as percent of the ARA metric: 755, 732, 684, 566, 469, 420, 381, 345, 309, 279 (series across years).
  - NIIP estimated at 92 percent of GDP at end-2016; projected to decline to around 54 percent of GDP in 2022.
  - Staff assesses CA gap of -7.7 percent of GDP (range -5.7 to -9.7 percent); fiscal gap estimates under external sustainability rules range from -14.1 to -18.5 percent of GDP.

### Staff appraisal — overall judgment and priorities
- Authorities have made considerable progress initiating implementation of an ambitious reform agenda; fiscal consolidation efforts beginning to bear fruit; progress in improving business environment and transparency frameworks.
- Key priorities:
  - Implement announced fiscal measures and smooth planned adjustment to balance by 2022 while protecting social outcomes and structural reform support.
  - Successfully introduce VAT and keep exemptions limited; consider raising VAT rate once successfully implemented.
  - Phase energy price reforms with effective household compensation and limited, transparent industry support.
  - Improve spending composition and public investment efficiency; gradually reduce wage bill.
  - Advance structural reforms to boost non-oil growth, increase Saudi private employment, and raise female labor force participation.
  - Strengthen SAMA liquidity management, finalize AML/CFT work, and deepen domestic debt market.
  - Maintain exchange rate peg with periodic review and continued fiscal consolidation to support external stability.

*Staff report for the 2017 Article IV Consultation (Saudi Arabia), June 28, 2017.*

### 2016. The authorities have made considerable progress in initiating the implementation of their

### cr17316 - 2016. The authorities have made considerable progress in initiating the implementation of their

### Executive Board Assessment
- The Saudi economy is adjusting to lower oil prices and fiscal consolidation; non-oil growth is expected to pick up in 2017 and overall growth is expected to strengthen over the medium term as structural reforms are implemented.
- Directors commended the authorities’ progress on an ambitious reform agenda and emphasized that proper calibration and sequencing of reforms will be crucial to success.
- Fiscal stance and revenue reforms
  - A large, sustained, and well-paced fiscal adjustment is needed over the medium term.
  - Most Directors noted Saudi Arabia has fiscal space to allow a more gradual consolidation than envisaged in the Fiscal Balance Program; a few cautioned that backloading adjustment could incur risks.
  - Directors welcomed steps to enhance non-oil revenue, including excises on tobacco and carbonated/energy drinks, and the authorities’ commitment to introduce the VAT at the beginning of 2018 (some Directors noted the timetable could be challenging).
  - Recommendation: keep exemptions and zero-rated items to a minimum.
- Energy price reform
  - Directors welcomed planned further energy price reforms, emphasized ensuring equity, and supported the planned household allowance to cushion impacts on low- and middle-income households.
  - Several Directors suggested scope for more gradual phasing of price increases to allow adjustment.
- Fiscal framework and spending composition
  - Directors welcomed improvements in fiscal framework and transparency; supported planned public expenditure review.
  - Emphasized importance of gradually reducing the wage bill, strengthening social safety nets, and improving capital spending efficiency.
- Structural reforms, privatization, and labor market
  - Good progress in identifying and removing obstacles to private sector growth; welcomed consultations with business community.
  - Welcomed privatization and PPP plans; cautioned to guard against fiscal risks.
  - Increasing employment of Saudi nationals in private sector is essential; highlighted need to strengthen education and training and to clearly communicate limited public sector employment prospects.
  - Called for further steps to boost female labor force participation and employment.
- Financial sector and external policy
  - Banks are well regulated and supervised; SAMA steps to strengthen regulatory/supervisory frameworks and to develop macroprudential framework and financial safety net were welcomed.
  - Scope seen for SAMA to strengthen liquidity management framework.
  - Welcomed efforts to strengthen AML/CFT framework and finalization of risk assessments.
  - Exchange rate peg to the U.S. dollar remains appropriate given the structure of the Saudi economy; continued fiscal adjustment is crucial to support the peg. Directors saw merit in periodic review of the peg.
  - Encouraged authorities to address data gaps and subscribe to the Special Data Dissemination Standard.

### Key issues, outlook, and risks
- Context and reform program
  - Saudi Arabia launched Vision 2030 in April 2016 to diversify away from oil, increase private sector role, raise private sector jobs for Saudis, adjust fiscal policy to lower oil prices, and improve government effectiveness and accountability.
  - Following Vision 2030, the National Transformation Program 2020 (NTP) launched June 2016 and the Fiscal Balance Program 2020 (FBP) launched December 2016; 10 additional programs were recently outlined.
  - A governance and monitoring system with KPIs and the National Center for Performance Management (Adaa) has been established.
- Oil production and external developments
  - Saudi Arabia reduced production under the OPEC+ agreement; cut to around 10 mb/d during January-April 2017, a decline of 3.4 percent from the same period in 2016. Agreement extended through first quarter of 2018.
- Outlook and risks
  - Non-oil growth expected to pick up in 2017, but overall GDP growth close to zero given decline in oil production; medium-term strengthening expected as structural reforms are implemented.
  - Main risks: uncertainty about future oil prices and the economic impact of ongoing reforms.
- Policy priorities highlighted by staff
  - Fiscal: large, sustained, and well-paced fiscal adjustment; introduce VAT successfully; gradually raise energy and water prices with protection for the less well-off; improve composition of government spending; strengthen fiscal framework.
  - Growth/employment: reduce obstacles to private sector growth and exports; create private sector jobs for Saudis; increase female participation; use well-targeted fiscal measures to support structural reforms.
  - Financial sector: banks are well positioned; develop domestic capital markets to increase financing and saving options.
  - External: exchange rate peg remains appropriate.

### Fiscal and macro-financial developments (selected findings)
- Fiscal adjustment and 2016 outcomes
  - Non-oil primary deficit declined to 44.7 percent of non-oil GDP in 2016 from 49.8 percent in 2015.
  - Spending contraction of 6.4 percent in 2016 led by sharp fall in capital expenditures; included settlement of arrears from 2015 equal to 3.3 percent of GDP.
  - Despite increased non-oil revenues, a sharp fall in oil revenues led to fiscal deficit increase to 17.2 percent of GDP in 2016 from 15.8 percent in 2015.
  - Government net financial assets declined to 17.1 percent of GDP in 2016 (35.9 percent of GDP in 2015).
  - 2017Q1 deficit shrank considerably relative to 2016Q1 due to higher oil revenues and lower spending; government employee allowances reinstated in April 2017 after cuts in October 2016.
- Real sector and non-oil growth
  - Real GDP growth slowed to 1.7 percent in 2016 from over 4 percent in 2015; non-oil growth near-zero in 2016 compared to 3.2 percent in 2015.
  - Non-oil output estimated below potential; construction, wholesale, and retail most affected.
  - Profits of listed non-financial companies fell by 6 percent (y/y) in 2016; corporate vulnerabilities appear limited per stress tests.
- Financial conditions and reforms
  - A Debt Management Office established; 2016 deficit financed by asset drawdown and debt issuance (domestic and external).
  - SAMA relaxed loan-to-deposit ratio and eased LTV for first home mortgage lending (from 70 to 85 percent).
  - National Financial Stability Committee set up; SAMA publishing Financial Stability Reports.
  - Authorities continuing reforms to develop equity and debt markets: foreign investment limits relaxed, Tadawul settlement moved to T+2, Nomu parallel equity market established, government listed bonds to increase liquidity.

### Selected economic indicators (as presented in source)
- Production and prices (Annual percent change; unless otherwise stated)
  - Real GDP: 5.4 2.7 3.7 4.1 1.7 0.1
  - Real oil GDP: 5.1 -1.62.1 5.3 3.8 -1.9
  - Real non-oil GDP: 5.5 6.44.9 3.2 0.2 1.7
  - Nominal GDP (billions of U.S. dollars): 736 747756 654 646 692
  - Consumer price index (avg): 2.9 3.52.7 2.2 3.5 1.7
- Fiscal and financial variables (Percent of GDP; unless otherwise stated)
  - Central Government revenue: 45.2 41.3 36.8 25.0 21.4 25.0
  - Of which: oil revenue: 41.5 37.0 32.2 18.2 12.7 17.5
  - Central Government expenditure: 33.2 35.5 40.2 40.7 38.6 34.3
  - Fiscal balance (deficit -): 12.0 5.8 -3.4-15.8-17.2-9.3
  - Non-oil primary balance (percent of non-oil GDP): -60.1-59.4-63.6-49.8-44.7-39.6
  - Broad money (annual percent change): 13.910.911.92.50.81.7
- External sector (US$ billions; unless otherwise stated)
  - Exports: 388.4 375.9 342.5 203.5 182.3 208.2
  - Of which: Oil and refined products: 337.2 321.7 284.4 153.0 136.2 158.5
  - Imports: -141.8 -153.3 -158.5 -159.3 -123.9 -127.6
  - Current account: 164.8 135.4 73.8 -56.7 -24.9 1.3
  - Current account (percent of GDP): 22.4 18.1 9.8 -8.7-3.90.2
  - SAMA’s net foreign assets: 647.6 716.7 724.3 608.9 528.6 472.6
  - SAMA's net foreign assets (in months of imports of goods and services): 33.8 33.2 35.1 37.5 31.7 28.2
  - Real effective exchange rate (percent change) (Latest 2017 data is for end-May): 3.2 3.0 9.4 8.4 4.8 0.8

### Staff recommendations and policy implications (summarized)
- Fiscal policy and revenues
  - Implement a large, sustained, and well-paced fiscal consolidation.
  - Introduce the VAT as planned (authorities committed to introduce VAT at the beginning of 2018).
  - Keep VAT exemptions and zero-rated items to a minimum.
  - Strengthen tax administration and establish an effective and efficient tax system.
  - Strengthen fiscal framework: move toward a MTFF, publish quarterly budget performance reports, and continue to improve fiscal transparency and data.
  - Conduct public expenditure review; improve composition of spending; gradually reduce wage bill; strengthen social safety nets; improve capital spending efficiency.
- Energy and household protection
  - Continue energy and water price reforms to international/cost recovery levels by 2020 as set out in FBP.
  - Provide household allowance to protect lower- and middle-income households; consider more gradual phasing where warranted.
- Financial sector and markets
  - Strengthen SAMA liquidity management and macroprudential framework.
  - Finalize AML/CFT risk assessments and continue strengthening related framework.
  - Deepen domestic capital markets to expand financing and saving options.
- Growth, private sector, and labor market
  - Advance privatization and PPPs while mitigating fiscal risks.
  - Remove regulatory obstacles to private sector growth; continue consultations with business community.
  - Increase employment of Saudi nationals in private sector; strengthen education and training; clearly communicate limited prospects for public sector employment to incentivize private sector job search.
  - Boost female labor force participation.

*Staff report for the 2017 Article IV Consultation (Saudi Arabia), June 28, 2017.*

### 8.      Employment growth has slowed.

### 8.      Employment growth has slowed.

### Employment and unemployment
- Total employment grew by 1.4 percent in 2016, down from 3.8 percent in 2015.
- Employment for Saudi nationals was broadly unchanged in 2016.
- The unemployment rate of Saudi nationals rose to 12.3 percent from 11.5 percent at end-2015.
- Youth (age 15–24) unemployment rate: 40.5 percent.
- Female unemployment rate: 34.5 percent.

### Inflation (CPI)
- CPI inflation rose in January 2016 and peaked at 4.3 percent (y/y) in March 2016 due to the energy and water price reforms introduced in early 2016.
- Non-energy inflation remained subdued, held down by falling food prices.
- CPI inflation turned negative in January 2017 as the effects of the energy and water price increases dropped out and food prices continued to decline.
- The CPI fell by 0.7 percent (y/y) in May 2017.
- Staff projection: headline CPI projected at 1.7 percent in 2017, to peak at 5 percent in 2018, then ease to 2 percent over the medium-term. Projections incorporate excise taxes introduced in June 2017, energy price reforms starting in 2017, and VAT implemented at the beginning of 2018.

### Current account, reserves, and external flows
- Current account deficit narrowed to 3.9 percent of GDP in 2016 from 8.7 percent of GDP in 2015.
- Imports declined by 22 percent in 2016 due to the decline in investment spending (mainly government).
- Government external borrowing in 2016: $27.5 billion.
- Errors and omissions were large at over 6 percent of GDP in 2016.
- Foreign exchange reserves declined by $80 billion during 2016 and by another $36 billion during January-April 2017.
- Net financial outflows are expected to continue; portfolio and other investment asset accumulation is partly offset by government external borrowing.
- The current account is projected to be in a small surplus over the projection period.

### Banking sector, liquidity, and financial markets
- Government payment arrears and domestic debt issuance contributed to tightening of banking sector liquidity in 2016.
- Withdrawal of deposits from banks by pension funds to purchase government debt and delays in government payments to contractors accelerated decline in bank deposits.
- Contractors drew on credit lines while waiting for payment.
- 3-month SAIBOR rose to 2.4 percent in mid-October 2016 (spread to U.S. LIBOR widened to 150 basis points).
- SAMA kept the repo rate unchanged at 2 percent and raised its reverse repo rate in line with the Fed.
- Bank profitability weakened; NPLs increased marginally to 1.4 percent.
- Capital and provisioning ratios remained high.
- Since late 2016: payment of government arrears that started in October, the external sovereign bond issue, and SAMA policy measures eased liquidity pressures; interbank interest rates fell; PMI increased to its highest level since 2015Q3 in 2017Q1; bank deposits stabilized; equity prices rebounded.
- Consumer confidence fell; consumer spending remains weak; credit growth is near zero; real estate prices are declining.
- Financial markets have not been significantly affected so far by the diplomatic rift with Qatar.

### Fiscal consolidation, revenues, and non-oil revenue reforms
- FBP and the 2017 budget aim to reduce fiscal deficit to 7.7 percent of GDP in 2017, balance the budget by 2019, and generate a fiscal surplus in 2020.
- Adjustment drivers: expected increase in revenues from oil exports; new non-oil revenue measures (excises on tobacco and carbonated/energy drinks, VAT, higher expatriate labor fees, and smaller fees/fines); further increases in energy and water prices with compensation measures; continued spending restraint.
- Staff projection: fiscal deficit declines to 9.3 percent of GDP in 2017 and to just under 1 percent of GDP in 2022 (difference from authorities’ projection in 2017 largely due to lower oil revenues).
- Projections assume major non-oil revenue and energy price reforms are introduced as scheduled in the FBP and VAT reaches full collection efficiency in 2020, and that operational and capital expenditure savings so far identified are realized.
- Staff projections do not include any additional military spending from the recent defense agreement with the United States nor budgetary spending to support the private sector stimulus (PSS) program being developed.

Box: Non-Oil Revenue Reforms (selected figures)
- Excise taxes introduced in June 2017: rates on tobacco and energy drinks are 100 percent; rate on carbonated drinks is 50 per cent.
- Expected revenues from excises: 0.4 percent of GDP by 2020.
- VAT planned at 5 percent beginning of 2018. VAT registration threshold: SAR 375,000 ($100,000).
- Expected revenues from VAT: projected to reach about 1.6 percent of GDP by 2020.
- Expatriate levy phased-in through 2020: current SAR 200 to be raised to SAR 800 per month by 2020 for companies where foreign labor exceeds Saudi employees; a lower levy for companies where expats do not exceed nationals—initially SAR 300 rising to SAR 700 by 2020. The levy will cover dependents at lower rates.
- Expected revenue from other reforms (fees/fines, subsidy removals, tourism and telecom license fees): less than 1 percent of GDP.
- Table (Additional Non-oil Revenue, in percent of GDP, Date of implementation, Rate, and Percent of non-oil GDP): Total additional non-oil revenue 4.8 percent of GDP (2020), 6.6 percent of non-oil GDP (100.0 percent share). VAT 1.6 percent of GDP (2020); Excises 0.4 percent of GDP (2020); Expat Levy 2.2 percent of GDP (2020); Other revenue reforms 0.7 percent of GDP (2020). 1/ Phased gradually over 2017-20.

### Energy and water price reforms (update and fiscal impact)
- Early 2016 increases in prices across most major energy and water products ranged from 10 to 134 percent.
- Growth of energy consumption declined from 4.6 percent in 2015 to 0.2 percent in 2016.
- CPI utilities and transport components increased by an average of 9.7 percent in January 2016.
- Second wave of price increases expected in 2017: to reach international/cost recovery prices would imply a 70–80 percent increase in the price of gasoline and electricity for households; bringing diesel prices to 75 percent of the international benchmark would imply a 195 percent increase.
- Household compensation: online portal opened in early February; families covering 12 million Saudi nationals (covering over one-half of the local population) have registered.
- Annual cost of household compensation estimated at around SAR 33 billion by 2020 once the price adjustment process is complete.
- Industry support: estimated total overall cost of SAR 26 billion during the 2017–20 period (most in the form of temporary funding of operational losses and subsidized loans for energy efficiency).
- Staff estimates gross fiscal savings of around SAR 254 billion by 2020 from energy price reforms.
- Net fiscal saving, taking account of household and industry compensation, is estimated at SAR 210 billion by 2020.
- Not all revenues are expected to accrue to the budget given the taxation regime applicable to Aramco.

Revenue Gains from Energy Price Reform (selected figures)
- Gross revenue gains (US$) 8.8 (2016–2020) and 67.7 (2020) — presented in table form in source.
- Gross revenue gains (SR) 33.1 (2016–2020) and 253.8 (2020).
- Household Allowance (SR) 33.0.
- Industry Support (SR) 11.0.
- Net revenue gains (SR) 33.1 (2016–2020) and 209.8 (2020).

### Growth outlook and projections
- Non-oil GDP growth projected at 1.7 percent in 2017.
- Oil output expected to contract by 1.9 percent in 2017 as Saudi Arabia reduces production in line with the OPEC+ agreement.
- Overall real GDP growth projected at 0.1 percent in 2017.
- Growth projected at 1.1 percent in 2018 as real oil GDP growth turns positive and non-oil growth slows in line with faster fiscal consolidation.
- Authorities project slightly higher growth than staff in 2017 and 2018; consensus forecasts are for growth of 0.2 percent and 1.9 percent, respectively.
- Medium-term: oil output projected to grow by around 1 percent a year.
- Medium-term non-oil growth expected to accelerate to around 3 percent with ongoing structural reforms.

Fiscal financing and public debt indicators (selected figures)
- Fiscal Deficit and Fiscal Financing 2016–22 table (Percent of GDP):
  - Cumulative Fiscal Deficit: 0.4 (2016) and 20.6 (2017–22) — presented as "0.4 20.6" in source.
  - Financing: 0.3 (2016) and 70.6 (2017–22) — presented as "0.3 70.6" in source.
  - Deposit drawdown at SAMA: 0.3 (2016) and 0.2 (2017–22).
  - Domestic debt issuance: 0.1 (2016) and 0.3 (2017–22).
  - Foreign borrowing: 0.1 (2016) and 0.3 (2017–22).
  - Memorandum items: Gross government debt 13.1 (2016) and 24.9 (2022); Deposits at SAMA 30.1 (2016) and 17.2 (2022); Net Financial assets 17.1 (2016) and -7.7 (2022).
  - (Percent of GDP) and (SAR trillions) reported in source tables.

### Credit, banking outlook, and non-performing loans (NPLs)
- Credit growth is projected to recover gradually as higher oil revenues and pick-up in non-oil activity support moderate growth in bank deposits.
- Narrowing fiscal deficit and expectation of more financing from non-bank and external sources will mean banks invest less in government bonds, creating more room for private sector credit.
- Given the weak growth environment, NPLs, which are very low, could increase; loan losses can be comfortably absorbed given capital and provisioning buffers.

### Risks and spillovers
- Near-term risks to growth are on the downside; medium-term risks are more balanced.
- Downside risks include:
  - lower oil prices;
  - slippages in the structural reform agenda;
  - tighter global financial conditions;
  - further escalation of regional tensions.
- Fiscal consolidation risks:
  - If consolidation proceeds too rapidly, it would adversely affect growth.
  - Insufficient fiscal consolidation would increase debt and interest rates and pressure the exchange rate peg, with negative medium-term growth effects.
- Other risks: heightened domestic security issues and cyber-attacks against critical infrastructure.
- Upside risks: successful implementation of broad structural reforms (only partially incorporated in the staff baseline), credible and well-paced fiscal consolidation boosting private sector confidence, higher oil prices, planned privatization of Aramco, and possible inclusion of Saudi Arabia in the MSCI index—which could boost foreign inflows and growth but are not incorporated in the projections.

*International Monetary Fund — Country Report excerpt (sections 8–19) contained in source PDF.*

### 20.      Developments in Saudi Arabia have an important impact on other GCC countries and

### 20.      Developments in Saudi Arabia have an important impact on other GCC countries and the broader MENA region

### POLICY DISCUSSIONS
- Reform themes discussed:
  - (i) the pace, composition, and implementation of fiscal adjustment;
  - (ii) reforms to boost growth and private sector employment;
  - (iii) financial sector resilience and development;
  - (iv) the exchange rate and external stability.
- Staff view:
  - Welcomed reform direction and noted considerable progress since the 2016 Article IV consultation.
  - Reforms are ambitious; prioritization, sequencing, and coordination are essential.
  - Authorities established governance centered on the Council for Economic and Development Affairs (CEDA) for planning, implementation, and monitoring.
  - Ensuring social buy-in is essential; authorities are stepping up communications and putting in place compensation mechanisms to protect lower and middle-income households.

### Risk Assessment Matrix — main risks, likelihoods, impacts, and policy responses
- Lower energy prices.
  - Likelihood/Time Horizon: Low/Short-to-medium-term
  - Expected impact: High — undermines confidence, increases fiscal deficit, pressures deeper spending cuts, negative implications for growth and employment, possible banking stress and reduced credit availability.
  - Policy response: Adjust fiscal policy to reflect lower oil prices, reduce current account deficit, support exchange rate peg; use existing buffers to smooth adjustment; ensure adequate banking liquidity and monitor banks for stress.
- Fiscal consolidation proceeds too rapidly, adversely affecting non-oil growth.
  - Likelihood/Time Horizon: Low/Short-to-medium-term
  - Expected impact: High — could adversely affect growth and employment and render reforms unsustainable.
  - Policy response: Ensure available fiscal space is used to enable gradual but sustained medium-term consolidation; support with structural reforms to boost non-oil growth.
- Slippages in the reform agenda result in weak growth and limited private sector employment opportunities.
  - Likelihood/Time Horizon: Medium/Short-to-medium-term
  - Expected impact: High — rising unemployment or increasing public employment with negative fiscal implications.
  - Policy response: Further labor market reforms to address skills gaps and reduce wage gap between Saudis and expatriates; structural reforms to boost non-oil growth.
- Retreat from cross-border integration with reduced policy collaboration.
  - Likelihood/Time Horizon: High/Short-to-medium term
  - Expected impact: High — affects oil prices and investor sentiment, external financing.
  - Policy response: Increased diversification efforts; consider temporarily slowing fiscal adjustment if confidence loss significantly affects growth.
- Intensification of fragmentation/security dislocation in parts of the Middle East.
  - Likelihood/Time Horizon: High/Short-to-medium term
  - Expected impact: Medium/Low — depends on event nature; oil-price channel likely.
  - Policy response: Dependent on shock nature; fiscal response possible; ensure adequate bank liquidity.
- Significant further strengthening of the US dollar and/or higher rates.
  - Likelihood/Time Horizon: High/Short-term
  - Expected impact: Low — real appreciation of the riyal, minimal impact on growth/current account given small non-hydrocarbon exports; banks resilient; large financial cushions mitigate effects.
  - Policy response: Monitor, maintain financial cushions.

(Note on RAM: staff subjective assessment of probabilities — “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent.)

### A. The Pace, Composition, and Implementation of Fiscal Adjustment

Findings and staff recommendations:
- Need for a large and sustained fiscal adjustment to respond to lower oil prices.
- Staff view: rapid fiscal consolidation is neither necessary nor desirable given strong fiscal buffers, financing availability, and current cyclical position.
- Fiscal timing:
  - Saudi Arabia has fiscal space to balance the budget by 2022 rather than in 2019 as originally set out in the FBP.
- Announced measures:
  - If fully implemented, appear sufficient to move the budget close to balance in 2022.
- Staff focus:
  - Successfully implement announced measures, smooth planned adjustment, improve expenditure composition to allow room for social safety net or other spending supporting structural reforms.
  - Identify additional fiscal measures of around 1 percent of GDP to achieve budget balance in 2022.
  - Suggest adjustment could be somewhat smaller during 2017-20 and larger during 2021–22; phase-in some reforms over a longer period without delaying initial implementation.
  - Composition: restrain wage and operational expenses to create room for higher social and other spending and to protect capital spending.
  - New spending/stimulus must be accommodated within the fiscal envelope that delivers budget balance by 2022.
- Complementarity of fiscal and structural reforms:
  - Well-paced fiscal adjustment will limit short-term growth losses and allow structural reforms to support medium-term growth.
  - Staff developed an alternate scenario (GFASR) combining fiscal adjustment with structural reforms to raise productivity and labor force participation and boost non-oil growth.

Authorities’ position and planned measures:
- Intention to review and update FBP targets regularly given weak growth.
- Merit in pushing ahead quickly with fiscal reforms, relying on compensation mechanisms to limit economic impact, but will monitor growth and employment and adjust timing if needed.
- Developing the PSS program to support private sector: combines well-targeted fiscal spending with streamlining business regulations.
  - Financing likely to partly comprise loans from the Special Credit Institutions (SCIs).
  - Total cost likely to be 1½-2 percent of GDP a year during 2017–20.

Revenue and expenditure implementation:
- VAT and excise:
  - Authorities and UAE ratified GCC excise and VAT agreements; implemented excises on tobacco and carbonated/energy drinks in June; fully committed to implementing VAT at the beginning of 2018.
  - Staff noted VAT timetable is very challenging given administrative and legal preparations; suggested exemptions and zero-rated items be kept to the minimum under the GCC agreement and that the rate be raised from its 5 percent level once introduced.
- Caution on multiple small fees and earmarking:
  - Staff cautioned against numerous smaller fees/charges and against earmarking new revenues (e.g., idle lands tax, tourism fees).
  - Revenues from planned increase in fees on expatriate labor are uncertain and may decline if policy succeeds in increasing Saudi employment.
- Energy and water price reforms:
  - Authorities plan to raise prices toward international/cost recovery levels by 2020; most household increases concentrated in 2017 and 2018.
  - Authorities developing a household allowance to compensate low and middle-income national households:
    - Aim: fully compensate households in bottom two quintiles; more limited compensation to third and fourth quintiles; no compensation to top quintile.
    - Registration opened in February; households covering 12 million people have registered, of which around 10 million are expected to be eligible for some compensation.
  - Authorities plan temporary support to companies to adjust to higher energy and water prices.
  - Staff saw scope for a more gradual implementation than in the FBP to allow adjustment time and ensure compensation mechanisms operate effectively; authorities preferred a relatively fast pace to minimize implementation risks.
- Spending containment and composition:
  - Bureau for Spending Rationalization (BSR) established to review spending, improve procurement, and align investment projects with Vision 2030.
  - BSR identified potential savings of SAR 21 billion in operational expenditures over 3 years for three pilot ministries and SAR 86 billion from an investment pipeline of SAR 260 billion for five pilot ministries; initiatives being extended to other ministries.
  - Procurement law under review.
- Public expenditure review with World Bank welcomed by staff; key observations:
  - Government wage bill is high:
    - Wages expected to account for over 45 percent of government spending in 2017.
    - Civil service employment has declined slightly, but wage bill remains large.
    - Recommend review of government employment and wages and development of strategy to gradually reduce wage bill.
    - Public employee allowances cut in October 2016 were restored; freeze of 2016 annual step pay increase and move to pay wages on Gregorian rather than Hijri calendar (saves 1 wage payment every three years) remain in place.
  - Quality of spending could be improved:
    - High education expenditure but poor scores on international tests (TIMSS); skills gap for private sector needs.
  - Improve efficiency of public investment to yield growth dividends.
  - Review and strengthen social safety net:
    - Budget spending on social assistance is lower than average emerging market economy and often targets certain groups rather than the less well-off.
    - Recommend review of size, composition, and targeting across government agencies.

Strengthening fiscal framework and transparency:
- Fiscal framework and budget process:
  - 2018 budget preparation underway using top-down and bottom-up approach within a medium-term framework.
  - Responsibility for FBP transferred to the Ministry of Finance.
  - Staff recommended continued development of macro-fiscal unit (MFU), strengthened expenditure controls, cash management, and adoption of a treasury single account (TSA).
  - Ensure all government spending initiatives (including PSS and recent defense agreements) are incorporated in the medium-term spending envelope.
- Transparency and fiscal measurement:
  - First quarterly budget performance report published for 2017Q1 with press conference.
  - Authorities plan to release a pre-budget fiscal report for the first time this year and are finalizing fiscal data in GFS2014 format for IMF submission.
  - Staff recommended strengthening transparency of broader government sector, including links between Aramco, the PIF, other sizeable government entities, and the budget; establish a statistical unit within MoF to collect/compile/disseminate fiscal data.
  - Introduction of KPIs across ministries expected to improve transparency and results-orientation over time.
- Debt management and PIF reforms:
  - Debt Management Office (DMO) established; three successful international issuances completed.
  - Coordination between domestic and external borrowing strategies has relieved pressures on the banking system.
  - A medium-term debt management strategy is being developed.
  - Reforms of the Public Investment Fund (PIF) underway to value and restructure the portfolio toward higher return/higher risk assets in line with new mandate.
  - Staff noted importance of an effective asset/liability management framework to coordinate borrowing and investment decisions.

### B. Reforms to Boost Growth and Private Sector Employment
- (Section header present in source; substantive detail on this section begins after provided excerpt.)

*Italic: IMF staff discussions and assessment as presented in the documented chapter.*

### 35.      Staff analysis identified several

### 35.      Staff analysis identified several

### Macro-structural constraints and potential growth gains
- Identified constraints: the skills of the Saudi workforce, the relative cost of Saudi and expatriate labor, low female participation in the labor force, business regulations, and credit availability for some sectors.
- Consequences: contributed to poor productivity growth, low participation of nationals in the private sector, and an over-reliance of private businesses on expatriate labor.
- Staff quantitative scenarios and assumptions:
  - The staff’s baseline assumes that recently implemented structural reforms boost non-oil growth by around ¼ pp by 2022.
  - The GFASR scenario assumes that implementing a broader set of structural reforms that successfully raises the female participation rate to the NTP target in 2022, starts to strengthen worker talent, and further deepens the financial sector could add an additional ¾ pp to non-oil growth by 2022.
- Estimated additional non-oil growth if underlying structural variables reach benchmark/desired levels (IMF staff estimates):
  - Financial Market Development: 0.5
  - Trade Openness: 0.1
  - Worker Talent: 0.7
  - Competitive Business Environment: 0.3
  - Raising Female Labor Participation Rate: 0.4
  - Total: 2.1
- Note on female participation benchmark assumption: Potential growth gains from raising female labor participation assumes that it would be increased by 6 percent of female population 15+ (announced in the NTP) by 2020.

### Removing obstacles to private sector growth, SMEs, privatization, and PPPs
- Authorities’ program: “Removing Obstacles to the Private Sector”—consultation with business community; several steps implemented or near completion.
- Expected effects: boost local investment and encourage foreign direct investment (FDI), which has fallen sharply in recent years.
- SME measures and institutional support:
  - Full automation and simplification of commercial registration.
  - New companies law reduces administrative burden on smaller companies.
  - Kafala loan guarantee program being revamped.
  - Consideration to amend government procurement law to ease SME access to government contracts.
  - Newly established SME authority (SEMA) coordinating SME policy and preparing a comprehensive SME strategy to strengthen data collection, increase banks' product and service offerings, and expand non-bank and capital market financing options for SMEs.
- Privatization and PPPs:
  - Authorities considering privatizations in 16 sectors including airports, utilities, healthcare, sports clubs, and grain silos; PPPs in education, health, and infrastructure.
  - Bureau of Privatization updating the 2004 privatization strategy and developing a PPP framework (both expected to be completed by end-year).
  - Policy focus on enhancing regulatory and institutional environments and separating policy and regulatory functions.
  - Staff recommendations: carefully design legal and regulatory frameworks (especially for PPPs) to minimize contingent risks; subject government-owned and privatized companies to competition law.

### Labor market challenges and policies to increase Saudi employment
- Labor force inflows and policy needs:
  - Over 1 million Saudis are expected to enter the labor force during the next 5 years.
  - Policies aim to increase competitiveness of Saudi workers and incentives for private businesses to hire Saudi nationals.
- Specific labor market measures:
  - Planned increase in labor fees on expatriate workers beginning in July 2017 (these fees will be equivalent to 20 percent of the current average wage gap between Saudis and expatriates when fully implemented).
  - Better targeted wage subsidies for Saudi workers.
  - Reforms to education and training systems.
  - Further refinements to the Nitaqat system of employment quotas.
  - Requirement for 100 percent of employees in certain sectors to be Saudis (applied in the mobile phone repair sector; being piloted in some shopping malls).
- Staff additional recommendations:
  - Government should set clear expectations about limited prospects for future public sector employment and review public sector wage structure.
  - Reform visa system to allow greater internal mobility of expatriate workers and to gradually reduce the number of visas and focus them more on skilled labor.
  - Establish a national dialogue between government, businesses, and potential workers/entrepreneurs.

### Barriers to female labor force participation and suggested measures
- Current targets and measures:
  - NTP targets increase in female participation rate to 28 percent by 2020.
  - Authorities expect recent high-profile appointments of women to have a positive demonstration effect.
  - Planned policies: subsidize transportation and childcare costs, expand availability of childcare facilities, and encourage greater use of teleworking.
- Staff suggestions:
  - Support female entrepreneurs via dedicated SME programs.
  - Offer fiscal incentives to companies to build or reconfigure work spaces to accommodate women in line with social norms.

### Interaction of structural reforms and fiscal policy
- Parallel implementation recommended: reforms to strengthen business environment and reform labor market should move ahead in parallel.
- Short-term mitigation: fiscal policy may need to mitigate possible costs to short-term growth (e.g., wage subsidies for nationals, support for female employment).
- Trade-offs noted:
  - Some reforms (improving business regulation, financial market deepening) may boost near-term growth.
  - Labor market reforms’ growth effects depend on specifics; increasing female participation will benefit growth but could have upfront costs for firms.
  - Expatriate labor fees will likely have a negative impact on growth and competitiveness (effect on Saudi employment less clear).

### Financial sector resilience, SAMA actions, and market development
- Bank resilience: banks are well regulated and supervised and remain liquid and resilient; stress tests show most banks, including all systemically important banks, can meet regulatory capital requirements under severe shocks; all banks pass severe liquidity tests.
- SAMA policy measures (January 2016—June 2017) and outcomes:
  - Monetary policy: Raised the reverse repo rate from 50 to 125 basis points. Repo rate left unchanged at 200 basis points. (June 2017, March 2017, December 2016)
  - Liquidity: Thomson Reuters appointed as SAIBOR administrator and calculation agent (November 2016); introduced 90, 28, and 7-day repos (September 2016, August 2016); provided SAR 20 billion of government entity deposits to banks (September 2016); offered (deposits) of SAR 15 billion to banks (June 2016); raised banks' maximum allowable loan-to-deposit ratio from 85 to 90 percent (February 2016).
  - Mortgage/other: Risk-weight for mortgage loans reduced from 100 percent to 75 percent (April 2017); increased LTV cap from 70 percent to 85 percent for real estate finance extended by banks on citizens' first home (January 2017); asked banks to reschedule personal and property loans if requested by borrowers affected by cuts in bonuses and allowances to government employees (October 2016; request revoked in late April when bonuses and allowances were reinstated); raised LTV ratio from 70 percent to 85 percent for real estate finance companies only (March 2016).
- Supervisory and resolution framework developments and staff observations:
  - SAMA enhanced risk-based supervision, introduced an aggregate large exposure limit (of 6 times banks’ eligible capital), and is reducing single borrower exposure limits from 25 to 15 percent of capital by 2019.
  - A commercial bank-funded Deposit Protection Fund (DPF) introduced; a draft resolution law (DRL) for systemic banks broadly corresponding to the FSB’s Key Attributes for Effective Bank Resolution is under legislative approval.
  - Staff recommended continued attention to: prudential oversight tools for Islamic and “hybrid” banks and mapping of risk profiles to the Basel framework; further enhancements to risk-based supervision (integration of on-site inspections, risk profile assessment, supervisory planning); careful monitoring of asset quality and classifying restructured loans due to borrower financial difficulties as substandard or doubtful (loan classification standards will be changed once IFRS9 standards are implemented in 2019).
- Macroprudential framework and liquidity management:
  - National Financial Stability Committee (NFSC) comprising SAMA, the MoF, and the CMA has been activated.
  - Agreed further steps: refine tools such as the EWE, address data gaps, refine definitions of key ratios (e.g., broaden debt service-to-income to include payments on all debt), and use macroprudential policy tools countercyclically.
  - Staff sees scope to strengthen liquidity management: align market interest rates with policy objectives, develop liquidity forecasting, focus money market interventions on regular short-term operations, move away from non-competitive liquidity allocation, limit standing facilities to overnight maturity, and require collateral on all lending to commercial banks.
- Capital market deepening and debt market development:
  - Reforms introduced: eased restrictions on qualified foreign investors, permitted covered short-selling and securities lending, activated T+2 settlement, established Nomu parallel equity market, developing private equity and venture capital frameworks, new corporate governance guidelines, strengthened minority shareholder rights, only institutional investors permitted in Nomu.
  - Government bond market development: registration and listing of all government bonds on the Tadawul welcomed, but further steps recommended: introduce government debt auctions and increase transparency on issuances; develop a primary dealer system; establish a central security repository.
  - Authorities note planned operations of a real estate refinancing company (being established by the PIF) may bring more debt issuance; authorities are resolving uncertainties regarding treatment of fixed income assets for zakat purposes that are an impediment to investors.
- AML/CFT improvements:
  - National Risk Assessments (NRA) for both money laundering and terrorism financing drafts finished and under discussion.
  - Revised mechanisms implementing relevant UN security resolutions on targeted financial sanctions in January 2017.
  - Updating supervisory frameworks for risk-based AML/CFT supervision of financial institutions.
  - Priorities ahead of joint FATF and MENAFATF assessment: complete the NRAs and revisions to legal framework as soon as possible, and continue work with financial institutions to ensure compliance with customer due diligence requirements.

*Source: IMF staff analysis in the provided content unit.*

### 51.      SAMA welcomed the global discussion on correspondent banking relationships (CBRs).

### cr17316 - 51.      SAMA welcomed the global discussion on correspondent banking relationships (CBRs).

### Correspondent Banking Relationships (CBRs)
- SAMA welcomed the global discussion on correspondent banking relationships (CBRs).
- Saudi Arabian banks have not experienced a decline in CBRs, according to authorities.
- SAMA stressed vigilance because a decline in CBRs "has the potential to pose financial stability risks and affect economic growth and development."
- Authorities are working closely with banks to ensure robust compliance with AML/CFT requirements to maintain trust and confidence of correspondent banks.

### The Exchange Rate and External Stability
- The government remains committed to the exchange rate peg to the U.S. dollar.
- SAMA emphasized the peg’s role as a monetary anchor and for the certainty it provides for trade and investment.
- Reserves remain "at very comfortable levels despite the decline over the past two years" and provide "considerable credibility to the peg."
- The real effective exchange rate has appreciated over the past two years and is above its long-term average, but authorities did not view this as adversely affecting the economy given its reliance on oil.
- Staff view:
  - Staff agreed the exchange rate peg remains appropriate given the structure of the economy.
  - Benefits of greater exchange rate flexibility (more stable fiscal revenues in riyal terms, potential support for non-oil tradable sector development, independent interest rate policy) are outweighed by costs and risks.
  - Depreciation would entail significant costs and risks given the longstanding and credible anchor provided by the peg, increasing uncertainty regionally and yielding very limited competitiveness gains given current economic structure.
  - Fiscal policy can deliver necessary external adjustment more smoothly and in an easier-to-target way than exchange rate adjustment.
  - The peg should be reviewed regularly in coordination with other GCC countries to ensure appropriateness given desired economic evolution away from oil and reliance on expatriate labor.
- External position and fiscal policy:
  - Staff viewed the external position in 2016 as "substantially weaker than consistent with desirable medium-term fiscal policy settings."
  - A "large, sustained, and well-paced fiscal consolidation is needed over the medium-term to strengthen the external position and support the exchange rate peg."
  - Authorities expected ongoing reforms and fiscal adjustment to strengthen the external position going forward.

### Statistical Issues
- Improvements noted:
  - GASTAT is publishing quarterly real GDP data on a regular basis.
  - GASTAT has started publishing quarterly labor market data.
  - GASTAT has introduced a real estate price index and an industrial production index.
- Remaining weaknesses and data gaps:
  - Fiscal data is not yet being reported and published in GFS format (MoF hopes to complete this in coming months).
  - Financial account data is weak and there are large errors and omissions in the balance of payments.
  - More transparency recommended for SAMA’s balance sheet where "other liabilities" are large.
  - Need for more disaggregated data on bank credit and deposits and more comprehensive data on household and corporate balance sheets.
- Recommendation:
  - Authorities should aim for SDDS subscription as soon as possible.

### Staff Appraisal — Key Findings and Policy Recommendations
- Progress and reforms:
  - Authorities have made considerable progress initiating implementation of an ambitious reform agenda.
  - Fiscal consolidation efforts are beginning to bear fruit.
  - Progress with reforms to improve the business environment is gaining momentum.
  - A framework to increase transparency and accountability of government is largely in place.
  - Effective prioritization, sequencing, coordination, clear communication, and equitable measures are essential to secure social buy-in and success.
- Growth outlook:
  - Low oil prices and fiscal consolidation are impacting the economy.
  - Non-oil sector growth is expected to pick up this year, but a decline in oil GDP is expected to result in overall real GDP growth "of around zero."
  - Growth is projected to be stronger over the medium-term as fiscal consolidation’s impact wanes and structural reforms take effect, but growth likely to remain well below past-decade levels.
  - Risks to the outlook are to the downside in the near-term, more balanced over the medium-term.
- Fiscal consolidation sequencing and targets:
  - A large, sustained, and well-paced fiscal adjustment is needed.
  - Strong fiscal buffers, availability of financing, and the cyclical position imply a rapid fiscal consolidation is neither necessary nor desirable.
  - Saudi Arabia has fiscal space to undertake a more gradual fiscal consolidation that balances the budget by 2022 rather than in 2019 as originally set out in the FBP.
  - The fiscal measures announced, if fully implemented, "appear sufficient to move the budget close to balance in 2022."
  - Focus should be on implementing measures, smoothing planned adjustment, improving composition of expenditure adjustment to provide room for social safety net or other spending to support structural reforms, and identifying additional fiscal measures to achieve budget balance in 2022.
- Revenue reforms:
  - With excises implemented, the focus should be on successfully introducing the VAT.
  - Introducing the VAT by the beginning of 2018 will be challenging given the administrative and legal preparations still needed.
  - VAT exemptions and zero-rated items should be kept to a minimum.
  - Once VAT is successfully introduced, the rate should be raised from its "5 percent" level.
  - Other lower-yielding fees and fines are low priority; earmarking of new revenues should be avoided.
- Energy and water price reforms:
  - Authorities intend to raise energy and water prices toward international/cost recovery levels.
  - Scope exists for more gradual phasing of price increases to give households and businesses time to adjust and to ensure compensation mechanisms are operational and effective.
  - The household allowance for low- and middle-income households is very important.
  - Support to industry should be limited, temporary, and transparent.
- Government spending efficiency and composition:
  - Expenditures have been reduced through large cuts in capital outlays.
  - Further efficiency gains may be available from improved public investment management; greater focus needed on current outlays.
  - The government wage bill is high and should be reduced gradually.
  - The work of the BSR should be expanded across all Ministries and entities to identify further expenditure savings.
  - The effectiveness of spending in areas such as education could be improved and a review of the social safety net undertaken.
  - The planned public expenditure review will help identify sustainable expenditure savings.
- Fiscal framework and transparency:
  - Important steps being taken to strengthen fiscal framework and improve fiscal transparency.
  - Capacity of the macro-fiscal unit (MFU) needs further development.
  - Expenditure controls and cash management systems should be strengthened, including adoption of a treasury single account.
  - Publication of the first quarterly budget performance report is an important step toward greater fiscal transparency.
  - Progress on fiscal data improvement should be supported by a dedicated statistical unit in the MoF.
- Structural and labor market reforms:
  - Structural reforms will support stronger non-oil growth; progress made reducing obstacles to private sector growth and exports (reducing custom clearance times, easing business start-up, nearing completion of new bankruptcy and commercial mortgage laws).
  - Efforts on privatization and PPP agendas are welcome.
  - Increasing employment of Saudi nationals in the private sector is essential:
    - Reforms to education and training systems are important to develop needed skills.
    - Increased foreign labor fees and time-bound wage subsidies for Saudis will help reduce the Saudi-expatriate wage gap.
    - Further reforms needed: greater mobility of expatriate workers via visa system reform could help close the wage gap and boost productivity.
    - Government should set clear expectations about limited prospects for future public sector employment to incentivize nationals toward private sector jobs.
    - A national dialogue between government, businesses, and prospective workers/entrepreneurs could help tailor job-solution approaches.
  - Encouraging more female employment will have a positive economic impact:
    - Efforts to broaden transportation options, childcare facilities, and encourage teleworking are welcome.
    - Female entrepreneurs could be supported via dedicated SME programs.
    - Companies could be offered fiscal incentives to build or reconfigure work spaces to accommodate women in line with social norms.
- Financial sector and supervision:
  - Banks are well regulated and supervised; SAMA has successfully managed emerging financial sector risks over the past year.
  - Given unique risk profile of Islamic products, SAMA should remain vigilant and expand its prudential oversight toolkit for banks offering such products.
  - SAMA should continue to monitor asset quality given the weak growth outlook.
  - The liquidity management framework should be strengthened.
  - Efforts to finalize AML/CFT risk assessments and ensure effective AML/CFT compliance by financial institutions should continue.
  - Significant progress has been made with capital market reforms, but more could be done to support development of the domestic debt market.
- Exchange rate peg reiteration:
  - "The exchange rate peg to the U.S. dollar remains appropriate."
  - A large, sustained, and well-paced fiscal consolidation over the medium-term is needed to strengthen the external position and support the exchange rate peg.

*International Monetary Fund — Staff Report excerpt*

### 69.      It is recommended that the next Article IV consultation take place on the standard 12-

### 69. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Fiscal Developments
- Fiscal Balance (Percent of GDP): charts show series for 2011–2017 with projected values; countries included: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, U.A.E.
- Average crude price in 2016: $42.8 (U.S. dollars per barrel).
- Non-oil Fiscal Deficit (Percent of non-oil GDP): series for 2011–2017 with projections.
- Non-oil Revenue (Percent of non-oil GDP): series for 2011–2017 with projections.
- Real Government Spending Growth (y-o-y percentage change) for 2008–2017: decomposition into Total Spending, Current Spending, Capital Spending; projected values shown.
- Projected and Sustainable Non-oil Primary Deficit (As percent of non-oil GDP): series 2013–2022 with:
  - Sustainable level (annuity constant in real terms)
  - Sustainable level (annuity constant in real per capita terms)
  - Projected level
  - Average (2005–2015)

### Real Sector Developments
- Contribution to Real GDP Growth (Percent), 2008–2016: components include Public consumption, Private consumption, Public investment, Private investment, Change in stocks, Net exports; GDP series shown.
- GDP growth decomposition: Oil; Non-oil: private; Non-oil: public (2008–2016).
- Purchasing Managers' Index (Index) and New Orders / Business Conditions (May-11 to May-17).
- Indicators of Consumer Spending (3 month moving average, y-o-y percent change): Point of Sales Transactions; ATM withdrawals (Apr-11 to Apr-17).
- Consumer Sentiment (Index) (May-10 to May-17).
- Indicators of Investment Spending (3 month moving average, y-o-y percent change): Letters of credit opened for building material and machinery imports; Domestic cement sales (Apr-11 to Apr-17).

### Inflation and Financial Market Developments
- Food Price Indices (y-o-y percent change): Saudi Arabia vs World index (May-08 to May-17).
- PMI Input and Output Index: Input price index and Output price index (May-10 to May-17).
- Equity Prices (y-o-y percent change): All shares, Petrochemicals, Constructions (Jun-10 to Jun-17).
- CPI Inflation (% y/y) and Contributions to Inflation: Food, Tobacco, Energy, Housing, Core CPI contributions (Aug-13 to May-17).
- 3-month SAIBOR and U.S. LIBOR (Percent): SAIBOR vs LIBOR series (May-10 to Jun-17).
- Saudi Arabia International Bonds Yields (Sovereign yields spread to US T-bills, in basis points): Spread to 5yr, 10yr, 30yr US T-bill (Oct-16 to Jun-17).

### External Sector Developments
- Spot Crude Price: Dubai ($/BBL, DOE) and Petrochemical Price Index (Apr-10 to Apr-17).
- International Investment Position (US$ billion) 2009–2017: asset and liability breakdowns; Net IIP series.
- Contribution to Non-oil Export Growth (Percent) by product categories for 2007–2016: Re-exports, Other, Machinery & Electrical, Metal Products, Plastic Products, Petrochemicals, Foodstuffs, Total.
- Contribution to Import Growth (Percent) by categories for 2007–2016: Machinery and Equipment, Transportation, Base metals, Chemical products, Agricultural products, Plastic products, Mineral products, Others, Total imports.
- Spot and Forward Exchange Rates, and Oil Prices (Saudi Riyal per US$): Spot exchange rate, 12M forward exchange rate, Oil prices (RHS, US$ per barrel) (Jun-14 to Jun-17).
- Real and Nominal Effective Exchange Rates (Index, 2010=100): REER and NEER (Sep-00 to May-17).

### Monetary Developments
- Credit Growth (y-o-y percent change) 2007Q2–2016Q4: SCI credit growth, Bank credit to private sector growth, Total credit growth.
- Sectoral Decomposition of Credit Growth (Percent) 2010Q1–2017Q1: sectors include Other (incl Agriculture), Services, Govt & Quasi Govt, Consumer loans, Finance, Transportation, Commerce, Building and Construction, Manufacturing/Processing/Mining.
- Real Estate Loan Growth (y/y percent change, LHS) and Share of Total Lending to Private Sector (RHS) 2010Q1–2017Q1.
- Excess Liquidity in Banking Sector (Percent of bank assets) Apr-10 to Apr-17.
- Commercial Bank Deposits: Growth y-o-y percent change (LHS) and Loan to Deposit Ratio (RHS) Apr-10 to Apr-17.
- Change in Bank Balance Sheet Composition, Apr 16–17 (Percentage point change of share of total assets): Private, Public, Other, Foreign; Excess deposits; SAMA bills; Other; Capital acct; Foreign Deposits; Assets; Liabilities with listed values (e.g., -2.4, 2.2, 0.72, etc. visible in chart).

### Oil Market Developments
- Oil Production and Exports (Million barrels per day): series for Exports: Crude Oil; Exports: Refined products; Oil production (Mar-11 to Mar-17).
- Indicator of Oil Investment (BHI International Rig Counts) Nov-12 to May-17 for Saudi Arabia, Middle East, Global.
- Consensus Oil Price Forecasts (Brent Crude Oil Forecasts, US$/barrel): Historical, Consensus Forecasts, High, Low (Mar-16 to May-18 and beyond).
- Oil Production in Periods of Falling Oil Prices (Monthly Crude Oil Production, mbd): historical episodes 1981–1986, 1998–1999, 2008–2009, 2014–2016 (T-36 to T+36 months).
- Output of Major Oil Producers (Million barrels per day) Mar-11 to Mar-17: Russia, Saudi Arabia, US, Iran, Iraq.
- Brent Crude Oil Futures and Confidence Intervals: Futures with 95%, 86%, 68% confidence intervals.

### Impact of Lower Oil Prices on Fiscal and External Outcomes
- Oil price shock assumption: oil price to be 20 to 44 percent below the WEO oil price from 2018 to 2022.
- Fiscal Balance (in percent of GDP): Baseline vs Oil price shock series for 2015–2022.
- Net Financial Assets (in percent of GDP): Baseline vs Oil price shock series for 2015–2022.
- Current Account Balance (in percent of GDP): Baseline vs Oil price shock series for 2015–2022.
- Reserves (in months of imports): Baseline vs Oil price shock series for 2015–2022.

### Baseline and GFASR Scenarios — Key Economic Indicators
- GFASR: "Gradual Fiscal Adjustment with Structural Reforms" scenario contrasted with Baseline for 2017–2022 across indicators:
  - Deficit (as a percent of GDP): Baseline vs GFASR (2017–2022). Figure shows starting around -11.0 to -1.0 range.
  - Non-Oil Revenue (as a percent of GDP): Baseline vs GFASR (2017–2022) with values spanning 6.0 to 18.0 percent.
  - Expenditure (as a percent of GDP): Baseline vs GFASR (2017–2022) with values around 30.0 to 40.0 percent.
  - Net Financial Assets (as a percent of GDP): Baseline vs GFASR (2017–2022) with ranges -15.0 to 20.0 percent.
  - Non-Oil Real GDP Growth (y-o-y percent change): Baseline vs GFASR (2017–2022) with values 0.0 to 4.0 percent.
  - Inflation (y-o-y percent change): Baseline vs GFASR (2017–2022) with values 0.0 to 5.0 percent.

### Structure of Government Spending
- Government Spending (in percent of GDP) 2004 vs 2016: Total, Current spending, Capital spending; comparative averages for Saudi Arabia, GCC, AEs, EMs.
- Change in Total Spending (in percent of GDP), 2004–2016: Saudi Arabia, GCC, AEs, EMs with values including 7.8, 11.4, 1.8, 5.3.
- Government Wage bill to GDP and Government Employment to Working-age Population (percent): Saudi Arabia vs AEs vs EMs.
- Public Capital Stock (percent of GDP) and Quality of Infrastructure (rank, 2015 where rank = 1 best and 144 worst): indicators for Saudi Arabia, GCC, AEs, EMs.
- Government education (in % total exp) and Adult literacy rate (in percent): comparative series and ranks.
- Nominal GDP per capita (thousands US$) vs Social Assistance Spending (in percent of GDP): charted.

### Labor Market Developments
- Saudi Nationals Unemployment Rates (in percent) 2007–2016: Male, Female, Youth (ages 15–24), Total.
- Saudi Nationals Unemployed by Sex and Education (in percent of total unemployed, as of 2016Q3): Male/Female by education (More than secondary school; Secondary school or less).
- Average Monthly Salaries (in SAR, as of 2016H1): Government, Public Enterprises, Private Sector for Saudi Nationals and Expatriates.
- Employment and Real GDP by Sector (as of 2016Q3): sectoral distributions (Construction, Commerce, Agri and Fishing, Manufacturing, Financial, Transportation, Utilities, Mining and Quarrying, Other Activities, Government) with Nationals and Expatriates (in thousands) and Real GDP (billions of SAR, rhs).
- Average Weekly Working Hours by Sector (as of 2016Q3).
- Average Monthly Salaries by Sector and Nationality (in SAR, as of 2016H1).

### Impediments to Private Sector Growth
- Doing Business Indicator, 2017, distance to frontier (DTF) components: Starting a Business; Dealing with Construction Permits; Getting Electricity; Registering Property; Getting Credit; Protecting Minority Investors; Paying Taxes; Trading Across Borders; Enforcing Contracts; Resolving Insolvency — comparative 2010, 2013, 2017.
- Doing Business Rankings: GCC Global Ranking comparisons across countries (UAE, Bahrain, Qatar, Oman, Saudi Arabia, Kuwait).
- Trade Barrier Ranking (1=least restrictive) and Trade Tariffs (% duty) across GCC.
- Most Problematic Factors for Doing Business (Percent of Responses): Crime and theft; Government instability/coups; Poor public health; Inflation; Corruption; Tax regulations; Foreign currency regulations; Inadequate supply of infrastructure; Tax rates; Policy instability; Insufficient capacity to innovate; Poor work ethic in national labor force; Access to financing; Inefficient government bureaucracy; Inadequately educated workforce; Restrictive labor regulations.
- Service Trade Restrictions Index and other Global Competitiveness Indicators: Saudi Arabia relative to Bahrain, Kuwait, Oman, Qatar, U.A.E.; AE and EM 80th percentile benchmarks.

### Selected Key Economic Indicators (Tables)
- Table 1. Selected Economic Indicators, 2013–22 (Prel./Proj.): includes exact series for:
  - Crude oil production (million of barrels per day): 2013–2022 with values including 9.6, 9.7, 10.2, 10.5, 10.0, 10.1, 10.1, 10.2, 10.3, 10.3.
  - Average oil export price (U.S. dollars per barrel): values include 105.4, 95.7, 50.4, 41.5, 50.3, 50.4, 49.9, 50.1, 52.0.
  - Nominal GDP (SAR billions) and (US$ billions): exact series 2,800; 2,836; 2,454; 2,424; 2,596; 2,713; 2,795; 2,896; 3,018; 3,095 (SAR) and 747; 756; 654; 646; 692; 723; 745; 772; 805; 825 (US$).
  - Real GDP growth series: 2.7, 3.7, 4.1, 1.7, 0.1, 1.1, 1.6, 1.8, 2.0, 2.2.
  - Consumer price index (avg): 3.5, 2.7, 2.2, 3.5, 1.7, 5.0, 2.0, 2.2, 2.1, 2.0.
  - Current account balance (percent of GDP): 18.1, 9.8, -8.7, -3.9, 0.2, 0.5, 0.9, 0.9, 0.9, 1.2.
  - SAMA's total net foreign assets (US$ billions): 716.7; 724.3; 608.9; 528.6; 472.6; 442.0; 419.2; 393.5; 360.4; 335.1.
  - Government deposits at SAMA and Central government's gross debt and net financial assets with exact series.
  - Population (millions): 30.0; 30.8; 31.0; 31.7; 32.4; 33.0; 33.7; 34.4; 35.0; 35.7.
  - Unemployment rate (nationals, in percent of total): 11.7; 11.7; 11.5; 12.3 (series provided).
  (Full table includes many additional precise series 2013–2022.)

- Table 2. Budgetary Central Government Operations, 2014–22 (Prelim./Budget/Proj.): exact budgetary series in SAR billions and percent of GDP:
  - Revenue series (SAR billions): 1,044; 612; 519; 692; 649; 757; 851; 982; 1,019; 1,052.
  - Oil and Non-oil revenue splits, Expenditure (SAR billions) 1,141; 999; 936; 890; 890; 936; 982; 1,023; 1,056; 1,077.
  - Expense and Net acquisition of non-financial assets with detailed line items (Compensation of employees, Purchase of goods and services, Subsidies, Social benefits, Interest payments).
  - Net lending (+)/borrowing (-): -96; -387; -416; -198; -241; -179; -131; -41; -37; -24.
  - Financing and Memorandum items including Non-oil overall balance and Average oil export price with exact values.

- Table 3. Fiscal Operations of the General Government, 2010–16 (Percent of GDP): I. Budgetary central government—Revenue, Expenditure, Overall balance, Primary balance (2010–2016); II. Autonomous Government Institutions (PPA, GOSI) with Revenues, Expenditures, Overall balance; III. Public Investment Fund (PIF) items; IV. General government aggregates including Net assets(+)/debt(-) memo items. Example values:
  - Budgetary central government Revenue: 37.5; 44.4; 45.2; 41.3; 36.8; 25.0; 21.4 (2010–2016).
  - Expenditure: 34.0; 33.3; 33.2; 35.5; 40.2; 40.7; 38.6.
  - Overall balance: 3.6; 11.1; 12.0; 5.8; -3.4; -15.8; -17.2.

- Table 4. Balance of Payments, 2012–22 (US$ billions) Prelim./Proj.:
  - Current account: 164.8; 135.4; 73.8; -56.7; -24.9; 1.3; 3.6; 6.8; 6.7; 7.6; 9.8 (2012–2022).
  - Trade balance, Exports, Oil exports, Other exports, Imports (f.o.b.), Services breakdown, Income, Current transfers with exact series.
  - Financial account and Net errors and omissions series (e.g., Net errors and omissions: -45.6; -8.6; -9.4; -15.3; -40.1; -40.0; -28.0; -28.0; -28.0; -28.0; -28.0).
  - Overall balance and Financing series with exact values and memorandum items (SAMA's total net foreign assets, Net International Investment Position percent of GDP, WEO oil price series).

- Table 5. Monetary Survey, 2013–22 (SAR billions and percent changes):
  - Foreign assets (net) series 2,824; 2,875; 2,509; 2,128; 1,908; 1,783; 1,688; 1,581; 1,447; 1,342.
  - Domestic credit (net), Claims on government, Government deposits with SAMA, Claims on private sector, Money and quasi-money (M3) series and percent change rows.
  - Memorandum items: Specialized Credit Institutions credit (SAR billions) and ratios (M3-to-GDP; Claims on private sector-to-non-oil GDP).

- Table 6. Financial Soundness Indicators, 2007–16 (Percent unless otherwise indicated):
  - Banking sector structure: Number of licensed banks and concentration indicators.
  - Total assets (percent of GDP) and related metrics (e.g., Total assets 69.0; 66.8; 85.2; 71.6; 61.5; 63.0; 67.8; 75.4; 90.2; 94.1).
  - Capital adequacy: Regulatory capital to risk-weighted assets (20.7; 16.0; 16.9; 17.6; 17.6; 18.2; 17.9; 17.9; 18.1; 19.5).
  - Asset quality metrics: Gross NPLs to gross loans series (2.1; 1.4; 3.3; 3.0; 2.2; 1.7; 1.3; 1.1; 1.2; 1.4) and Total provisions to gross NPLs, Total provisions for loan losses, sectoral loan shares.
  - Profitability and liquidity indicators (Average pretax return on assets, Return on equity, Liquid assets to total assets, Customer deposits to net loans).
  - Stock market indicators: Stock market capitalization (percent of GDP) and price index changes.

*Source: IMF staff calculations and Saudi Arabian authorities (selected tables and figures from the Saudi Arabia country report).*

### Appendix I. Saudi Arabia’s Nonfinancial Corporate Sector:

### Appendix I. Saudi Arabia’s Nonfinancial Corporate Sector: Performance and Vulnerabilities

### Profit Trends and Sector Performance
- Profits of 122 listed non-financial firms declined by 6 percent in 2016, following a decline of nearly 17 percent in 2015.
- Total operating revenue (sample of 122 firms): $159.2 billion (2014), $141.1 billion (2015), $136.9 billion (2016); 2015–16 growth: -3.0 percent.
- Total operating profit/loss (sample): $26.5 billion (2014), $22.1 billion (2015), $20.8 billion (2016); 2015–16 growth: -5.9 percent.
- Sector highlights:
  - Petrochemical Industries: Operating Revenue $84.9 billion (2014), $62.2 billion (2015), $57.4 billion (2016); Operating Profit $15.1 billion (2014), $10.2 billion (2015), $10.2 billion (2016); 2015–16 profit growth -0.2 percent.
  - Energy & Utilities: Operating Revenue $10.9 billion (2014), $11.7 billion (2015), $13.9 billion (2016); Operating Profit $0.4 billion (2014), $0.5 billion (2015), $0.8 billion (2016); 2015–16 profit growth 57.7 percent (benefited from higher electricity tariffs effective from the beginning of 2016).
  - Construction and Cement: recorded lower revenues and profits as government investment fell.
- Note: The analysis is based on Orbis data covering 122 non-financial public companies with available data for 2011–16; total revenue of these companies amounted to $137 billion, or about 29 percent of non-oil GDP, in 2016. Data last updated in May 2017. Sample may not be fully representative.

### Debt Profile and Liquidity
- Total debt of the companies in the sample: $144 billion in 2016 (30 percent of nonoil GDP), an increase of 5 percent from 2015.
- Debt concentration by sector (2016):
  - Petrochemical: 40 percent of total debt (Table 2 / Figure 1 shows petrochemicals ~57.0 percent of total debt by Orbis table data).
  - Energy & Utilities: 23 percent of total debt (Orbis table: Energy & Utilities total debt share 33.3 in 2016; sample caveats apply).
- Short-term debt increased by 25.7 percent in aggregate from 2015 to 2016.
- Saudi Electricity Company (SEC) specific:
  - SEC short-term debt rose from $0.9 billion in 2015 to $5.7 billion in 2016 (over 500 percent increase), considerably higher than its liquid assets.
- Cash and cash equivalents fell by 18 percent in 2016 across most sectors.
- Liquidity comparison:
  - Cash and cash equivalents exceeded short-term debt in 2014 and 2015, but in 2016 short-term debt exceeded cash holdings.
  - Only 4 of the 13 sectors in Table 2 had more cash on hand than short-term debt at end-2016.

### Debt Repayment Schedule and Maturity Concentration
- Repayment obligations on outstanding corporate debt are relatively low until 2020: maturing debt over the next four years is $6–$12 billion a year (or between 4 and 7 percent of the outstanding debt stock) and mainly takes the form of loans.
- Repayments are highest for petrochemical, energy, and telecom companies.
- Repayments are much higher in 2021 and 2023 than during 2017–20.
- Debt sample for repayment schedule: covers 110 nonfinancial companies with total debt outstanding of $168 billion as of May 2017 (Bloomberg-based sample differs from Orbis sample).

### Interest Coverage, Implied Interest Rates, and Debt-at-Risk
- Interest Coverage Ratio (ICR) declined in 2016 but remains higher than 2 in most sectors.
- Drivers of ICR decline: lower profits and higher interest costs; largest declines in hotels and tourism, wholesale and retail, and transport sectors.
- Implied interest rate on corporate debt: around 2.5 percent in 2016; on an upward trend since 2013 for most sectors (energy sector excluded from implied interest rate calculation due to lack of interest paid data).
- Debt-at-risk definition: debt of companies with an ICR less than 1.5.
  - Debt-at-risk increased from 30 percent of total debt in 2015 to 40 percent at end-2016.
  - Firms-at-risk (percentage of total firms with debt-at-risk) increased from 14 percent in 2015 to 18 percent in 2016.

### Sensitivity Analysis and Stress Scenarios
- Three scenarios used to assess resiliency (Table 3):
  - Scenario 1: Operating Income Decrease by 6 percent; Increase in Borrowing Cost 70 bps.
  - Scenario 2: Operating Income Decrease by 20 percent; Increase in Borrowing Cost 150 bps.
  - Scenario 3: Operating Income Decrease by 39 percent; Increase in Borrowing Cost 300 bps.
- Key sensitivity outcomes:
  - Median ICR drops under all scenarios but remains above 2.
  - Debt-at-risk increases to between 46 and 64 percent of total debt across scenarios.
  - Most at-risk debt concentrated in petrochemicals, industrial, telecommunications, and real estate sectors.
  - Real estate sector particularly vulnerable: 40 to 80 percent of their total debt would become at risk under scenarios 2 and 3.
- Sectoral heterogeneity: vulnerability varies significantly by sector (petrochemical, industrial, telecommunications, real estate most affected).

### Public Debt and External Debt Context (Selected Projections and Indicators)
- Public sector (central government) DSA baseline summary (selected):
  - Nominal gross public debt projections (in percent of GDP): 10.0 (2015), 5.8 (2016), 13.1 (2017), 16.7 (2018), 20.3 (2019), 23.9 (2020), 24.5 (2021), 24.7 (2022), 24.9 (2022).
  - Public gross financing needs (in percent of GDP): -6.7 (2015), 15.8 (2016), 18.2 (2017), 9.4 (2018), 6.6 (2019), 4.6 (2020), 2.9 (2021), 3.2 (2022), 3.3 (cumulative).
  - Real GDP growth (in percent): 4.0 (2015), 4.1 (2016), 1.7 (2017), 0.1 (2018), 1.1 (2019), 1.6 (2020), 1.8 (2021), 2.0 (2022), 2.2 (2022).
  - Effective interest rate (in percent): 5.5 (2015), 5.9 (2016), 3.5 (2017), 3.3 (2018), 3.4 (2019), 3.6 (2020), 3.9 (2021), 4.1 (2022), 4.3 (2022).
  - Change in gross public sector debt (in percent of GDP): -4.0 (2015), 4.2 (2016), 7.3 (2017), 3.6 (2018), 3.6 (2019), 3.6 (2020), 0.6 (2021), 0.2 (2022), 0.2 (cumulative), 11.8 (cumulative).
  - Identified debt-creating flows (in percent of GDP): -3.9 (2015), 3.6 (2016), 12.7 (2017), 5.6 (2018), 5.5 (2019), 5.5 (2020), 2.5 (2021), 2.0 (2022), 2.0 (cumulative), 23.0 (cumulative).
  - Primary deficit (in percent of GDP): -9.5 (2015), 17.7 (2016), 20.4 (2017), 10.8 (2018), 7.9 (2019), 5.8 (2020), 2.4 (2021), 2.1 (2022), 1.6 (cumulative), 30.6 (cumulative).
- External debt (baseline, percent of GDP): 12.6 (2012), 12.3 (2013), 13.1 (2014), 13.8 (2015), 19.8 (2016), projected 21.7 (2017), 23.8 (2018), 26.0 (2019), 27.1 (2020), 25.5 (2021), 25.9 (2022).
- Gross external financing need (in billions of US dollars): -129.4 (2012), -84.8 (2013), -31.4 (2014), 111.4 (2015), 68.9 (2016), projected 47.5 (2017), 50.5 (2018), 52.5 (2019), 56.6 (2020), 59.1 (2021), 55.0 (2022).
- Debt-stabilizing non-interest current account: 1.9 (2012–22 table).

Sources: Orbis, Bloomberg, and IMF staff estimates.

### Appendix III. Structural Policy Gaps and Obstacles to Private

### Appendix III. Structural Policy Gaps and Obstacles to Private Sector Growth and Employment

### Overview
- The note benchmarks Saudi Arabia against Advanced Economies (AEs), Emerging Markets (EMs), and other GCC countries to identify structural gaps in the business environment and labor market.
- The identified gaps could add 2 percentage points to non-oil growth over the longer-term if addressed.
- Reforms in many of the areas highlighted in this appendix are underway.

### Identifying Structural Gaps — Methodology
- Comparative analysis uses a comprehensive set of indicators based on surveys and socio‑economic indicators.
- Indicators include World Bank Doing Business 2017, WEF Global Competitiveness Indicators (GCIs), and IMF staff calculations.
- Caveat: indicators may not fully capture all aspects of the underlying environment.

### A. Private Sector Business Environment — Key Findings
- Saudi Arabia is generally below the 80th percentile of AEs and EMs and below the GCC average on several Doing Business categories.
- Starting a business
  - Starting a business in Saudi Arabia takes 15 days and requires 12 procedures compared to an advanced country average of 7 procedures.
  - Selected Doing Business indicator: Starting a Business: DTF = 77 (AE 80th = 95; EM 80th = 90; GCC avg. ex Saudi = 85).
  - Starting a Business: Procedures (number) = 12 (AE 80th = 7; EM 80th = 10; GCC avg. ex Saudi = 7).
  - Starting a Business: Time (days) = 15 (AE 80th = 12; EM 80th = 33; GCC avg. ex Saudi = 19).
- Getting credit and financial development
  - Getting Credit: DTF = 50 (AE 80th = 73; EM 80th = 70; GCC avg. ex Saudi = 39).
  - Getting Credit: Strength of legal rights index (0–12) = 2 (AE 80th = 8; EM 80th = 8; GCC avg. ex Saudi = 1).
  - Getting Credit: Credit bureau coverage (% of adults) = 48 (AE 80th = 100; EM 80th = 53; GCC avg. ex Saudi = 22).
  - WEF GCIs highlight ease of access to financing and legal rights as issues.
- Trading across borders
  - Trading Across Borders: DTF = 50 (AE 80th = 100; EM 80th = 81; GCC avg. ex Saudi = 67).
  - Time to export: Border compliance (hours) = 69 (AE 80th = 24; EM 80th = 102; GCC avg. ex Saudi = 50).
  - Time to export: Documentary compliance (hours) = 90 (AE 80th = 2; EM 80th = 96; GCC avg. ex Saudi = 19).
  - Documentary compliance for exporters: around 90 hours in Saudi Arabia compared to 2 hours on average for advanced countries.
  - Cost and time to import also substantially higher (selected figures: Time to import: Border compliance (hours) = 228; Time to import: Documentary compliance (hours) = 131; Cost to import: Documentary compliance (USD) = 390).
- Enforcing contracts and insolvency
  - Enforcing Contracts: DTF = 55 (AE 80th = 73; EM 80th = 63; GCC avg. ex Saudi = 60).
  - Enforcing Contracts: Quality of judicial processes index (0–18) = 6 (AE 80th = 13; EM 80th = 9; GCC avg. ex Saudi = 7).
  - Resolving insolvency: information suggests there were no foreclosure, liquidation, or reorganization proceedings filed in the last 12 months.
- FDI and rules
  - WEF GCIs indicate gaps in rules and regulations governing foreign direct investment; FDI inflows have fallen sharply in recent years (statement in source).

### A. Private Sector Business Environment — Perception and Competitiveness
- WEF Executive Opinion survey: most problematic factors for doing business are the labor market (restrictive labor regulations and inadequately educated workforce), inefficient government bureaucracy, and access to financing.
- GCIs point to gaps in the number of procedures to start a business, rules on FDI, financial market development, and education / training inputs for competitiveness.

### B. Labor Market — Structure and Key Statistics
- Labor market structure
  - About 70 percent of nationals work in the public sector.
  - Expatriates fill most private sector jobs (80 percent).
- Participation and unemployment
  - Female labor force participation: 19 percent in 2016 (up from 14 percent in 2011).
  - Unemployment of nationals: 12.3 percent.
  - Unemployment concentrated among the young: 40 percent.
  - Unemployment concentrated among females: 35 percent.
- Employment needs and fiscal context
  - Weak growth and fiscal consolidation will limit public sector employment opportunities.
  - Over 1 million private sector jobs will be needed for Saudis over the next 5 years, double that achieved from 2007–16, if the unemployment rate is not to rise.
- Wage gaps and incentives
  - Significant gaps exist between private and public sector wages for Saudi nationals and between wages paid to Saudi nationals and expatriates in the private sector; these gaps skew demand toward expatriates and supply toward public sector employment.
  - Working conditions (including a shorter work week) and perceived public sector stability amplify these incentives.
- Human capital and skills
  - Saudi Arabia has high literacy rates at 94 percent.
  - Gaps exist in net enrollment for secondary education (comparators outperform Saudi Arabia).
  - TIMSS math score gaps: TIMSS math score...-26.3% (EM 80th and AM/OECD comparisons in source table).
  - Mean years of schooling gap: -23.0% (EM 80th gap -9.4%; OECD/AM 80th gap -29.3%) — figures appear in the human capital comparison table.
  - GCIs show gaps in the quality of primary education and in higher education and training, and limited availability of research and training services.
- Labor force participation distribution
  - Female share of university graduates exceeds one-half, yet female participation remains low at 19 percent in 2016.
  - For Saudi males, participation rates are relatively low (in the bottom 25th percentile of the sample considered).

### Infrastructure — Assessment and Efficiency
- Public capital and infrastructure quality
  - Saudi Arabia has spent heavily on public investment and has a relatively high public capital stock.
  - Quality of infrastructure ranks at or near Advanced Markets (AMs) in the GCI.
  - Conclusion: infrastructure is not identified as one of the key structural gaps holding back private sector growth.
- Efficiency of public investment
  - Caution: ensure infrastructure spending is efficient; higher efficiency raises the productivity dividend of public investment.
  - 2015 IMF study “Making Public Investment More Efficient” indicates closing the efficiency gap can significantly raise growth returns to public investment.
  - Example estimate from that study (as cited): a one-off 1 percent of GDP increase in public investment increases output by 0.3 percent for countries in the bottom efficiency quartile, but by 0.6 percent for countries in the top efficiency quartile.
  - Assuming movement from the 2nd lowest to the highest efficiency quartile in about 4 years would add a 0.2 percentage points increase in growth for every 1 percent of GDP increase in public investment.

### Growth Impact of Structural Reforms — Summary of Approach
- Closing the identified structural gaps could have a substantial impact on non-oil growth, though positive effects will take time to materialize.
- Cross-country regression results and other external estimates are used with caution due to uncertainty in applying such results to a single country context.
- The source begins to reference Mitra et al., 2016, and estimated structural gaps between Saudi Arabia and the 80th percentile of advanced economies, noting potential additional growth effects, but the text provided ends mid-sentence and does not include the complete numerical estimate from that study.

*International Monetary Fund. Appendix III. Structural Policy Gaps and Obstacles to Private Sector Growth and Employment (excerpts).*

### 1.7 percentage points to growth

### 1.7 percentage points to growth

### Growth impact of structural reforms
- Over the period it implements these reforms and they bear fruit, additional growth contributions are estimated (Table 4):
  - Developing worker talent: 0.7 percentage points (pp)
  - Improving the business environment: 0.3 pp
  - Financial market development: 0.5 pp
  - Increased trade openness: 0.1 pp
- Table 4 (summary of IMF staff estimates):
  - Financial Market Development: 0.5
  - Trade Openness: 0.1
  - Worker Talent: 0.7
  - Competitive Business Environment: 0.3
  - Raising Female Labor Participation Rate: 0.4
  - Total: 2.1

### Female labor participation and growth
- Increasing female participation and employment opportunities would boost productivity, growth, and household incomes:
  - Steinberg and Nakane (2012) estimate a 0.2-0.4 percentage point increase in potential GDP growth if Japan raised its FLP rate from 63 percent (in 2010) to 70 percent (G7 level) over a 20-year period.
  - Applying the same methodology to Saudi Arabia: increasing the female labor participation rate from 19 percent to 28 percent by 2020 (as targeted in the National Transformation Plan) could add an additional 0.4 percentage points to growth.
  - Note: the Steinberg and Nakane estimate reflects the impact of increased labor input alone and does not include any increase in productivity.

### Human capital gap and growth
- IMF (2015) used years of schooling as a proxy for human capital quality:
  - Chile about 13 percent below the OECD average on years of schooling; implied GDP loss from Chile’s lower human capital: in the 6–7 percent range over 15–20 years.
  - Saudi Arabia’s gap in years of schooling is higher at 23 percent, suggesting more substantial gains if other factors are comparable.
  - Annual gains in growth from applying this methodology are similar to those reported for worker talent in Table 4.

### FSAP: Key recommendations (selected)
- Banking Oversight (Authorities: Government; SAMA)
  - Update the Banking Charter and Banking Control Law to delete contradictory and redundant provisions and revoke Article 21. [MT]
  - Codify and publish all bank legislative circulars, and eliminate those superseded. [ST]
  - Strengthen the supervisory approach by refining determination of banks’ risk and control ratings, aligning supervisory planning with banks’ risk profiles, and enhancing loan examination documentation. [ST]
  - Develop a licensing manual for banks and publish guiding principles for bank licensing. [SAMA] [ST]
  - Provide guidance to banks on mapping the risk profiles of Islamic products to the Basel framework. [SAMA] [ST]
  - Adopt the draft regulation on loan classification and ensure regular reporting on rescheduled and restructured loans. [SAMA] [ST]
  - Require banks to establish formal policies and procedures for loan rescheduling, refinancing, and restructuring and to submit prudential returns on such loans. [SAMA] [ST]
  - Strengthen cross-border cooperation by entering into MoUs with foreign regulators. [SAMA] [ST]
- Liquidity Management
  - Establish a liquidity forecasting framework to guide money market operations. [SAMA] [MT]
- Financial Safety Nets
  - Adopt and implement the Draft Resolution Law (DRL). [Government; SAMA] [ST]
  - Establish an Emergency Liquidity Assistance (ELA) framework. [SAMA] [ST]
  - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line. [MoF; SAMA] [ST]
- Macroprudential Policy
  - Broaden the definition of debt service to income in the regulations to include all types of debt and income. [SAMA] [ST]
  - Strengthen data collection and use for the household, corporate, and real estate sectors. [Government; SAMA] [MT]
- Timing convention: ST = Short Term (up to 2 years); MT = Medium Term (2–5 years).

### External stability assessment — key findings and projections
- Current account (CA)
  - CA deficit narrowed to 3.9 percent of GDP in 2016 from 8.7 percent of GDP in 2015.
  - Trade: imports of goods fell by 22 percent in 2016; exports declined by 10 percent (import volumes fell by 19 percent, export volumes increased by 4 percent).
  - Trade balance improved by 2½ percent of GDP and services deficit improved by 2.8 percent of GDP.
  - CA projected to move into a small surplus in 2017 and is expected to be in a surplus of about 1.2 percent of GDP by 2022.
  - Oil price assumptions: $50.3 a barrel in 2017; $52 a barrel in 2022; $41.5 in 2016.
  - From savings-investment perspective, the 2016 CA deficit narrowing was due to improvement in the private sector saving-investment gap offsetting deterioration in the public sector saving-investment gap.
  - Sensitivity: At current oil production levels, a $1 change in the oil price results in a 0.4 percent of GDP first round change in the current account balance.
- Financial flows and reserves
  - Financial outflows slowed but continued in 2016; financial inflows picked up in 2016 dominated by issuance of government debt; non-government sector continued to accumulate external assets.
  - Errors and omissions remained large: 6.2 percent of GDP.
  - fx reserves drawdown: $80 billion in 2016 (fx reserves fell by $115 billion in 2015).
  - SAMA’s net foreign assets at end-2016: $529 billion (82 percent of GDP, 32 months of imports, 111 percent of broad money, 566 percent of the Fund’s reserve metric).
  - Reserve coverage of the ARA metric: 566 percent in 2016; projected to decline to 279 percent of the metric by 2022.
  - Fund’s recommended range of reserves: 100 to 150 percent of the ARA metric.
  - Adjusted ARA scenario note: Using an oil price on average 33 percent lower than baseline would yield reserve coverage around 178 percent of the metric in 2022.
- Foreign Reserve Adequacy (selected figures from staff table)
  - Actual Foreign Reserves: 717, 724, 609, 529, 473, 442, 419, 393, 360, 335 (series across years with projection)
  - ARA metric: 95, 98, 99, 93, 101, 105, 110, 114, 116, 120
  - Foreign Reserves as a % of the ARA metric (in percent): 755, 732, 684, 566, 469, 420, 381, 345, 309, 279
  - Foreign Reserves in percent of GDP: 96.0, 95.8, 93.1, 81.8, 68.3, 61.1, 56.2, 51.0, 44.8, 40.6
  - Foreign Reserves in percent of broad money: 174, 157, 129, 111, 97, 90, 83, 76, 67, 60
  - Foreign Reserves in 3 months of imports of goods and services: 11.1, 11.7, 12.5, 10.6, 9.4, 8.7, 8.1, 7.5, 6.8, 6.2
- Net International Investment Position (NIIP)
  - NIIP estimated at 92 percent of GDP at end-2016; external assets at 145 percent of GDP and external liabilities at 53 percent of GDP.
  - External assets declined by 7.3 percent of GDP during 2016 largely due to decline in central bank foreign exchange reserves.
  - External liabilities rose by 6.3 percent of GDP in 2016 largely due to new sovereign loans and bond issuance.
  - Projected NIIP-to-GDP ratio: decline to 54 percent of GDP in 2022.
  - Average return on assets: 3.3 percent; return on liabilities: 3.5 percent during 2015–16.
  - Caveat: NIIP may be underestimated given large errors and omissions (6.2 percent of GDP in 2016) and BoP/IIP inconsistencies.
- External sustainability approach (annuities and norms)
  - Current account in 2016: -3.9 percent of GDP.
  - Current account norms in 2022 under two annuity rules:
    - Constant real per capita annuity: 6.3 percent of GDP
    - Constant real annuity: 0.4 percent of GDP
  - Current account gaps implied by these norms in 2022: -10.2 percent and -4.3 percent of GDP, respectively.
  - Estimated fiscal gaps (difference between actual fiscal balance and that consistent with intergenerational equity):
    - Constant real per capita allocation rule: -18.5 percent of GDP
    - Constant real annuity allocation rule: -14.1 percent of GDP
  - If the large fiscal gap is closed, the current account gap is largely eliminated.
  - Assumptions underpinning projections:
    - Proven oil reserves at end-2015: 258 billion barrels.
    - Oil production grows at a constant rate (2 percent), peaks at 12.9 million barrels in 2030, remains constant until oil production stops.
    - Oil prices increase by 2 percent, GDP deflator increases by 2.5 percent, real non-oil GDP grows by 4 percent after 2022.
    - Future oil revenues nominally discounted at 6 percent; population growth 1 percent.
- EBA-lite and oil-specific EBA results
  - EBA-lite approach:
    - Current account norm (2016): 4.4 percent of GDP
    - Actual current account: -3.9 percent of GDP
    - Current account gap: -8.3 percent of GDP (primarily driven by current fiscal policy settings)
    - Policy gap: -8.9 percent of GDP
  - EBA-oil approach II (oil-sample specification):
    - Current account norm: 4.1 percent of GDP
    - Current account gap: -8.0 percent of GDP
    - Policy gap: -14.5 percent of GDP
  - Note: EBA-lite and EBA approaches provide regression-based estimates of current account norms but may not fully account for specifics of oil-exporting countries (e.g., intergenerational savings needs).
- Real Effective Exchange Rate (REER) and competitiveness
  - Riyal pegged to U.S. dollar at 3.75 since 1986.
  - REER strengthened by 4 percent in 2016 and by 20 percent since mid-2014 as the U.S. dollar appreciated.
  - As of May 2017, the REER was unchanged relative to the 2016 average.
  - Terms of trade: fell by 44 percent in 2015 and by 12 percent in 2016; projected to improve by 15 percent in 2017.
  - REER in 2016 was 20 percent above its 10-year average.
  - Staff estimates a REER gap in the range of 15-25 percent.
  - Exchange rate movements have limited impact on competitiveness due to oil-dominant exports and limited substitutability between imports and domestically-produced products.
  - Expectation: as fiscal consolidation proceeds, the REER gap would narrow.

*Source: IMF staff estimates and text from the IMF document.*

### 8.      The Riyal peg to the U.S. dollar serves Saudi Arabia well. The pegged exchange rate

### 8. The Riyal peg to the U.S. dollar serves Saudi Arabia well. The pegged exchange rate

### Overall assessment
- The pegged exchange rate provides Saudi Arabia with a longstanding and credible policy anchor.
- Given the structure of the economy—exports dominated by oil and oil-related products and limited substitutability between imports and domestically produced goods—external adjustment will be driven primarily by fiscal policy rather than the exchange rate.
- The external balance sheet remains very strong, representing both savings of exhaustible resource revenues for future generations and protection against oil price volatility.
- The external position in 2016 remained substantially weaker than the level consistent with desirable medium-term fiscal policy settings.
- Planned fiscal adjustment needs to be successfully implemented over the medium-term to improve the current account balance and support the peg.
- Despite the substantial drawdown since 2015, reserves remain very comfortable against standard Fund metrics, although external savings are not sufficient from an intergenerational equity perspective.
- Under the government’s planned fiscal adjustment, reserve loss will slow over the medium term.

### Foreign asset and liability position and trajectory
- Background:
  - Net external assets were 92 percent of GDP at end-2016.
  - External assets declined by 7.3 percent of GDP during 2016 and by 12.5 percent since their peak in 2014Q4 largely due to a decline in central bank FX reserves.
  - External liabilities rose by 6.3 percent of GDP in 2016 mainly because of new borrowing.
  - Projections suggest the NIIP-to-GDP ratio will decline further over the medium-term to around 54 percent of GDP in 2022.
  - No details are available on the composition of external assets.
- Assessment:
  - The external balance sheet remains very strong.
  - Substantial accumulated assets serve both as savings and protection against oil price volatility.

### Potential policy responses
- Fiscal consolidation is necessary over the short- and medium term to strengthen the CA and support the exchange rate peg.
- The government’s Fiscal Balance Program (FBP) outlines planned adjustment based on:
  - further energy price reforms,
  - new non-oil revenue measures,
  - continued expenditure compression.
- The non-oil primary fiscal deficit is expected to narrow substantially over the medium-term and reduce the external gap.
- Structural reforms to diversify the economy and boost the non-oil tradeable sector over the medium-term will support a stronger external position over time.

### Current account
- Background:
  - The current account (CA) deficit narrowed to 3.9 percent of GDP in 2016 from 8.7 percent of GDP in 2015.
  - Imports of goods fell by 22 percent as the government cut spending and exports declined by 10 percent largely due to lower oil prices (import volumes fell by 19 percent while export volumes increased by 4 percent), leading to an improvement in the goods and services balance of 5 percent of GDP.
  - The CA balance is projected to move into a small surplus in 2017 as oil revenues increase and be in a surplus of 1.2 percent of GDP in 2022.
- Assessment:
  - Reliance on oil subjects the CA to wide swings and considerable uncertainty.
  - Estimated CA gaps:
    - -8 percent of GDP using the macro-balance approach.
    - between -4.3 and -10.2 percent of GDP using the external sustainability approach.
    - Staff assesses a CA gap of - 7.7 percent of GDP, with a range of -5.7 to -9.7 percent of GDP.

### Real exchange rate (REER)
- Background:
  - The Riyal has been pegged to the U.S. dollar at a rate of 3.75 since 1986.
  - The REER strengthened by 4 percent in 2016 and by 20 percent since mid-2014 as the U.S dollar appreciated.
  - As of May 2017, the REER was unchanged relative to its 2016 average.
  - The terms of trade fell by 44 percent in 2015 and by 12 percent in 2016, but are projected to improve by 15 percent in 2017.
  - The REER in 2016 was 20 percent above its 10-year average.
- Assessment:
  - The REER has appreciated at a time of a sharp decline in the terms of trade.
  - Most exports are oil or oil-related products; exchange rate movements have limited impact on competitiveness.
  - With limited substitutability between imports and domestically-produced products (which have significant imported labor and intermediate input content), exchange rate movements have only a small impact on import demand through substitution.
  - Staff estimates a REER gap in the range of 15–25 percent.
  - As fiscal consolidation proceeds, the REER gap would be expected to narrow.

### Capital and financial accounts: flows and policy measures
- Background:
  - Net financial outflows slowed in 2016.
  - Financial inflows picked up, dominated by the issuance of government debt.
  - Errors and omissions remained large (6.2 percent of GDP).
  - FX reserves continued to fall.
- Assessment:
  - Analysis of the financial account is complicated by the very large errors and omissions in the balance of payments.
  - The strong reserves position limits immediate risks and vulnerabilities.

### FX intervention and reserves level
- Background:
  - The government is developing a SWF by broadening the mandate of the Public Investment Fund (PIF).
  - Most of the government’s foreign assets are held at the central bank within international reserves.
  - Reserves fell to $529 billion (82 percent of GDP, 32 months of imports, and 566 percent of the IMF’s reserve metric) at end-2016, down from $727 billion in 2014.
- Assessment:
  - Reserves play a dual role—savings for both precautionary motives and for future generations.
  - Reserves are more than adequate for precautionary purposes (measured by the Fund’s metrics).
  - A substantial fiscal adjustment is needed over the medium-term to help moderate the decline in reserves, support the exchange rate peg, and achieve intergenerational equity.
  - A CA surplus and the resulting NIIP accumulation will be needed over the medium-term to ensure equitable intergenerational saving of oil revenues.

### Technical background notes
- NIIP and data issues:
  - The NIIP is likely underestimated given large errors and omissions in the balance of payments (6.3 percent of GDP in 2016) and inconsistencies between the BoP and IIP data.
  - If the errors and omissions reflect financial outflows, the NIIP will be under-recorded.
  - The cumulative CA balance between 1987 and 2016 was $1 trillion, while the net asset position in the IIP is $0.6 trillion.
- Projections and assumptions:
  - The decline in the NIIP over the forecast period is due to the assumption of continued large errors and omissions rather than recorded CA flows.
  - At current oil production levels, a $1 change in the oil price results in a 0.4 percent of GDP first-round change in the CA balance.
  - The oil price is assumed to be $50.3 in 2017, rising to $52 in 2022 ($41.5 in 2016).
- Methodology for CA norms and gaps:
  - EBA methodology assessments are not available for Saudi Arabia.
  - Staff considered two methodologies, including one that incorporates special intertemporal considerations for economies with high non-renewable resource shares.
  - Estimates suggest CA norms under the external sustainability (ES) approach were 6.3 percent of GDP and 0.4 percent of GDP under the constant real per capita annuity and constant real annuity allocation rules, respectively.
  - Using the macro-balance approach, the norm is estimated at 4.4 percent of GDP under the EBA-lite approach.
  - An alternative specification estimated on a sample of oil-exporting countries suggests a CA norm of 4.1 percent of GDP.
  - The CA deficit in 2016 was 3.9 percent of GDP. The corresponding CA gaps are estimated at, respectively, -10.2 and -4.3 percent of GDP under the ES approach and around -8 percent of GDP under the macro-balance approach.
  - The estimated fiscal gap is -18.5 percent of GDP (constant real per capita allocation rule) and -14.1 percent of GDP (constant real annuity allocation rule), derived as the difference between the adjusted fiscal balance and that consistent with intergenerational equity under the respective allocation rule.

*Prepared by IMF staff (Middle East and Central Asia Department) — Staff Report for the 2017 Article IV Consultation — Informational Annex (June 28, 2017).*

### Introduction of VAT and Excises: Key Policy Design Issues, April 28-May 10, 2016.

### Introduction of VAT and Excises: Key Policy Design Issues, April 28-May 10, 2016

### Tax and related technical assistance missions
- Introduction of VAT and Excises: April 28-May 10, 2016.
- Tax Administration (VAT and excises): May 17–30, 2016 and October 23-November 8, 2016.
- VAT Policy design: May 30–June 12, 2016.
- Excise Tax Implementation: January 14-30, 2017 and February 27–April 9, 2017.
- Energy Price Reforms: September 2016.
- Strengthening the Macro-Fiscal Unit: May 14–24, 2017.
- AML/CFT Diagnostic Mission: November 1–12, 2015.
- AML/CFT Threat Analysis Workshop: March 6–10, 2016.
- AML/CFT engagements: March and September 2016.

### Financial sector and FSAP engagement
- Main FSAP mission: January 2004.
- FSSA published: June 5, 2006.
- FSSA-update published: April 18, 2012.
- FSAP-update mission: April 16–30, 2011.
- Detailed Assessment of Observance published: July 19, 2013.
- FSAP missions held: November 2016 and February 2017.
- Resident Representative: No resident representative is stationed in Saudi Arabia.

### Relations with the World Bank Group
- World Bank Technical Cooperation Program (TCP) has provided reimbursable policy advice, capacity development, and implementation support to Saudi Arabia since 1975.
- Reimbursable Advisory Services (RAS) objectives:
  - Address development challenges: generating productive jobs for a fast-growing population.
  - Improve education and health system performance.
  - Improve business climate and investment appeal.
  - Enhance provision of public services including water, electricity, and transport.
  - Strengthen capacity in national, municipal institutions, and tourism.
- Ongoing World Bank advisory areas include: public financial management; business climate and foreign direct investment; small and medium enterprise strategy; urban development and city institutional strengthening capacity building; poverty and social protection issues; employment policy including unemployment assistance; education quality and relevance; health sector efficiency; energy efficiency; electricity sector legislation and policies; national ports strategy implementation planning; valuation of water resources; national transport strategy implementation support; creation of the Public Transport Authority.

### IFC engagements and achievements
- IFC strategy: selective investments to add value in institution building, new financial instruments, supporting SMEs, the private sector, and mobilizing South-South investments.
- Selective Direct Investments: total commitments of around $250 million in housing finance, insurance, leasing and microfinance finance.
- Promoting Regional Integration: since 2007, IFC has mobilized over US$2.5 billion from Saudi sponsors for investments in MENA and other emerging markets.
- Mobilizing: IFC engagements have resulted in obtaining commitments around $1.5 billion.
- Supporting Public-Private Partnerships (PPP): active engagement with a new PPP mandate signed with the Ministry of Health; past mobilization included over $1 billion for the Medina Airport PPP; successes include the Hajj Terminal and a captive desalination project at Jeddah Airport.
- Increasing Access to Finance: IFC advisory supports SMEs with capacity building, corporate governance support, and trainings for banks on SME financial services, risk management, and mortgage finance.

### Statistical issues — Assessment of Data Adequacy for Surveillance (As of June 28, 2017)
- General assessment: Data provision has some shortcomings, but is broadly adequate for surveillance.
- Most affected areas: government finance statistics, monetary and financial statistics, and external sector statistics.

- Real sector statistics:
  - National accounts: annual GDP estimates rebased to 2010 from 1999; revision increased coverage of services (distribution and financial services) and resulted in upward revisions to the level of GDP and activity contributions.
  - Rebasing effect: increased share of the oil GDP in 2013 to 43 percent from 21 percent previously.
  - A quarterly industrial production index was published for the first time in 2016; timeliness of publication will be improved in the year following.
  - Price statistics: weight reference period for the wholesale price index updated to 2014; a quarterly real estate price index is now being published.
  - Labor market statistics: no official time series breakdown of employment between the private and public sector exists at present.

- Government finance statistics:
  - Authorities reclassified the budget in line with GFSM 2014.
  - GFSM 2014 framework is being used to report and publish fiscal data, although data prior to 2016 is not yet available in this format.

- Monetary and financial statistics:
  - Quality of monetary data has improved; additional information available in the Saudi Arabian Monetary Authority (SAMA) Monthly Statistical Bulletin.
  - SAMA reported monetary data for the central bank and deposit money banks to the Fund, published in the IFS.
  - Authorities have not yet adopted the Standardized Report Forms (SRFs) recommended in the MFS Manual and Compilation Guide.
  - A TA mission on MFS took place in December 2015 to assist SAMA to migrate monetary data to the SRFs.
  - Detailed breakdowns of corporate and household deposits and credit-by-sector are not available.
  - Data on corporate and household balance sheets are not published.
  - SAMA’s published balance sheet has a large and growing “other liabilities” item that hinders analysis.
  - Financial sector surveillance: SAMA reports quarterly financial soundness indicators (FSIs) to the IMF; reported FSIs comprise 12 core FSIs and 8 encouraged FSIs for deposit takers.

- External sector statistics:
  - Quarterly IIP data are published but are highly aggregated; coverage in the capital and financial accounts, particularly for the private sector, needs improvement.
  - Official data likely substantially underestimates the net international investment position, reflecting unrecorded private financial outflows on the asset side and under-recording of debt liabilities.
  - Errors and omissions in the balance of payments data are large.
  - Authorities are working on strengthening financial account data, where data on FDI flows and other investment flows are weak.
  - There are inconsistencies between the BOP and IIP data.

### Data Standards and Quality
- Participation: Participant in the General Data Dissemination System (now the enhanced GDDS) since 2008.
- No data ROSC is available.

### Table of Common Indicators Required for Surveillance (As of June 28, 2017) — key reported dates and frequencies
- Exchange rates: Date of latest observation 6/22/2017; Date received 6/22/2017; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 4/2017; Date received 5/28/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Reserve/base money: Date of latest observation 4/2017; Date received 5/28/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Broad Money: Date of latest observation 4/2017; Date received 5/28/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Central Bank balance sheet: Date of latest observation 4/2017; Date received 5/28/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Consolidated balance sheet of the banking system: Date of latest observation 4/2017; Date received 5/28/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Interest rates: Date of latest observation 6/22/2017; Date received 6/22/2017; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- Consumer price index: Date of latest observation 4/2017; Date received 6/14/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Revenue, expenditure, balance and composition of financing—central government: Date of latest observation Q1 2017; Date received 5/11/2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- Stocks of central government and central government-guaranteed debt: Date of latest observation Q1 2017; Date received 5/11/2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- External current account balance: Date of latest observation Q4 2016; Date received 4/28/2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- Exports and imports of goods and services: Date of latest observation 3/2017; Date received 5/24/2017; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- GDP/GNP: Date of latest observation Q4 2016; Date received 4/28/2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- Gross external debt (BIS): Date of latest observation Q4 2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.
- International investment position: Date of latest observation Q4 2016; Date received 4/28/2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q.

*International Monetary Fund — Saudi Arabia country report material (as provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17316.pdf_