## cr18263-sa ## Source details **Canonical URL:** [cr18263-sa](https://www.imf.org/-/media/files/publications/cr/2018/cr18263-sa.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18263-sa.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18263-sa.pdf.json) --- ### VAT implementation — overview, scope, and administration - Launch and design - VAT launched on January 1, 2018. - VAT rate: 5 percent. - Mandatory registration threshold: SAR 1 million for 2018; to be reduced to SAR 375,000 in January 2019 as set in the GCC Agreement. - Initial taxpayer base reduced from over 400,000 to around 110,000 through the high registration threshold. - Administration and delivery - Responsibility consolidated into a single project team reporting to the GAZT Governor, with oversight from MoF. - GAZT appointed external consultants and sub-contracted specialists for training and delivery support. - Emphasis on intra-government coordination (especially with Customs), business communication and readiness, and consumer awareness. - VAT scope — exemptions and zero-rating - Exemptions & Zero rating include: Lease of residential real estate; Financial services on margin base; Qualifying medicines and medical goods, as defined by the Ministry of Health; Exported goods and services. - Key challenges and priorities - Limited prior experience in internal tax administration; coordination across government entities; ensuring business readiness and consumer awareness. - Address the additional 300,000 smaller businesses expected to register in 2019 when threshold lowered. - Remaining priorities: successfully administer VAT and ensure high compliance for return filing, payment, and refunds. - Prepared by Nabil Ben Ltaifa and Charles Jenkins (FAD). Sources: Country authorities; Haver; Reuters; and IMF staff calculations. ### Fiscal stance, budget operations, and consolidation guidance - On- and off-budget operations in 2018 - Transferring 1.7 percent of GDP from government deposits at SAMA to specialized credit institutions (SCIs) for on lending. - PIF planning to invest up to 2.8 percent of GDP domestically from its own resources. - Staff view and timing - Staff supported slower pace of fiscal consolidation announced in the 2018 budget; achieving budget balance in 2023 (instead of 2022) has limited impact on GNFA position. - Staff stressed spending should not be moved off-budget to achieve fiscal objectives. - Fiscal recommendations (selected) - Keep non-oil revenue reforms on track (VAT implementation and readiness for the reduced registration threshold on January 1, 2019). - Continue energy price reforms toward benchmark levels by 2025; provide specifics and automatic pricing mechanisms once at benchmark levels; increase transparency about reference prices and cross-subsidies. - Contain the wage bill (accounts for about one-half of government spending); consider gradual workforce reduction through natural attrition. - Take a cautious approach to ramping up capital spending while strengthening public investment management processes. - Ensure effective compensation for low and middle-income households and temporary help for businesses (Citizens’ Account Program; verify adequacy for lower end of income distribution). ### Growth, monetary, and external outlook — projections and key figures - Growth projections - Non-oil growth: 2.3 percent in 2018; 2.1 percent in 2019; baseline assumes structural reforms boost non-oil growth by around ¼ pp per annum by 2022–23. - Real oil GDP growth: 1.4 percent in 2018. - Overall growth forecast: 1.9 percent in 2018. - Oil GDP growth: 1.7 percent in 2019; around 1 percent over the medium-term. - Inflation and credit - CPI Inflation: rise to 3 percent in 2018; stabilize at around 2 percent over the medium-term. - Money and credit growth: projected to strengthen modestly in 2018; bank profitability to increase; NPLs likely to increase slightly but remain low. - External balances and flows - Current account surplus: expected to increase to 9.3 percent of GDP in 2018. - Government external borrowing projected at $17 billion. - SAMA’s NFA expected to increase through 2022; SAMA’s total net foreign assets (US$ billions): 2017: 488.9; 2018: 521.8; 2019: 560.3; 2020: 592.5; 2021: 602.5; 2022: 605.2; 2023: 585.6. - Central government's net financial assets (Percent of GDP): 2017: 7.7; 2018: 0.5; 2019: -1.2; 2020: -3.2; 2021: -5.6; 2022: -8.4; 2023: -11.7. ### Risks, stress scenarios, and contingency measures - Key risk drivers - Oil prices are the main driver of fiscal and external outlook and affect growth, liquidity, asset quality, credit availability, and confidence. - Geopolitical escalation could boost oil prices but harm confidence. - Payoff from reforms is uncertain; delays in privatization and PIF activity could crowd out private sector. - Fiscal stress tests (selected results) - Starting public financial asset position is about 5 percentage points of GDP lower than previously. - Low oil price scenario (oil prices 25 to 41 percent below baseline during 2019–23): fiscal deficit would deteriorate on average by about 7 percent of GDP during 2019–23. - CGNFA would deteriorate to -35 and -44 percent of GDP in 2022 and 2023, respectively, under that shock. - Contingency measures if oil prices fall below budget assumptions (examples with fiscal impact) - Raising the VAT rate to 10 percent (1.3 percent of GDP). - Freezing the wage bill (1 percent of GDP). - Further prioritizing investment projects (1.3 percent of GDP). - Staff recommended planning for different oil price scenarios; if oil prices are higher than the budget, save additional revenues and maintain non-oil balance path. ### Public financial management reforms and Etimad platform - Budget process and transparency improvements - Preparations for the 2019 budget and earlier updating of the medium-term fiscal framework. - Release of quarterly fiscal reports and publication of central government budget data in GFS 2014 format. - Plans for a mid-year budget report and pre-budget statement. - Etimad digital platform objectives and components - Objectives: increase transparency, improve monitoring, unify financial procedures, ensure regularity of payment, enable SME access to public tenders. - Four components: (i) Budget Management, (ii) Tenders and Procurement, (iii) Contract Management, (iv) Payment Management. - Central payroll system: Financial Rights Management for Employees to give MoF detailed salary/benefits data and enable MoF payments directly. - Pilot status: piloted by about 25 of more than 400 government entities (about 2000 contracts); MoF expected to make Etimad mandatory for all government projects from 2019. ### PIF, integrated asset-liability management, and financing concerns - PIF profile and figures - PIF reported assets of SAR 840 billion (excluding land assets) or 33 percent of GDP at end-2017Q3. - Expects assets to increase to SAR 1.5 trillion by 2020 (52 percent of staff projected GDP). - Staff estimates external investment commitments made since 2016 total SAR 360 billion (14 percent of GDP). - In 2017, PIF purchased land from the government (SAR 70 billion); in 2018 it is expected to invest SAR 83 billion domestically. - Government transferred SAR 100 billion to the PIF in late 2016. - If PIF earned 5 percent on its assets this would have yielded around SAR 40 billion in 2017, of which SAR 20 billion was transferred to the budget. - Policy guidance - Develop an integrated asset-liability management framework linking PIF, Debt Management Office (DMO), and SAMA reserve management strategies. - Financing options for PIF investments include capital injections, asset transfers, borrowing, retained earnings, sale of assets, use of government reserve accounts at SAMA, or borrowing—decisions should be made within a comprehensive asset/liability framework. ### Structural reforms, privatization, and private sector development - Reform progress (selected items since July 2017) - Capital markets: reduced minimum asset size for foreign investors (January 2018); creation of PIF mortgage refinance company (August 2017); government bonds traded on the Tadawul (April 2018). - FDI/Tourism: qualified foreign companies allowed full ownership of engineering firms (August 2017); foreign investment licenses available for 5 years (February 2018); tourist visa regulations (April 2018). - Legal/regulatory: new bankruptcy law approved (December 2017); Public Procurement Law, Competition Law, Companies Law, Franchise law in final stages. - Female empowerment: women permitted to drive (June 2018); consent of male guardian no longer needed to start a business (February 2018). - Labor market: measures on Nitaqat and sectoral restrictions to increase national employment. - SMEs: Fund of Funds created by PIF; restructuring of Kafalah program; Investment Fund to invest in SMEs. - Privatization and PPP - Privatization and PPP law in approval process; National Privatization Committee and 12 sector committees established. - Staff view: privatization/PPP program could increase efficiency but PPP framework must protect government against future fiscal risks. - FDI and business environment - Saudi Arabia had the most restrictive FDI regime in 2016 among G-20 countries (OECD reference). - Recent steps: reduced negative list from 13 to 9 sectors; increased license length from 1 to 5 years; eased domestic partner restrictions in some sectors. - Staff recommendation: review FDI policies against international best practices. ### Employment, labor market, and female labor force participation (FLFP) - Employment policy priorities - Focus on employment creation for nationals, particularly youth and women, in the private sector. - Policies include expatriate levy and temporary employment subsidies; Nitaqat quotas and bans in certain retail sectors; encouragement of female employment. - Staff recommended gradual reforms to avoid sharp firm adjustments and short-term growth depression; make private sector jobs more attractive to Saudis. - Female labor force participation (Box 6 key findings) - FLFP increased from 10.1 percent to 19.4 percent between 2000 and 2017. - Female unemployment rate is 31 percent. - Drivers of recent FLFP increase: declining fertility rates, higher female education, improved transportation and telecommunications. - Policy actions to boost FLFP - Transportation subsidies, childcare support, expanding childcare facilities, encouraging telework. - Remove explicit and implicit restrictions; provide support to reconfigure workplaces; programs for female entrepreneurs under SME initiatives. - Strengthen training and education targeted at private sector skills. ### Financial sector, inclusion, and stability - Banking and liquidity - Reported NPLs: 1.6 percent of loans in 2017 (1.4 percent at end-2016). - Regulatory capital to risk-weighted assets: 20.4 percent in 2017. - IFRS9 introduction expected to raise provisions moderately. - SME finance and inclusion - SMEs account for around 95 percent of registered businesses; 38 percent of jobs (80 percent held by expatriates); 20 percent of GDP; receive about 2 percent of bank lending. - Reforms: new bankruptcy law, updated commercial pledge law, expansion of leasing/factoring/private equity/venture capital, restructuring Kafalah. - Recommendation: national financial inclusion strategy with focus on women and remote populations; fintech and financial literacy support. - Capital markets and debt market - Equity market reforms led to announcement of inclusion in FTSE/Russell (March 2019 start) and MSCI (June 2019 start). - DMO plans to extend the yield curve; establish primary dealer system; enable trading of debt securities on Tadawul. ### AML/CFT and correspondent banking - New AML/CFT laws issued in November 2017; National Risk Assessment concluded. - Risk-based supervisory framework in place. - SAMA objective: reduce cash use and encourage cashless payments. - FATF/MENAFATF Mutual Evaluation Report to be discussed in June (meeting referenced). ### External position, exchange rate, and NIIP - Exchange rate and reserves - Riyal peg to U.S. dollar at rate of 3.75 since 1986 (formally pegged effective January 2003; classified as a conventional peg). - REER: 2017 average was 15 percent above its 10-year average, gap declined to 10 percent by year-end; REER weakened by 2 percent as of end-May 2018 relative to 2017 average. - SAMA reserves: fell to $489 billion at end-2017 (71 percent of GDP, 28 months of imports). - NIIP and external saving - Net external assets: 81 percent of GDP at end-2017. - NIIP projected to increase to around 92.6 percent of GDP in 2023. - Staff assessment: external balance sheet remains very strong, but external savings are not sufficient from an intergenerational equity perspective. - Current account and oil price assumptions - Current account: 2.2 percent of GDP in 2017; projected 9.3 percent of GDP in 2018; narrows over medium-term as oil price declines. - Oil price assumptions: $70.7 in 2018; $59.2 in 2023; $53.2 in 2017. - A $1 change in oil price results in a 0.4 percent of GDP first-round change in the current account. ### Debt sustainability and key numeric projections (selected table highlights) - Real GDP (annual growth): 2015: 4.1; 2016: 1.7; 2017: -0.9; 2018: 1.9; 2019: 1.9; 2020: 2.0; 2021: 2.1; 2022: 2.2; 2023: 2.4. - Central government's gross debt (Percent of GDP): 2015: 5.8; 2016: 13.1; 2017: 17.2; 2018: 19.1; 2019: 20.3; 2020: 22.0; 2021: 24.0; 2022: 24.2; 2023: 24.3. - Central government's net financial assets (Percent of GDP): 2015: 35.9; 2016: 17.1; 2017: 7.7; 2018: 0.5; 2019: -1.2; 2020: -3.2; 2021: -5.6; 2022: -8.4; 2023: -11.7. - Current account balance (Percent of GDP): 2015: -8.7; 2016: -3.7; 2017: 2.2; 2018: 9.3; 2019: 8.8; 2020: 6.7; 2021: 4.3; 2022: 2.5; 2023: 1.2. - Crude oil production (million barrels per day): 2015: 10.2; 2016: 10.5; 2017: 10.0; 2018: 10.1; 2019: 10.2; 2020: 10.3; 2021: 10.3; 2022: 10.4; 2023: 10.5. - Average oil export price (U.S. dollars per barrel): 2015: 50.44; 2016: 41.55; 2017: 53.27; 2018: 70.76; 2019: 69.56; 2020: 65.46; 2021: 62.56; 2022: 60.55; 2023: 59.2. - Balance of Payments (Current account, US$ billions): 2015: -56.7; 2016: -23.9; 2017: 15.2; 2018: 72.7; 2019: 70.6; 2020: 54.6; 2021: 35.7; 2022: 21.5; 2023: 10.8. - Monetary Survey (Money and quasi-money M3, SAR billions): 2015: 1,773; 2016: 1,787; 2017: 1,791; 2018: 1,832; 2019: 1,884; 2020: 1,950; 2021: 2,026; 2022: 2,111; 2023: 2,210. ### Corporate sector vulnerabilities (Appendix I) - Sample and aggregate performance - Sample: 94 non-financial public companies with data 2012–17; operating revenue in 2017: $132.0 billion; operating profit/loss: $21.5 billion. - Profits of the 94 firms rose by 12 percent in 2017 after a nearly 7 percent decline in 2016. - Debt and liquidity - Total debt of the sample: $158 billion in 2017 (33 percent of non-oil GDP), up 2 percent from 2016. - Cash & cash equivalents: $26.1 billion in 2017. - Short-term debt: $61.1 billion in 2017. - Short-term debt exceeded cash holdings for the third year in a row in 2017; 7 of 13 sectors had more short-term debt than cash. - Maturities and rollover - Maturing debt over next four years (from 2018 baseline): $11–14 billion a year (6–8 percent of outstanding debt), mainly loans. - Nearly a third of total outstanding debt falls due in 2021 and 2023 (28 percent). - Interest coverage and debt-at-risk - Median implied interest rate on corporate debt: around 2.8 percent in 2017. - Debt-at-risk (ICR<1.5): decreased from 14 percent of total debt in 2016 to 7 percent in 2017; firms-at-risk increased slightly from 27 percent to 29 percent. - Stress scenarios (three) - Scenario 1: Operating Income Decrease 6 percent; Borrowing Cost +70 bps → debt-at-risk increases to 17 percent of total debt; median ICR remains above 2. - Scenario 2: Operating Income Decrease 20 percent; Borrowing Cost +150 bps → debt-at-risk increases to 68 percent of total debt; median ICR remains above 2. - Scenario 3: Operating Income Decrease 30 percent; Borrowing Cost +300 bps → debt-at-risk increases to 76 percent of total debt; median ICR = 1.3. - Industrial, telecommunications, and energy sectors most vulnerable; industrial companies see nearly all debt at risk under scenarios. - Overall assessment - 2017 showed improved aggregate profits and cash buffers; aggregate indebtedness modestly increased with concentrations in Energy & utilities and Petrochemical industries. - Sectoral divergence sharp; moderate shocks manageable, larger shocks produce high vulnerability. ### Energy price reform (EPR) and Citizens’ Accounts (CA) - 2018 price changes (gasoline) - Octane 95: increased from SAR 0.8 per liter to SAR 2.04 (127 percent increase). - Octane 91: increased from SAR 0.8 per liter to SAR 1.37 (83 percent increase). - These increases effectively eliminated average consumer subsidies on octane 95 gasoline in 2018 (staff projection at Article IV mission, May 2018). - Electricity tariffs - Tariffs increased and tiers simplified; new average reference tariffs per ECRA: 0.21 SAR/kWh for residential consumption and 0.24 SAR/kWh for non-residential consumption. - Fiscal revenue from EPR (estimates) - Estimated fiscal revenues from 2018 electricity and gasoline price increases: about SAR 30 billion (households account for almost 80 percent). - Fiscal revenues from increasing domestic energy prices to reference prices estimated to reach SAR 112 billion by 2023. - Estimated fiscal savings by consumer type (SAR billions): - Households: 2018: 23; 2019: 31; 2020: 32; 2021: 32; 2022: 33; 2023: 35. - Non Households: 2018: 7; 2019: 23; 2020: 45; 2021: 61; 2022: 69; 2023: 77. - Total: 2018: 30; 2019: 54; 2020: 76; 2021: 94; 2022: 101; 2023: 112. - Fuel products contribution (SAR billions): 2018: 23; 2019: 45; 2020: 68; 2021: 89; 2022: 93; 2023: 102. - Electricity contribution (SAR billions): 2018: 7; 2019: 9; 2020: 9. - Citizens’ Accounts (CA) design, coverage, and fiscal cost - Registration: started February 2017; between February 2017 and April 2018, 4.4 million households covering 14.6 million people registered. - Eligibility: assessed against household composition, residency, and Saudi citizenship; self-declared information cross-checked across databases of 17 governmental entities. - Payment design: monthly cash transfer decreases with household income; bottom 5 deciles receive full entitlement; deciles 6–7 receive partial; eighth decile receives minimum 300 SAR/month. - Individual full entitlement amount: SAR 382/month. - Equivalence scale: OECD modified-scale; household weight for representative household of 6 = 2.9 (1 + 2*0.5 + 3*0.3); example family of 6 receives 1,108 SAR/month (382*2.9) if eligible for full entitlement. - In April 2018, 3.7 million households (83 percent of registered) received a cash transfer; fiscal cost SAR 2.2 bn for that month; 57 percent received full compensation that averaged SAR 933/month. - Transparency and adequacy concerns - Staff finds CA working well and average compensation appears adequate for average household effects but lacks information to confirm adequacy for lower income households. - Benchmark calibration uses assumed "fair" consumption for a representative household of 6: Electricity 2,890 kWh/month; Gasoline 498 liters/month; VAT rate applied 5 percent. - Lack of disclosure on data and precise benefit formula limits assessment of distributional adequacy. - Staff recommendations: confirm adequacy for low and middle-income households; make CA compensation details public; increase transparency on subsidies and fuel pricing components. ### Risk Assessment Matrix — main risks and policy responses (selected) - Lower energy prices - Likelihood/Time Horizon: Low/Short-to-medium-term; Expected impact: High. - Policy response: adjust fiscal policy, use buffers and external borrowing, ensure banking system liquidity, speed up structural reforms. - Policy and geopolitical uncertainties - Likelihood/Time Horizon: High/Short-to-medium-term; Expected impact: High. - Policy response: save additional revenues if oil prices exceed budget assumptions; SAMA actively manage banking system liquidity; continue structural reforms. - Payoff from reforms larger than expected - Likelihood/Time Horizon: Medium/Medium-term; Expected impact: High. - Policy response: continue reforms to sustain stronger growth. - Slippages in reform agenda - Likelihood/Time Horizon: Low/Medium-term; Expected impact: High. - Policy response: calibrate policy to catalyze private sector investment; support reforms to boost non-oil growth and competitiveness of nationals. ### Staff appraisal — priorities and implementation guidance (summary) - Main priorities - Continue effectively implementing bold structural reforms. - Meet medium-term fiscal targets and resist further expansion in government spending in response to higher oil prices. - Fiscal guidance - Targeting budget balance by 2023 is appropriate; deliver on this objective through revenue and energy price reforms and limiting future spending growth. - Develop contingency scenarios given oil price uncertainty: save additional revenues if prices are higher than assumed; implement contingency measures if prices are lower. - Implementation guidance - Prioritize and sequence reforms; ensure they are equitable, transparent, and well-communicated. - Improve data availability and quality to monitor Vision 2030 and reform progress. - Continue strengthening the fiscal framework before considering a formal fiscal rule. - Social protection - Compensation for low and middle-income households is essential; Citizens’ Accounts operational and average compensation appears adequate but needs confirmation for the lower end of income distribution; communication on Citizens’ Accounts should be stepped-up. *International Monetary Fund — cr18263-sa (excerpt and selected pages summarized).* ### 1. An Update on VAT Implementation ____________________________________________________________ 8 ### 1. An Update on VAT Implementation ### Overview and implementation timeline - VAT launched on January 1, 2018. - VAT rate: 5 percent. - Mandatory registration threshold set at SAR 1 million for 2018; to be reduced to SAR 375,000 in January 2019 as set in the GCC Agreement. - Initial taxpayer base reduced from over 400,000 to around 110,000 through the high registration threshold. ### Administration and delivery arrangements - Responsibility for delivering the VAT consolidated into a single project team reporting to the GAZT Governor, with oversight from MoF. - GAZT appointed external consultants to help develop the implementation plan and to sub-contract specialists for training and delivery support. - Emphasis on intra-government coordination (especially with Customs), business communication and readiness, and consumer awareness. ### Key challenges identified - Limited prior experience in internal tax administration. - Managing coordination across government entities. - Ensuring business readiness and consumer awareness for the new tax. - Addressing the large number of taxpayers once the threshold is lowered (an additional 300,000 smaller businesses expected to register in 2019). - Ensuring high compliance with respect to on-time return filing, payment of taxes, and refunds. ### VAT scope — exemptions and zero-rating - Exemptions & Zero rating include: - Lease of residential real estate; - Financial services on margin base; - Qualifying medicines and medical goods, as defined by the Ministry of Health; - Exported goods and services. ### Implementation approach and rationale - Phased implementation used to overcome the challenge posed by a very large number of taxpayers. - High 2018 registration threshold intended to help administration and compliance by reducing the initial taxpayer base to around 110,000. ### Remaining priorities for successful rollout - Successfully administer the VAT and ensure high compliance for filings, payments, and refunds. - Register and support the additional 300,000 smaller businesses likely less well equipped to comply with accounting and other VAT requirements when the threshold is lowered. *Prepared by Nabil Ben Ltaifa and Charles Jenkins (FAD). Sources: Country authorities; Haver; Reuters; and IMF staff calculations.* ### 7.7 percent of GDP in 2017 to -11.7 percent of GDP in 2023. ### cr18263-sa - 7.7 percent of GDP in 2017 to -11.7 percent of GDP in 2023. ### Fiscal stance, on- and off-budget operations - Government plans sizable spending/on-lending outside the budget in 2018: - Transferring 1.7 percent of GDP from its deposits at SAMA to specialized credit institutions (SCIs) for on lending. - The PIF is planning to invest up to 2.8 percent of GDP domestically from its own resources. - Staff view on fiscal consolidation timing: - Staff supported the slower pace of fiscal consolidation announced in the 2018 budget. - Achieving budget balance in 2023 (instead of 2022) will have limited impact on the GNFA position. - Staff stressed that spending should not be moved off-budget to achieve fiscal objectives. - Fiscal policy recommendations highlighted by staff: - Keep non-oil revenue reforms on track (VAT implementation and readiness for the reduction of the registration threshold on January 1, 2019). - Continue energy price reforms toward benchmark levels by 2025; provide more specifics and automatic pricing mechanisms once at benchmark levels; increase transparency about reference prices and cross-subsidies. - Contain the wage bill, noting it accounts for about one-half of government spending; consider gradual workforce reduction through natural attrition. - Take a cautious approach to ramping up capital spending while strengthening public investment management processes. - Ensure effective compensation for low and middle-income households and temporary help for businesses (Citizens’ Account Program; verify adequacy for lower end of income distribution). ### Growth projections and composition - Non-oil growth: - Expected to strengthen to 2.3 percent in 2018 supported by higher on- and off-budget fiscal spending and higher oil prices. - Forecast to slow to 2.1 percent in 2019 with the ending of the fiscal stimulus, then pick up over the medium-term as structural reforms bear fruit. - Baseline assumes structural reforms boost non-oil growth by around ¼ pp per annum by 2022–23. - Oil and overall growth: - Real oil GDP growth projected at 1.4 percent in 2018 due to stronger petroleum refining and gas production and a modest increase in crude oil production in the second half of the year under the OPEC+ agreement. - Overall growth forecast at 1.9 percent in 2018. - Oil GDP growth projected at 1.7 percent in 2019, and around 1 percent over the medium-term. - Indicators and forecasting: - An Indicator Index constructed from monthly indicators implies a 2018 forecast in line with staff’s baseline; the implied forecast is 2.3 percent in 2018. - Several monthly indicators (cement sales, import letters of credit, ATM withdrawals, new orders component of PMI) are informative for forecasting non-oil growth after controlling for past growth, world demand, and realized real oil prices; other indicators such as private credit growth do not seem informative. ### Monetary, credit, and inflation outlook - Money and credit growth: - Projected to strengthen modestly in 2018. - Higher government spending expected to positively impact deposits and private sector credit. - Bank profitability should increase as interest margins widen; NPLs likely to increase slightly but remain low. - Inflation: - CPI Inflation forecast to rise to 3 percent in 2018 due to the VAT/higher energy prices and stronger growth. - Inflation expected to stabilize at around 2 percent over the medium-term. ### External balances and financial account - Current account: - Current account surplus expected to increase to 9.3 percent of GDP in 2018 as higher oil revenues more than offset a recovery in imports. - As oil prices soften and import growth continues, the current account surplus narrows over the medium-term. - Financial account and external flows: - Pension fund and PIF investments overseas expected to continue. - Government external borrowing projected at $17 billion. - Inflows into the equity market are picking up ahead of inclusion in FTSE/Russell (starting in March 2019) and MSCI (starting in June 2019) indices. - Planned sale of a stake in Aramco is not included in the baseline projections. - SAMA’s NFA is expected to increase through 2022. ### Risks, spillovers, and stress scenarios - Key uncertainties and risk drivers: - Oil prices are a key driver of the external and fiscal outlook and will affect growth, financial sector liquidity and asset quality, credit availability, and confidence. - An escalation of regional geopolitical tensions could boost oil prices but hurt confidence. - Payoff from reforms is uncertain: successful implementation could yield larger non-oil growth dividends than in staff’s baseline; weak non-oil growth could impede further fiscal reforms and widen the fiscal deficit. - Delays in privatization and the growing role of the PIF may crowd out the private sector. - Regional spillovers: - Spillovers operate through trade, remittances, and financial flows. - Higher imports by Saudi Arabia will modestly support regional economies; within the GCC, growth spillovers from Saudi to Bahrain are apparent; developments in Saudi equity markets have implications for other GCC markets. - Fiscal space and stress-test findings (Box 3 highlights): - Starting public financial asset position (government deposits at SAMA) is about 5 percentage points of GDP lower than previously. - Under a low oil price scenario (oil prices 25 to 41 percent below the baseline during 2019–23), the fiscal deficit would deteriorate on average by about 7 percent of GDP during 2019–23. - CGNFA would deteriorate to -35 and -44 percent of GDP in 2022 and 2023, respectively, under that shock. - Debt and net financial asset trajectories do not stabilize in the baseline scenario. - The adjustment projected in staff’s baseline is very large relative to past international adjustment experiences. - The intergenerational equity gap (relative to PIH-consistent fiscal balance) is considerable and larger than last year, reflecting a lower assumed transfer ratio of oil revenues to the budget. ### Policy discussion priorities from IMF staff discussions - Four focus areas in discussions: - (i) Fiscal policy to deliver budget balance by 2023 and avoid pro-cyclical fiscal policies in response to higher oil prices. - (ii) Reforms to boost private sector growth and employment of Saudi nationals. - (iii) Promoting financial sector development and inclusion and maintaining financial stability. - (iv) External stability. - Specific implementation and communication points: - Authorities should carefully consider and communicate the respective roles of the public and private sectors to avoid crowding out the private sector. - Ensure governance frameworks and implementation capacity for VRP initiatives; avoid overstretching financial resources. - Improve data availability and quality to monitor and report on progress toward Vision 2030 objectives. - Authorities reiterated their aim of subscribing to SDDS. *International Monetary Fund — cr18263-sa (excerpt).* ### 25. The government’s ability to achieve its fiscal objectives will importantly depend on the ### cr18263-sa - 25. The government’s ability to achieve its fiscal objectives will importantly depend on the ### Oil price scenarios and contingency measures - Staff recommended planning for different oil price scenarios given uncertainty in the oil price outlook. - If oil prices turn out higher than in the budget: - Opportunity to increase savings (i.e. the target for the non-oil balance should not be changed) and rebuild policy buffers depleted since 2014. - If oil prices turn out lower than in the budget (staff’s baseline): - Government should be ready to implement contingency measures to still achieve its balanced budget target by 2023 and stabilize the GNFA ratio. - Potential contingency measures identified: - Raising the VAT rate to 10 percent (1.3 percent of GDP). - Freezing the wage bill (1 percent of GDP). - Further prioritizing investment projects (1.3 percent of GDP). - Authorities viewed the oil price path in staff’s baseline as overly pessimistic and were confident current policies would deliver budget balance in 2023. ### Budget vulnerability and spending discipline - Increase in spending in 2018 has increased the vulnerability of the budget to an unexpected drop in oil prices; vulnerabilities would rise further if spending increases in response to recent higher oil prices. - Staff emphasized: - Ensure spending remains at a sustainable level in different oil price environments. - Avoid procyclical fiscal policy that would create undue volatility in economic activity. - Authorities were less concerned and saw higher oil prices as potentially allowing acceleration of some high priority spending, while asserting the medium-term expenditure envelope would be unaffected. ### Strengthening the fiscal framework and budget process - Progress noted in: - Strengthening the budget process. - Developing the medium-term fiscal framework. - Increasing transparency and improving macro-fiscal analysis. - Specific improvements: - Preparations for the 2019 budget and updating of the medium-term fiscal framework started earlier to enable better evaluation of policy options and negotiations under established spending ceilings. - 2018 budget provided more detailed information including on the medium-term fiscal framework. - Release of quarterly fiscal reports and publication of central government budget data in GFS 2014 format. - Plans for a mid-year budget report and a pre-budget statement in the year to further enhance transparency. - Macro-Fiscal Policies Unit producing monthly analysis for the Fiscal Committee. - Authorities intend to meet the Open Budget Index standards for fiscal transparency. - Staff view: - Merit in eventually considering a fiscal rule, but current emphasis should remain on continuing to strengthen the fiscal framework. - Experience in resource rich countries suggests higher chances of success of a fiscal rule when strong fiscal frameworks are in place. ### Recommended future fiscal reforms - Better expenditure management: - 2017Q4 spending surge; budget overran by 5 percent in 2017; payment arrears continued. - New electronic Etimad portal launched to improve controls and transparency in spending and avoid recurrence of government arrears. - Budget targeted a smoother quarterly spending path in 2018; a committee has been established to assess remaining contractor claims. - More detailed and integrated expenditure framework: - For 2019, develop a more detailed and integrated medium-term expenditure framework, specifically identifying projects and budget amounts to give greater clarity to the private sector on government project spending. - Fiscal reporting, transparency, and coverage of fiscal data: - Expand fiscal coverage beyond the budgetary central government to encompass spending undertaken by Aramco and the PIF on behalf of the government and the financial links between them and the government. ### Etimad: new digital platform for expenditure and wage bill management - Objectives of Etimad: - Increasing transparency and improving monitoring. - Unifying financial service procedures. - Ensuring regularity of payment. - Enabling access to public tenders for SMEs. - Four components accessible according to credentials/needs: - (i) Budget Management — ministries review/manage budgets. - (ii) Tenders and Procurement — manage tenders and private sector participation. - (iii) Contract Management — manage contracts and ensure consistency with approved budget. - (iv) Payment Management — private sector submits financial claims for approval and payment. - Central payroll system: Financial Rights Management for Employees will give MoF detailed information on workers’ salaries and benefits and enable MoF to pay government employees directly based on ministry-provided data. - Pilot status and rollout: - Piloted by about 25 of more than 400 government entities (about 2000 contracts). - MoF expected to make Etimad mandatory for all government projects from 2019. - Only a few ministries currently using new payroll system; usage expected to increase. ### Integrated asset-liability management and PIF financing - Staff emphasized importance of developing an integrated asset-liability management framework linking PIF, Debt Management Office (DMO), and SAMA reserve management strategies. - PIF developments: - Investment strategy progress and increasing transparency in government debt management welcomed. - Unclear how large investment commitments announced by the PIF will be financed. - Authorities working to develop a Sovereign Asset-Liability Management Framework. - Government continuing plans for sale of a stake in Aramco, likely in 2019 with at least part of listing on the Tadawul; allocation decision should be made within the asset/liability framework. - PIF profile and financing concerns (Box 5 highlights): - PIF reported assets of SAR 840 billion (excluding land assets) or 33 percent of GDP at end-2017Q3. - Expects assets to increase to SAR 1.5 trillion by 2020 (52 percent of staff projected GDP). - Staff estimates external investment commitments made since 2016 total SAR 360 billion (14 percent of GDP). - In 2017, PIF purchased land from the government (SAR 70 billion); in 2018 it is expected to invest SAR 83 billion domestically. - Government transferred SAR 100 billion to the PIF in late 2016. - If PIF earned 5 percent on its assets this would have yielded around SAR 40 billion in 2017, of which SAR 20 billion was transferred to the budget. - Financing options for PIF investments include capital injections and asset transfers from the government, borrowing, retained earnings, sale of existing assets, use of government reserve accounts at SAMA, or borrowing — decisions should be made within a comprehensive asset/liability management framework. ### Macro-structural reforms to boost growth and employment - Staff welcomed reform progress and stressed continuation in consultation with the private sector. - Prior IMF Article IV estimate: combination of structural reforms could boost non-oil growth by up to 2 percentage points over the period of the reforms relative to a no reform scenario (some reforms take many years to bear fruit). - Fiscal and structural reforms are complementary; sequencing in priority reform areas recommended. - Summary of reforms implemented July 2017–Present (selected items): - Capital markets: minimum asset size for foreign investors reduced (January 2018); creation of PIF mortgage refinance company (August 2017); government bonds traded on the Tadawul (April 2018). - FDI/Tourism: qualified foreign companies allowed full ownership of engineering firms (August 2017); foreign investment licenses available for 5 years (February 2018); regulations for tourist visas (April 2018). - Legal/Regulatory: new bankruptcy law approved (December 2017); Public Procurement Law, Competition Law, Companies Law, Franchise law in final stages of legislative process. - Female empowerment: women permitted to drive (June 2018); consent of male guardian no longer needed to start a business (February 2018); access to certain jobs in the military (February 2018). - Labor market: prohibition of issuing new work visas for 19 professions restricted to Saudis; Ministerial decree to limit work in 12 sales activities to Saudis effective September 2018; amendments to Nitaqat increasing mandatory national employment ratio (August 2017–September 2018). - SMEs: Fund of Funds created by PIF; restructuring of Kafalah program; Investment Fund to invest in SMEs (October–December 2017). ### Employment creation for Saudi nationals — policy focus - Authorities prioritize employment creation for nationals, particularly youth and women, in the private sector. - Policies to increase competitiveness of Saudi workers and reduce cost/wage differential with expatriates: - Expatriate levy and temporary employment subsidies. - Limiting expatriate employment through Nitaqat quotas and bans in certain retail sectors. - Encouraging female employment. - Staff recommended gradual reforms to avoid difficult adjustments for firms and potential short-term growth depression, and called for reforms to make private sector jobs more attractive to Saudis and Saudis more attractive to private firms. - Specific policy priorities: - Set clear expectations about limited prospects for government employment to lower reservation wages and encourage skills aligned with private sector needs. - Increase mobility of expatriate workers through visa system reforms to raise expatriate wages and boost productivity; consider gradually reducing number of visas and targeting higher skilled workers; auctioning visas as a revenue source. - Continue addressing constraints to female employment (remove explicit and implicit restrictions; consider financial support to reconfigure workspace; create programs for female entrepreneurs under SME initiatives). - Strengthen training and education to equip Saudis with private sector skills; welcome efforts to improve teacher training, update curricula, involve private sector in schools, and strengthen vocational training without additional spending. - Review wage subsidy program; consider offering subsidies only for new workers employed above Nitaqat targets. ### Female labor force participation and employment (Box 6 key findings) - Female labor force participation (FLFP) increased from 10.1 percent to 19.4 percent between 2000 and 2017 but remains low relative to GCC average and peers. - Female unemployment rate is 31 percent; educated women have a much higher unemployment rate than their male counterparts. - Cross-country analysis findings: - U-shaped relationship between FLFP and economic development noted; for MENA the curve differs from other regions. - Female tertiary enrollment positively impacts FLFP; male tertiary attainment has a negative coefficient in the region. - Fertility rates have a small negative impact on FLFP; urbanization negatively affects FLFP. - Drivers of recent FLFP increase: declining fertility rates, higher female education, improved transportation and telecommunications. - Authorities’ policies to boost FLFP and employment: - Transportation subsidies (subsidizing rides for female employees via apps), covering childcare costs, expanding childcare facilities, encouraging telework. - Women permitted to drive; ability to start a business without male guardian consent. - Continued investment in female education, support for businesses to hire women (recruiting and HR support, defraying workplace reconfiguration costs), and ensuring legal rights grant women the same economic opportunities as men. *International Monetary Fund — cr18263-sa (selected pages and boxes summarized above).* ### 33. Staff welcomed the reforms to improve the business environment. Legal reforms have ### cr18263-sa - 33. Staff welcomed the reforms to improve the business environment. Legal reforms have ### Legal and business-environment reforms - New insolvency law expected to go into effect in August. - Competition law and franchise law are nearing completion. - All government licensing and regulatory requirements are being reviewed, streamlined, and automated, including enabling online, rather than in person, applications. - New public procurement law nearing completion; intended to cover all government procurement in a transparent way, including local content and SME requirements. - Consideration should be given to introducing an asset declaration regime for high-ranking officials. ### Anti-corruption, governance, and fiscal transparency (Box 7) - Authorities established a high-level anti-corruption committee last year to oversee anti-corruption and governance work. - Expected macroeconomic benefits from anti-corruption reforms: - Improving corruption indicators in Saudi Arabia to the average level observed in advanced economies could raise real GDP growth by 0.5-1 percent. - Reducing corruption is also expected to raise investment, FDI, and the tax to GDP ratio, and support more inclusive growth. - Key elements of an effective anti-corruption strategy highlighted: - Increased transparency in government decision-making and fiscal policy. - Predictable and effective enforcement of a strong and clear legal framework. - Elimination of excess regulation that may create opportunities for corruption. - Credible supporting institutions. - Specific measures noted: - Revise public procurement law (under way). - Increase fiscal transparency (ongoing; more is needed). - Streamline government regulations to reduce opportunities for corruption. - Introduce an asset declaration regime for senior government officials (consideration recommended). - Continue to enhance the AML/CFT framework and effective use of AML/CFT tools. - Footnotes and data sources cited in Box 7 include IMF staff discussion note references and non-IMF perception-based indicators; when available, 95% confidence intervals are shown for Saudi Arabia. ### Privatization and PPP program - Government expects to accelerate privatization/PPP transactions. - A privatization and PPP law is in the approval process. - Institutional arrangements established: National Privatization Committee and 12 sector specific committees. - Staff views: - Privatization/PPP program could increase government efficiency and create room for the private sector. - PPP framework should adequately protect the government against future fiscal risks. - Authorities noted development of legal and regulatory framework and sector governance took longer than expected but were essential. ### Foreign direct investment (FDI) - Saudi Arabia had the most restrictive FDI regime in 2016 among the G-20 countries according to the OECD (Figure 10 referenced). - Recent steps taken: - Reduce the negative list from 13 to 9 sectors. - Increase the length of licenses from 1 to 5 years. - Ease domestic partner restrictions in some sectors. - Staff recommendation: review FDI policies and practices against international best practices. ### Financial stability, development, and inclusion - Staff welcomed the Financial Sector Development Program (FSDP) focus on financial development and inclusion. - Policy emphasis: - Remove constraints deterring financial institutions from entering new markets or developing products rather than requiring directed lending. - Focus on improving credit infrastructure to reach FSDP program metrics (e.g., increasing lending to SMEs from around 2 percent to 5 percent of total bank lending by 2020). - Institutional coordination: National Financial Stability Committee comprising MoF, SAMA, and CMA provides a framework to discuss and monitor financial stability issues. ### SME finance and financial inclusion - SMEs: - Account for around 95 percent of registered businesses. - Account for 38 percent of jobs (of which 80 percent are held by expatriate workers). - Account for 20 percent of GDP. - Receive only about 2 percent of bank lending. - Reforms to support SME access to finance: - New bankruptcy law to strengthen borrower and creditor rights. - Updated commercial pledge law to extend collateral registry coverage to movable assets. - Expansion of leasing, factoring, private equity, and venture capital (including Fund of Funds and SME investment fund). - Restructuring of the Kafalah loan guarantee program. - Recommendation: SME authority should help companies understand benefits of improved corporate governance to facilitate access to financing. - Financial inclusion gaps: - National financial inclusion strategy recommended with a focus on women and remotely-located populations. - Fintech and financial literacy programs identified as key enablers. - Suggestion to tie social assistance programs to opening a bank account (example: Hafiz). - SAMA and CMA proactive use of fintech through regulatory sandboxes welcomed. ### Capital markets and domestic debt market development - Equity market reforms by CMA welcomed: - Eased restrictions on foreign investors. - Strengthened trading infrastructure. - Established a market for smaller companies. - Strengthened corporate governance. - Reforms resulted in announcement of Saudi Arabia’s inclusion in the FTSE/Russell and MSCI indices. - Debt market steps welcomed: - Establish a primary dealer system. - Increase flexibility in pricing of government debt issuances. - Enable trading of debt securities on the Tadawul. - DMO plans to extend the yield curve by issuing shorter and longer-dated bonds and to announce a regular issuance calendar. - Disclosure requirements for debt issuance by large listed companies eased and medium-term note programs permitted. - Recently created Mortgage Refinance Company to help create a secondary market for mortgage securities. - Easier setup of special purpose entities to help issuance of Sharia-compliant instruments. - Unresolved issue: treatment of zakat across financial instruments and institutions needs to be resolved. ### Liquidity management and macroprudential policy - SAMA liquidity management: - Banks have become more liquid as oil prices have risen. - SAMA cancelled the term repo facility and stopped rolling over deposits placed with commercial banks in 2016 as they mature. - SAMA developing a liquidity forecasting framework and considering introducing open market operations. - Staff support for robust liquidity forecasting and more active liquidity management to reduce short-term interest rate volatility. - Staff suggestion: allow banks to average cash reserve requirements to better manage liquidity and help develop an interbank market. - Macroprudential tools used by SAMA: - Loan-to-deposit ratio, loan-to-value (LTV) ratio, and the risk-weight on mortgage loans. - Recent increase in the LTV ratio for first-time home owners to 90 percent (from 85 percent) noted as quite high by international standards; staff raised questions given strong retail mortgage lending growth. - SAMA response: risks to financial stability from this change are extremely limited given the low average LTV ratio, small share of mortgage lending in banks’ portfolios, and very low mortgage default rates. ### Banking sector resilience and supervision - Key indicators: - Reported NPLs increased modestly during 2017 to reach 1.6 percent of loans (1.4 percent at end-2016). - Risk-weighted capital ratio increased to over 20 percent. - Returns on assets and equity increased as interest margins rose (Table 6 referenced). - IFRS9 introduction expected to result in a manageable increase in provisions; SAMA will need to monitor banks’ loan classification approaches. - Banks have scope to increase credit provision as the non-oil economy strengthens. - Staff suggested reviewing degree of competition in the financial sector given high interest margins and FSDP product/outcome goals. ### AML/CFT and correspondent banking - New AML and CFT laws issued in November 2017 and the National Risk Assessment concluded. - Risk-based supervisory framework in place. - Cash identified as an important enabler of money laundering and terrorist financing; SAMA policy objective to reduce cash use by encouraging cashless payments. - FATF/MENAFATF Mutual Evaluation Report to be discussed in the FATF plenary meeting in June. - SAMA noted Saudi banks have not experienced a decline in correspondent banking relationships and are engaging with partners to ensure this remains the case. ### External position and exchange rate - SAMA’s reserves declined further in 2017 but have risen in recent months and remain high compared to standard Fund coverage metrics. - Staff assessment: external position in 2017 was weaker than consistent with desirable medium-term fiscal policy settings (Appendix VI referenced). - Continued fiscal consolidation needed to strengthen the current account from its 2017 level and to save for future generations. - Authorities and staff agreed the exchange rate peg serves Saudi Arabia well given current economic structure. - Trade-offs of moving to a more flexible exchange rate noted: - Potential benefits: more stable fiscal revenues in riyal terms if exchange rate moved with oil prices; support development of non-oil tradable sector; enable SAMA to follow more independent interest rate policy. - Potential costs: remove a credible monetary anchor, likely result in higher inflation, increase uncertainty, and have limited near-term competitiveness benefits. - Recommendation: review the peg regularly to ensure it remains appropriate. ### Staff appraisal — priorities and policy guidance - Authorities are making good progress in implementing reform program; growth expected to pick up this year and over the medium-term as reforms take hold. - Main priorities: - Continue effectively implementing bold structural reforms. - Meet medium-term fiscal targets. - Resist further expansion in government spending in response to higher oil prices. - Implementation guidance: - Prioritize and sequence reforms; ensure they are equitable, consistent, transparent, and well-communicated. - Focus reform goals and targets to be deliverable and supported by improved data quality. - Fiscal policy guidance: - Targeting budget balance by 2023 is appropriate; government should ensure delivery on this objective. - Slower pace of fiscal consolidation will help support growth and reform implementation. - Delivering on balanced budget requires fully implementing revenue and energy price reforms and limiting future growth of government spending. - Develop contingency scenarios given oil price uncertainty: - If oil prices are higher than assumed in the budget, additional revenues should be saved—i.e., maintain the non-oil primary deficit path. - If oil prices are lower than in the budget, implement identified contingency measures over the medium-term to achieve the balanced budget target. - Revenue and subsidy reforms: - Major progress on new revenue initiatives; VAT described as a milestone achievement for tax culture and administration. - Preparations for lowering the VAT registration threshold from the beginning of 2019 should continue. - Energy prices should continue to be gradually increased until they reach benchmark levels. - Social protection and compensation: - Compensation for low and middle-income households is essential to support reforms. - Citizens’ accounts are operational and welcome; average compensation appears adequate but needs confirmation for lower end of income distribution. - Communication on citizens’ accounts should be stepped-up. - Spending and public investment guidance: - Limiting growth of government spending is key to fiscal targets and robustness to oil price swings. - Anchor spending in a medium-term expenditure framework to resist spending pressures as oil prices rise. - Ongoing civil service review should help identify reforms to contain the wage bill. - Re-expand public investment cautiously until new project management process experience is tested. - Allowances in the January Royal Decree should be allowed to expire as announced at year-end. *Prepared from IMF staff report content.* ### 53. Reforms to strengthen the budget and medium-term fiscal framework, increase fiscal ### Reforms to strengthen the budget and medium-term fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis ### Fiscal framework, transparency, and public financial management - Reforms are making good progress to strengthen the budget and medium-term fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis. - The introduction of Etimad should over time help strengthen public financial management to reduce expenditure overruns and avoid a recurrence of payment arrears. - Fiscal transparency can be further enhanced. - Fiscal coverage should be expanded beyond the budgetary central government to capture the impact of entities such as the PIF and Aramco and give a fuller and more transparent picture of the impact of fiscal policy on the economy. ### Integrated asset-liability management - An integrated asset-liability management framework is essential to guide the government’s borrowing and investment decisions. - Such a framework will enable an assessment of the risk-return trade-offs and a full evaluation of the impact of decisions taken on and off-budget on the public-sector balance sheet, including the PIF’s domestic and external investments. ### Public and private sector roles in non-oil development - The roles of the public and private sectors in developing the non-oil economy need to be carefully considered. - The public sector can be a catalyst for the development of new sectors, but should avoid crowding-out private sector involvement or remaining a long-term player in markets where private enterprises can thrive. - The privatization/PPP program should now be accelerated. ### Policies to create jobs for nationals, particularly women - Policies should focus on leveling the playing field on wages, benefits, and working conditions between Saudis and expatriates in sectors where Saudis want to work. - Implementation will involve a difficult adjustment for companies reliant on expatriate labor and should be implemented gradually. - Policy measures should include: - setting clear expectations about employment prospects in the public sector, - reforming the visa system to enhance expatriate labor mobility, - addressing constraints to female employment, - strengthening training and education, - reviewing and ensuring that labor market interventions such as wage subsidies are effective. ### Business environment reforms - Reforms to improve the business environment are particularly important in the context of fiscal consolidation, labor market reforms, and low growth. - Reducing the costs of doing business through regulatory and administrative reforms will help offset higher energy and labor costs resulting from other reform initiatives. - With many legal reforms passed or in the latter stages of legislative approval, focus should turn to empowering institutions to implement the new laws in a clear and transparent way that encourages business investment and financial sector lending. - The new public procurement law has a key role to play in anti-corruption policies. ### Financial development, inclusion, and stability - Increasing financial development and inclusion and maintaining financial stability are key policy priorities. - Considerable progress has been made in developing the equity market. - The focus now should be on increasing SME finance, developing the private debt market, and improving financial sector access, particularly for women. - Reforms should focus on removing structural impediments that dissuade financial institutions from entering these markets. - Efforts to strengthen liquidity management and to use macroprudential tools countercyclically are welcome, but careful calibration of the latter is needed to manage potential risks. - The effectiveness of the AML/CFT regime should continue to be strengthened in response to the recommendations of the upcoming FATF/MENAFATF Mutual Evaluation Report. ### Exchange rate and external position - The exchange rate peg serves Saudi Arabia well given the current structure of the economy. - The team assesses that the external position in 2017 was weaker than consistent with desirable medium-term fiscal policy settings. *Source: IMF staff assessment contained in the provided content unit.* ### 60. It is recommended that the next Article IV consultation take place on the standard ### cr18263-sa - 60. It is recommended that the next Article IV consultation take place on the standard ### Risk Assessment Matrix — main risks, likelihood, impact, and policy responses - Lower energy prices - Likelihood/Time Horizon: Low/Short-to-medium-term - Expected impact: High — increase fiscal deficit; negative implications for growth and employment; adverse confidence effects; lower banking system liquidity; deteriorating asset quality. - Policy response: - Fiscal policy would need to adjust to reduce medium-term fiscal and external risks. - Use existing buffers together with external borrowing to smooth adjustment. - Ensure banking system liquidity and carefully monitor banks for signs of stress. - Speed up planned structural reforms to reduce oil price fluctuation impact. - Policy and geopolitical uncertainties (intensification of fragmentation/security dislocation in parts of the Middle East, Africa, Asia, and Europe) - Likelihood/Time Horizon: High/Short-to-medium-term - Expected impact: High — depends on nature of shock; most likely transmission via oil prices; higher oil prices strengthen fiscal/external balances, but regional uncertainties could increase defense and security spending. - Policy response: - If oil prices exceed budget assumptions, save additional revenues and target the same non-oil fiscal balance path. - SAMA to actively manage banking system liquidity to keep SAIBOR-LIBOR spread in a non-disruptive range. - Continue ambitious structural reforms. - The payoff from economic and social reforms is larger than expected - Likelihood/Time Horizon: Medium/Medium-term - Expected impact: High — non-oil growth could be larger than staff baseline if reforms successfully boost domestic and foreign investment and productivity. - Policy response: - Continue reforms to ensure stronger growth is sustained. - Slippages in the reform agenda - Likelihood/Time Horizon: Low/Medium-term - Expected impact: High — failure to follow through on fiscal consolidation, privatization/PPP, and structural reforms could crowd out private sector, reduce growth and employment, and worsen fiscal prospects. - Policy response: - Calibrate government policy to catalyze private sector investment. - Support with structural and labor market reforms to boost non-oil growth and competitiveness of Saudi nationals. - Retreat from cross-border integration - Likelihood/Time Horizon: Medium/Short-to-medium-term - Expected impact: High — similar to lower energy prices; negative consequences for trade, capital and labor flows; likely decline in oil prices; deterioration in external and fiscal balances; adverse effects on growth, employment, and financial sector. - Tighter global financial market conditions - Likelihood/Time Horizon: High/Short-to-medium-term - Expected impact: Low — continued strong fundamentals and large financial cushions mitigate excessive volatility. - Policy response: - Could affect government’s ability to borrow internationally and increase domestic financing requirement; bank funding costs may rise. *Notes from RAM legend: “low” indicates probability below 10 percent, “medium” between 10 and 30 percent, “high” between 30 and 50 percent.* ### Fiscal developments — key dynamics and projections (figures) - Fiscal balance: charted as Percent of GDP (historic and projected). - Non-exported Oil Primary Deficit: charted as Percent of non-oil GDP (historic and projected). - Non-exported Oil Revenue: charted as Percent of non-oil GDP (historic and projected). - PIH-consistent and projected Non-oil Primary Deficit: shown as Percent of non-oil GDP with PIH-consistent level (annuity constant in real per capita terms). - Net Financial Assets: charted as Percent of GDP (historic and projected). - Government Spending (SAR billion): Government Spending and components (Capital Expenditure, Current Expenditure, Land Sale, Total Expenditure) plotted 2012–2018. ### Real sector — contributions and indicators - Contribution to Real GDP Growth: breakdown by Public consumption, Private consumption, Public investment, Private investment, Change in stocks, Net exports, and GDP (historic and projected). - Oil vs Non-oil contributions to GDP growth shown (Percent). - Purchasing Managers' Index and Business Conditions index plotted (Sep-11 to May-18). - Indicators of Consumer Spending: Point of Sales Transactions and ATM withdrawals (3 month moving average, y-o-y percent change). - Consumer Sentiment index (Sep-10 to May-18). - Indicators of Investment Spending: Letters of credit opened for building material and machinery imports, Domestic cement sales (3 month moving average, y-o-y percent change). ### Inflation and financial market developments — key measures - Food Price Indices (y-o-y percent change) plotted alongside World index. - Tadawul All Shares Index (y-o-y percent change). - 3-month SAIBOR and U.S. LIBOR (Percent) — SAIBOR and LIBOR series. - Saudi Arabia International Bonds Yields: spreads to 5yr, 10yr, 30yr US T-bill (basis points). - Real Estate Index (y-o-y percent change) and sectoral contributions (Agricultural, Commercial, Residential). - CPI Inflation: Headline, Food, Core, Rent contributions (y-o-y percent change or contribution). ### External sector developments — prices, IIP, trade composition, exchange rates - Spot Crude Price: Dubai ($/BBL, DOE) and Petrochemical Price Index. - International Investment Position (US$ billion) with assets and liabilities components and Net IIP. - Contribution to Non-oil Export Growth by product categories (2008–2017). - Contribution to Import Growth by product categories (2008–2017). - Spot and Forward Exchange Rates and Oil Prices: Spot exchange rate and 12M forward exchange rate (Saudi Riyal per US$) with Oil prices (US$ per barrel). - Real and Nominal Effective Exchange Rates (Index, 2010=100). ### Monetary developments — credit, liquidity, and bank balance sheet - Credit growth (y-o-y percent change) series: Total credit growth; Bank credit to private sector growth; SCI credit growth. - Mortgage loan growth and share of total lending to private sector. - Excess liquidity in banking sector (Percent of bank assets). - Loan-to-deposit ratio (RHS) and Commercial Bank Deposits growth (LHS); Loan-to-Deposit ratio and Growth plotted. - Change in Bank Balance Sheet Composition, Apr. 17–18 (Percentage point change of share of total assets): assets and liabilities components (Private, Public, Other, Foreign, Excess deposits, SAMA bills, Other, Capital acct, Foreign Deposits, Assets, Liabilities). - Bank Credit Growth in Select Sectors (y-o-y percent change) by sector (Manufacturing, Construction, Commerce). ### Oil market developments and forecasts - Oil Production and Exports (Million barrels per day): Exports: Crude Oil and Refined products. - Output of Major Oil Producers (Million barrels per day): Russia, Saudi Arabia, US, Iran, Iraq. - Consensus Oil Price Forecasts (Brent Crude Oil, US$/barrel) with historical and forecasted ranges (End 2020, End 2021, End 2022). - Futures and confidence intervals for Brent Crude Oil (U.S. dollars per barrel). - Note: Futures-derived data referenced as of May 29, 2018. ### Upside/Downside Oil Price Scenarios — fiscal and external implications - Scenario assumptions (Figure 7): - Low oil price scenario: oil price is 25 to 41 percent below the WEO oil price from 2019 to 2023. - High oil price scenario: oil price is 25 to 41 percent above the WEO oil price from 2019 to 2023. - Both scenarios assume no change in government spending or in external borrowing relative to baseline. - Impacts shown (2016–2023): - Fiscal Balance (in percent of GDP): Baseline, Low Oil Price Scenario, High Oil Price Scenario plotted 2016–2023. - Government Net Financial Assets (in percent of GDP). - Current Account Balance (in percent of GDP). - Reserves (in months of imports). ### Structure of government spending and public capital - Government Wage Bill to GDP and Government Employment to Working-age Population plotted (Latest Value). - Social Assistance Spending (in percent of GDP) and relationship to nominal GDP per capita (thousand USD). - Change in Total Spending (in percent of GDP), 2007–2016: Capital spending, Current spending, Total. - Public Capital Stock (percent of GDP) and Quality of Overall Infrastructure, Air Transport, Roads, Ports (Ranking: 1 = best, 144 = worst). - Education Spending per Capita (USD) and Average TIMSS Score (8th Grade, 2015). ### Labor market developments — unemployment, participation, wages - Saudi Nationals Unemployment Rates (in percent) by Male, Female, Youth (ages 15-24), Total (2007–2017). - Saudi Nationals Unemployed by Sex and Education, 2017 (percent of total unemployed). - Saudi to Non-Saudi Monthly Wages by Education (Ratio) — 2009 vs 2017. - Employment by Sector, 2017 (In thousands): Nationals and Expatriates across sectors including Telecommunications, Trade, Construction, Mining and quarrying, Social services, Agriculture and fishing, Manufacturing, Utilities, Financial services, Other activities. - Labor Force Participation by Gender and Age, 2017 (Percent of age-band in labor force). - Average Monthly Wages by Sector and Nationality, 2017 (In SAR thousands). ### Impediments to private sector growth — constraints and competitiveness - Selected Doing Business Indicators, 2018 (distance to frontier scores) and time series (2010, 2014, 2018). - Global Competitiveness Indicators (scores) across pillars: Institutions, Infrastructure, Macroeconomic environment, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labor Market Efficiency, Financial Market Development, Technological Readiness, Market Size, Business Sophistication, Innovation. - Most Problematic Factors for Doing Business (scores): top items include Poor public health; Crime and theft; Government instability/coups; Inadequate supply of infrastructure; Inflation; Corruption; Foreign currency regulations; Insufficient capacity to innovate; Tax regulations; Poor work ethic in national labor force; Inefficient government bureaucracy; Tax rates; Policy instability; Inadequately educated workforce; Access to financing; Restrictive labor regulations. - Trade and FDI regime indicators vs G20, EM averages including OECD trade facilitation performance and WB-IFC ease of starting a foreign business. ### Key numeric highlights from tables and projections - Crude oil production (million of barrels per day): 2015: 10.2; 2016: 10.5; 2017: 10.0; 2018: 10.1; 2019: 10.2; 2020: 10.3; 2021: 10.3; 2022: 10.4; 2023: 10.5. - Average oil export price (U.S. dollars per barrel): 2015: 50.44; 2016: 41.55; 2017: 53.27; 2018: 70.76; 2019: 69.56; 2020: 65.46; 2021: 62.56; 2022: 60.55; 2023: 59.2. - Real GDP (annual growth): 2015: 4.1; 2016: 1.7; 2017: -0.9; 2018: 1.9; 2019: 1.9; 2020: 2.0; 2021: 2.1; 2022: 2.2; 2023: 2.4. - Non-oil primary balance/non-oil GDP (Percent): 2015: -50.0; 2016: -45.7; 2017: -39.7; 2018: -41.7; 2019: -36.9; 2020: -35.3; 2021: -34.1; 2022: -33.0; 2023: -32.1. - Central government's gross debt (Percent of GDP): 2015: 5.8; 2016: 13.1; 2017: 17.2; 2018: 19.1; 2019: 20.3; 2020: 22.0; 2021: 24.0; 2022: 24.2; 2023: 24.3. - Central government's net financial assets (Percent of GDP): 2015: 35.9; 2016: 17.1; 2017: 7.7; 2018: 0.5; 2019: -1.2; 2020: -3.2; 2021: -5.6; 2022: -8.4; 2023: -11.7. - SAMA's total net foreign assets (US$ billions): 2015: 608.9; 2016: 528.6; 2017: 488.9; 2018: 521.8; 2019: 560.3; 2020: 592.5; 2021: 602.5; 2022: 605.2; 2023: 585.6. - Current account balance (Percent of GDP): 2015: -8.7; 2016: -3.7; 2017: 2.2; 2018: 9.3; 2019: 8.8; 2020: 6.7; 2021: 4.3; 2022: 2.5; 2023: 1.2. - Table 2 highlights (Budgetary central government, selected lines, Percent of GDP): - Revenue: 2015: 25.0; 2016: 21.5; 2017: 24.1; 2018: 29.3; 2019: 30.6; 2020: 31.7; 2021: 32.0; 2022: 31.5; 2023: 30.6; 2024: 29.9. - Expenditure: 2015: 40.8; 2016: 38.7; 2017: 33.4; 2018: 36.6; 2019: 35.2; 2020: 33.4; 2021: 34.0; 2022: 34.0; 2023: 33.6; 2024: 33.4. - Net lending (+)/borrowing (-): 2015: -15.8; 2016: -17.2; 2017: -9.3; 2018: -4.6; 2019: -1.7; 2020: -2.0; 2021: -2.5; 2022: -3.0; 2023: -3.6. - Balance of Payments (Table 4, US$ billions): - Current account: 2015: -56.7; 2016: -23.9; 2017: 15.2; 2018: 72.7; 2019: 70.6; 2020: 54.6; 2021: 35.7; 2022: 21.5; 2023: 10.8. - Trade balance: 2015: 44.3; 2016: 55.7; 2017: 101.7; 2018: 159.0; 2019: 151.4; 2020: 131.9; 2021: 116.0; 2022: 104.9; 2023: 95.2. - Exports: 2015: 203.5; 2016: 183.6; 2017: 221.1; 2018: 285.8; 2019: 284.0; 2020: 271.2; 2021: 263.1; 2022: 259.4; 2023: 257.4. - Imports (f.o.b.): 2015: -159.3; 2016: -127.8; 2017: -119.3; 2018: -126.8; 2019: -132.7; 2020: -139.3; 2021: -147.0; 2022: -154.5; 2023: -162.2. - SAMA's total net foreign assets (US$ billions): repeated — see above. - Monetary Survey (Table 5, SAR billions): - Money and quasi-money (M3): 2015: 1,773; 2016: 1,787; 2017: 1,791; 2018: 1,832; 2019: 1,884; 2020: 1,950; 2021: 2,026; 2022: 2,111; 2023: 2,210. - Claims on private sector: 2015: 1,372; 2016: 1,405; 2017: 1,394; 2018: 1,422; 2019: 1,453; 2020: 1,502; 2021: 1,564; 2022: 1,634; 2023: 1,716. - Financial Soundness Indicators (Table 6, selected): - Total assets (percent of GDP) rose from 71.6 (2010) to 89.9 (2017). - Gross NPLs to gross loans: 2010: 3.0; 2011: 2.2; 2012: 1.7; 2013: 1.3; 2014: 1.1; 2015: 1.2; 2016: 1.4; 2017: 1.6. - Total provisions to gross NPLs: 2010: 115.7; 2011: 132.8; 2012: 145.1; 2013: 157.4; 2014: 182.9; 2015: 164.4; 2016: 177.0; 2017: 151.9. - Regulatory capital to risk-weighted assets: 2010: 17.6; 2011: 17.6; 2012: 18.2; 2013: 17.9; 2014: 17.9; 2015: 18.1; 2016: 19.5; 2017: 20.4. - Average pretax return on assets: around 2.0 percent in recent years. ### Policy recommendations and priorities (synthesized from text) - Fiscal - Adjust fiscal policy if oil prices decline to reduce medium-term fiscal and external risks. - Save additional oil revenues if oil prices exceed budget assumptions and keep to non-oil fiscal balance path. - Use buffers and external borrowing to smooth fiscal adjustment. - Monetary/Financial - SAMA should actively manage banking system liquidity and monitor banking sector for stress; maintain SAIBOR-LIBOR spreads at levels that do not encourage capital outflows. - Ensure banking system liquidity and preserve large financial cushions to mitigate market tightening. - Structural/Reform - Speed up planned structural reforms to reduce economy’s exposure to oil price fluctuations and to catalyze non-oil growth. - Continue ambitious structural reforms even if reform payoffs are larger than expected to sustain growth. - Avoid slippage in fiscal consolidation, privatization/PPP, and other structural reforms; implement labor market reforms to increase competitiveness of Saudi nationals. - Crisis/Contingency - Calibrate government policy scope to catalyze private sector investment and enhance its role in growth and employment. *Italic line: Source: IMF staff report content as provided in the unit.* ### Appendix I. Saudi Arabia’s Nonfinancial Corporate Sector: ### Appendix I. Saudi Arabia’s Nonfinancial Corporate Sector: Performance and Vulnerabilities ### Corporate profits and sector performance (2015–17) - Profits of 94 listed non-financial firms rose by 12 percent in 2017, following a decline of nearly 7 percent in 2016. - Sample coverage: 94 non-financial public companies with available data for 2012–17. Total revenue of these companies amounted to $132 billion, or about 27 percent of non-oil GDP, in 2017. - Sectoral highlights: - Petrochemical sector: revenues and profits rose, buoyed by stronger sales prices in 2017. - Energy & utilities: large year-on-year rise in profits, benefiting from higher electricity tariffs effective from beginning of 2016. - Multi-investment: large year-on-year rise in profits. - Construction, cement, and transport: recorded lower revenues and profits as government investment remained subdued relative to pre-2014 levels. - Overall: profits in seven of the thirteen sectors declined. - Aggregate sample figures (2017): Operating revenue $132.0 billion; Operating profit/loss $21.5 billion. ### Debt profile and composition (2015–17) - Total debt of the sample was $158 billion in 2017 (33 percent of non-oil GDP), an increase of 2 percent from 2016. - Debt concentration by sector (2017): Energy & utilities 41 percent of total debt; Petrochemical industries 29 percent of total debt. - Short-term debt increased by 5 percent in 2017; total corporate debt grew by $2.8 billion in 2017. - Notable driver: Saudi Electricity Company (SEC) — SEC’s debt grew by 13 percent, or by $7.5 billion, in 2017. - Petrochemical sector total debt fell in 2017 by $5.4 billion, mainly due to a drop in long-term debt. - Cash and cash equivalents grew by 21 percent in 2017, recovering from a 19 percent decline in 2016. - Short-term debt exceeded cash holdings for the third year in a row in 2017; 7 of 13 sectors had more short-term debt than cash on hand at end-2017. - Aggregate sample table totals (2017): Cash & cash equivalents 26.1 (billions of U.S. dollars); Total debt 159.8 (billions); Short term debt 61.1 (billions). ### Debt maturities and rollover needs - Maturing debt over the next four years (from 2018 baseline) is $11–14 billion a year (or between 6 and 8 percent of the outstanding debt stock) and mainly takes the form of loans. - Repayments are highest for petrochemical and energy & utilities companies. - Repayments are much higher in 2021 and 2023 with nearly a third of total outstanding debt falling due in those two years (28 percent). - Corporate debt sample for rollover analysis: covers 109 nonfinancial companies with total debt outstanding of $181 billion as of May 2018. Corporate debt here includes bonds and loans, and reflects marketable debt captured by Bloomberg. ### Interest coverage, implied interest rates, and debt-at-risk - Median interest coverage ratio (ICR) declined further in 2017 but remains above 2 in most sectors. - Implied interest rate on corporate debt was around 2.8 percent in 2017, and has been on an upward trend since 2013 for most sectors. - Sector-specific ICR developments: declines in cement, agriculture & food, and transport sectors due to lower profits and higher interest costs. - Debt-at-risk definition: debt of companies with an ICR less than 1.5. - Debt-at-risk decreased from 14 percent of total debt in 2016 to 7 percent in 2017. - Firms-at-risk (percentage of total firms with debt-at-risk) increased slightly from 27 percent to 29 percent between 2016 and 2017. - The 2016 decline in total debt-at-risk was concentrated: a large petrochemical company accounted for 50 percent of total debt-at-risk in 2016; its ICR improved in 2017 and its debt is no longer considered at risk. ### Sensitivity analysis to earnings and borrowing cost shocks (three scenarios) - Scenarios (operating income decrease; increase in borrowing cost): - 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 30 percent; Increase in Borrowing Cost 300 bps. - Key simulation outcomes: - Median ICR drops in all scenarios; remains above 2 in scenarios 1 and 2; median ICR is 1.3 in scenario 3. - Debt-at-risk (ICR<1.5) outcomes: - Scenario 1: debt-at-risk increases to 17 percent of total debt. - Scenario 2: debt-at-risk increases to 68 percent of total debt. - Scenario 3: debt-at-risk increases to 76 percent of total debt. - Sectoral vulnerability: most of the increase in debt-at-risk would be in the industrial, telecommunications, and energy sectors. - Industrial companies are the most vulnerable: nearly all their debt becomes at risk under all scenarios. - Historical context: the debt-at-risk and firms-at-risk indicators for 2012–2017 show improvements prior to scenarios but substantial deterioration under the severe scenarios. ### Overall assessment - 2017 showed an improvement in aggregate profits and cash buffers for the sample, with sharper performance divergence across sectors. - Aggregate indebtedness modestly increased in 2017, with concentrations in Energy & utilities and Petrochemical industries and material short-term rollover needs in 2021 and 2023. - The corporate sector exhibits manageable vulnerabilities to moderate shocks (scenario 1) but becomes highly vulnerable under larger earnings and borrowing cost shocks (scenarios 2 and 3), with particular stress in industrial, telecommunications, and energy sectors. *Prepared by Tucker Stone; analysis based on Orbis data at end-May 2018 and IMF staff estimates.* ### Appendix III. Fiscal and External DSAs ### Appendix III. Fiscal and External DSAs ### Public Sector Debt Sustainability — Baseline Scenario (Figure 1) - Nominal gross public debt (in percent of GDP): 7.7 (2016), 13.1 (2017), 17.2 (2018), 19.1 (2019), 20.3 (2020), 22.0 (2021), 24.0 (2022), 24.0 (2023), 24.3 (projection year shown). - Public gross financing needs (in percent of GDP): -3.7 (2016), 18.3 (2017), 9.8 (2018), 4.7 (2019), 1.8 (2020), 3.4 (2021), 3.3 (2022), 5.8 (2023), 6.3 (later projection). - Real GDP growth (in percent): 4.1 (2016), 1.7 (2017), -0.9 (2018), 1.9 (2019), 1.9 (2020), 2.0 (2021), 2.1 (2022), 2.2 (2023), 2.4 (projection). - Inflation (GDP deflator, in percent): 3.0 (2016), -3.0 (2017), 7.4 (2018), 11.4 (2019), 0.8 (2020), -0.5 (2021), 0.3 (2022), 0.7 (2023), 1.0 (projection). - Nominal GDP growth (in percent): 7.5 (2016), -1.4 (2017), 6.5 (2018), 13.6 (2019), 2.7 (2020), 1.5 (2021), 2.4 (2022), 3.0 (2023), 3.4 (projection). - Effective interest rate (in percent): 5.5 (2016), 3.5 (2017), 2.8 (2018), 2.7 (2019), 3.3 (2020), 3.8 (2021), 4.0 (2022), 3.6 (2023), 3.6 (projection). - Cumulative change in gross public sector debt (2007–2015 actual and projections): Change in gross public sector debt shows -2.2 (2016) then 7.3, 4.1, 1.9, 1.2, 1.7, 1.9, 0.3, 0.1 adding to cumulative 7.1. - Identified debt-creating flows (cumulative): -1.4 (2016), 12.5 (2017), 6.9 (2018), 3.4 (2019), 2.8 (2020), 3.5 (2021), 3.7 (2022), 1.9 (2023), 1.6 (projection), cumulative 16.9. - Primary deficit (in percent of GDP): -5.0 (2016), 20.2 (2017), 11.1 (2018), 5.6 (2019), 2.7 (2020), 3.0 (2021), 3.4 (2022), 3.8 (2023), 4.2 (projection); cumulative 22.8. - Primary (noninterest) revenue and grants (in percent of GDP): 38.8 (2016), 18.3 (2017), 21.9 (2018), 29.2 (2019), 30.1 (2020), 30.2 (2021), 29.7 (2022), 29.0 (2023), 28.4 (projection), cumulative 176.6. - Primary (noninterest) expenditure (in percent of GDP): 33.8 (2016), 38.5 (2017), 33.0 (2018), 34.8 (2019), 32.8 (2020), 33.2 (2021), 33.1 (2022), 32.8 (2023), 32.6 (projection), cumulative 199.4. - Automatic debt dynamics (contribution, percent of GDP): -0.4 (2016), 0.3 (2017), -0.4 (2018), -1.7 (2019), 0.1 (2020), 0.5 (2021), 0.3 (2022), 0.1 (2023), 0.1 (projection), cumulative -0.5. - Of which: real interest rate: -0.1, 0.4, -0.6, -1.4, 0.5, 0.9, 0.8, 0.7, 0.6, cumulative 2.0. - Of which: real GDP growth: -0.3, -0.1, 0.1, -0.3, -0.4, -0.4, -0.5, -0.5, -0.6, cumulative -2.6. - Exchange rate depreciation contribution: 0.0 for years shown. - Other identified debt-creating flows (percent of GDP): 4.0 (2016), -8.0 (2017), -3.8 (2018), -0.6 (2019), 0.0 (2020), 0.0 (2021), 0.0 (2022), -2.1 (2023), -2.7 (projection), cumulative -5.3. - Accumulation of deposits: 4.0 (2016), -12.1 (2017), -3.5 (2018), -2.3 (2019), 0.0 (2020), 0.0 (2021), 0.0 (2022), -2.1 (2023), -2.7 (projection), cumulative -7.1. - Contingent liabilities: 0.0 for all years. - Loans and equity: 0.0 (2016), 4.1 (2017), -0.3 (2018), 1.7 (2019), 0.0 (2020–2023), 0.0 (projection), cumulative 1.7. - Residual, including asset changes (percent of GDP): -0.8 (2016), -5.2 (2017), -2.8 (2018), -1.4 (2019), -1.7 (2020), -1.8 (2021), -1.8 (2022), -1.6 (2023), -1.5 (projection), cumulative -9.8. - Note: Public sector defined as central government; effective interest rate defined as interest payments divided by debt stock at end of previous year. ### Composition of Public Debt and Alternative Scenarios (Figure 2) - Under the Baseline scenario (2018–2023): - Real GDP growth (in percent): 1.9 (2018), 1.9 (2019), 2.0 (2020), 2.1 (2021), 2.2 (2022), 2.4 (2023). - Inflation from GDP deflator (in percent): 11.4 (2018), 0.8 (2019), -0.5 (2020), 0.3 (2021), 0.7 (2022), 1.0 (2023). - CPI Inflation (in percent): 3.0 (2018), 2.0 (2019), 2.2 (2020), 2.2 (2021), 2.1 (2022), 2.1 (2023). - Primary Balance (in percent of GDP): -5.6 (2018), -2.7 (2019), -3.0 (2020), -3.4 (2021), -3.8 (2022), -4.2 (2023). - Effective interest rate (in percent): 2.7 (2018), 3.3 (2019), 3.8 (2020), 4.0 (2021), 3.6 (2022), 3.6 (2023). - Historical Scenario (2018–2023) key lines shown for comparison: - Real GDP growth: 1.9, 3.6, 3.6, 3.6, 3.6, 3.6. - Primary Balance: -5.6, 0.3, 0.3, 0.3, 0.3, 0.3. - Effective interest rate: 2.7, 3.3, 3.3, 3.3, 3.3, 3.5. - Constant Primary Balance Scenario: - Primary Balance fixed at -5.6 (2018–2023). - Effective interest rate path: 2.7 (2018), 3.3 (2019), 4.4 (2020), 4.6 (2021), 3.9 (2022), 3.9 (2023). - Note: The constant primary balance scenario assumes all financing needs are met through the issuance of short-term debt and is rolled over in full each year. - Composition charts: Net debt, Gross nominal public debt, Public gross financing needs, By maturity (medium and long-term vs short-term), By currency (local currency-denominated vs foreign currency-denominated) are presented for 2016–2023. ### External Debt Sustainability Framework (Table 1) - Baseline external debt (in percent of GDP): 13.7 (2013), 13.5 (2014), 12.1 (2015), 21.0 (2016), 29.1 (2017), 27.2 (2018), 27.7 (2019), 29.1 (2020), 29.4 (2021), 30.2 (2022), 27.3 (2023). - Change in external debt (in percent of GDP): -4.0 (2013), -0.2 (2014), -1.4 (2015), 8.9 (2016), 8.1 (2017), -1.9 (2018), 0.5 (2019), 1.4 (2020), 0.3 (2021), 0.7 (2022), -2.9 (2023). - Identified external debt-creating flows (percent of GDP): -19.8 (2013), -8.2 (2014), 10.3 (2015), 5.0 (2016), -0.9 (2017), -7.1 (2018), -6.8 (2019), -4.9 (2020), -2.7 (2021), -1.1 (2022), 0.0 (2023). - Current account deficit, excluding interest payments (percent of GDP): -20.2 (2013), -10.1 (2014), 7.5 (2015), 3.0 (2016), -2.6 (2017), -9.5 (2018), -9.3 (2019), -7.4 (2020), -4.9 (2021), -3.1 (2022), -1.8 (2023). - Deficit in balance of goods and services (percent of GDP): -23.5 (2013), -13.0 (2014), 3.9 (2015), -0.4 (2016), -6.6 (2017), -12.4 (2018), -13.2 (2019), -10.3 (2020), -8.3 (2021), -6.8 (2022), -5.3 (2023). - Exports (percent of GDP): 57.8 (2013), 48.2 (2014), 29.2 (2015), 26.6 (2016), 36.5 (2017), 38.8 (2018), 37.7 (2019), 35.7 (2020), 34.0 (2021), 32.8 (2022), 31.6 (2023). - Imports (percent of GDP): 34.3 (2013), 35.2 (2014), 33.1 (2015), 26.2 (2016), 30.0 (2017), 26.4 (2018), 24.5 (2019), 25.4 (2020), 25.7 (2021), 26.0 (2022), 26.3 (2023). - Net non-debt creating capital inflows (negative, percent of GDP): 0.6 (2013), 2.0 (2014), 0.6 (2015), 1.7 (2016), 2.8 (2017), 2.4 (2018), 2.2 (2019), 2.1 (2020), 1.9 (2021), 1.8 (2022), 1.7 (2023). - Net foreign direct investment, equity (percent of GDP): 0.6 (2013), 0.4 (2014), 0.4 (2015), -0.2 (2016), -0.6 (2017), -0.6 (2018), -0.6 (2019), -0.6 (2020), -0.6 (2021), -0.6 (2022), -0.6 (2023). - Net portfolio investment, equity (percent of GDP): -1.2 (2013), -2.4 (2014), -1.0 (2015), -1.5 (2016), -2.1 (2017), -1.9 (2018), -1.7 (2019), -1.6 (2020), -1.4 (2021), -1.3 (2022), -1.2 (2023). - Automatic debt dynamics (percent of GDP): -0.2 (2013), -0.1 (2014), 2.2 (2015), 0.4 (2016), -1.1 (2017), 0.0 (2018), 0.2 (2019), 0.4 (2020), 0.3 (2021), 0.2 (2022), 0.1 (2023). - Contribution from nominal interest rate (percent of GDP): 0.1 (2013), 0.1 (2014), 0.1 (2015), 0.2 (2016), 0.2 (2017), 0.5 (2018), 0.7 (2019), 0.9 (2020), 0.9 (2021), 0.8 (2022), 0.8 (2023). - Contribution from real GDP growth (percent of GDP): -0.5 (2013), -0.5 (2014), -0.6 (2015), -0.2 (2016), 0.2 (2017), -0.5 (2018), -0.5 (2019), -0.5 (2020), -0.6 (2021), -0.6 (2022), -0.7 (2023). - Contribution from price and exchange rate changes (percent of GDP): 0.2 (2013), 0.3 (2014), 2.7 (2015), 0.4 (2016), -1.4 (2017), remainder dotted for projections. - Residual, including change in gross foreign assets (percent of GDP): 15.8 (2013), 8.0 (2014), -11.7 (2015), 3.9 (2016), 9.0 (2017), 6.6 (2018), 7.3 (2019), 6.4 (2020), 3.0 (2021), 1.8 (2022), -2.9 (2023). - External debt-to-exports ratio (in percent): 23.7 (2013), 27.9 (2014), 41.5 (2015), 79.1 (2016), 79.7 (2017), 70.2 (2018), 73.5 (2019), 81.6 (2020), 86.5 (2021), 92.0 (2022), 86.2 (2023). - Gross external financing need (in billions of US dollars): -85.2 (2013), -31.9 (2014), 111.0 (2015), 66.5 (2016), 34.1 (2017), -17.5 (2018), -13.5 (2019), 4.4 (2020), 25.2 (2021), 41.3 (2022), 53.9 (2023). - In percent of GDP for select years: -12.7 (2013), -4.3 (2014), 14.9 (2015), 8.8 (2016), 5.2 (2017). - Key macroeconomic assumptions underlying baseline (selected): - Real GDP growth (in percent): 2.7 (2013), 3.7 (2014), 4.1 (2015), 1.7 (2016), -0.9 (2017), 3.6 (2018), 3.5 (2019), 1.9 (2020), 1.9 (2021), 2.0 (2022), 2.1 (2023), 2.2 (later), 2.4 (projection shown elsewhere). - GDP deflator (change in domestic currency): -1.2 (2013), -2.3 (2014), -16.9 (2015), -3.0 (2016), 7.4 (2017), 2.3 (2018), 12.6 (2019), 11.4 (2020), 0.8 (2021), -0.5 (2022), 0.3 (2023), 0.7 (projection). - Nominal external interest rate (in percent): 0.5 (2013), 0.5 (2014), 0.5 (2015), 1.4 (2016), 1.1 (2017), 0.9 (2018), 0.7 (2019), 2.0 (2020), 2.7 (2021), 3.3 (2022), 3.1 (2023), 2.9, 2.8 in adjacent entries. - Growth of exports (US dollar terms, in percent): -2.9 (2013), -8.5 (2014), -38.6 (2015), -7.9 (2016), 19.1 (2017), 3.3 (2018), 27.8 (2019), 26.6 (2020), -0.2 (2021), -3.9 (2022), -2.4 (2023), -0.8, -0.3 shown. - Growth of imports (US dollar terms, in percent): 6.9 (2013), 12.6 (2014), -4.5 (2015), -19.9 (2016), -1.0 (2017), 3.7 (2018), 12.1 (2019), 5.2 (2020), 3.8 (2021), 4.0 (2022), 4.6 (2023), 4.4, 4.3 elsewhere. - Debt-stabilizing non-interest current account (long-run constant balance that stabilizes the debt ratio) indicated as 6/ in table. ### External Debt Vulnerability — Bound Tests and Shocks (Figure 3) - External debt (in percent of GDP) baseline level shown at 27 (baseline label). - Individual shock scenarios include: - Interest-rate shock: interest rate shock plotted up to 28 (percent) with baseline at 27. - Current account (CA) shock: CA shock increases debt to 56 in scenario plot (baseline 27). - Combined shock (permanent 1/2 standard deviation shocks and other combinations): combined shock plotted reaching 44 (scenario) and other values. - Real depreciation shock (one-time real depreciation of 30 percent in 2010) shows scenario reaching 39 (baseline 27). - Growth shock (permanent 1/4 standard deviation shocks to growth) shows scenario reaching 31 (baseline 27). - Notes: - Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in boxes represent average projections for the respective variables in baseline and scenario. Ten-year historical average is shown for variables. - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. *Source: IMF staff.* --- ### Appendix IV. Energy Price Reform and the Citizens’ Accounts ### Overview and policy context - Energy price reforms continue and are an important source of fiscal revenues in coming years. - The Citizens’ Accounts (CA) are used to compensate households for higher energy prices and non-oil revenue reforms. - Staff finds CA working well and average compensation levels appear adequate to cover effects on the average household of higher prices, but insufficient information exists to confirm adequacy for lower income households; authorities should confirm adequacy. ### 2018 price changes and planned schedule - Gasoline prices on January 1, 2018: - Octane 95 increased from SAR 0.8 per liter to SAR 2.04 (a 127 percent increase). - Octane 91 increased from SAR 0.8 per liter to SAR 1.37 (an 83 percent increase). - According to price projections at Article IV mission (May 2018), these increases effectively eliminated average consumer subsidies on octane 95 gasoline in 2018. - Electricity tariffs were increased and tiers simplified for residential and commercial consumers; new electricity tariffs aim to reflect average supply cost of electricity producers, but still generate high consumer subsidies as producers receive fuel at very subsidized price. - Other fuel and water prices remain virtually unchanged compared to 2017. - Planned gradual, differentiated price increases to reference prices by 2025: - Natural gas price expected to start increasing in 2020 and reach reference price very gradually. - LPG and kerosene prices to reach reference price levels in 2019. - Diesel prices to be incrementally increased starting 2019. - Water price reforms delayed due to metering and billing issues; ECRA conducting assessments and study on water supply costs. - Reference prices for fuel products include: (i) expected 2018 export FOB price; (ii) distributors’ margins normalized to 0.375 SAR/liter; (iii) 5 percent VAT. Reference prices projected using OECD oil price projections for 2019–23. - Electricity average reference tariff set at 0.21 SAR/kWh for residential consumption and 0.24 SAR/kWh for non-residential consumption per ECRA estimates; noted this average reference tariff is unlikely to reflect an efficient supply cost due to subsidized fuel for SEC. ### Assumed EPR schedule (from 2018 Budget Statement; staff estimates) - Years to reference price, number of price increases, reference price, first and last price increases are listed per product; examples shown: - Gasoline (liter) — Households: 2019-19 years to reference price, 12 number of price increases, 12.1% reference price, 22% (first/last increase entries in source table formatting). - Diesel (liter) — Non-households: 2019-25 years to reference price, 71.9 number of price increases, 48% reference price, 12% next entries. - Jet fuel (liter): 2019-2022 years, 13 number, 1% and 57% entries. - HFO (liter): 2019-25 years, 71.7 number, 250% and 16% entries. - Kerosene (liter): 2019-2022 years, 10 number, 6% and 51% entries. - Gas (mBTU): 2020-21 years, 22 number, 3.2 168% and 63% entries. - (Note: table formatting in source is complex; above entries preserved exactly as presented in the source.) ### Fiscal revenue estimates from EPR - Estimated fiscal revenues from 2018 electricity and gasoline price increases: about SAR 30 billion, with households accounting for almost 80 percent of total. - Fiscal revenues from increasing domestic energy prices to reference prices are estimated to reach SAR 112 billion by 2023 (these are additional to revenues already received from domestic sale of energy products). - Distribution over time and by consumer: - Estimated fiscal savings by consumer type (SAR billions): - Households: 23 (2018), 31 (2019), 32 (2020), 32 (2021), 33 (2022), 35 (2023). - Non Households: 7 (2018), 23 (2019), 45 (2020), 61 (2021), 69 (2022), 77 (2023). - Total: 30 (2018), 54 (2019), 76 (2020), 94 (2021), 101 (2022), 112 (2023). - Estimated fiscal savings by products (SAR billions): - Fuel products: 23 (2018), 45 (2019), 68 (2020), 89 (2021), 93 (2022), 102 (2023). - Electricity: 7 (2018), 9 (2019), 9 (2020); totals shown: 30 (2018), 54 (2019), 76 (2020), 94 (2021), 101 (2022), 112 (2023). - Contribution to fiscal savings: charts indicate households dominate early years and non-households contribute most from 2020 onward (non-households expected to bear two thirds of reform cost by 2023). ### Citizens’ Accounts (CA) design and coverage - Purpose: cash transfer to mitigate negative effects of EPR, VAT, and indirect effects of expatriate levy on household welfare. - Registration: - Started February 2017 via online application with self-declared income, household size, residency, and citizenship. - Registration open to all: between February 2017 and April 2018, 4.4 million households covering 14.6 million people registered. - Eligibility assessed against three criteria: (i) household composition; (ii) residency in the Kingdom; (iii) Saudi citizenship. - Self-declared information cross-checked across databases of 17 governmental entities (e.g., social security). - Certain groups of non-Saudi citizens (e.g., “Bidoun”, Saudi women married to non-Saudi men) are eligible if they reside in the Kingdom. - Eligibility and payment design: - Monthly cash transfer decreases with household income: - Bottom 5 deciles receive full entitlement. - Deciles 6 to 7 receive a partial entitlement. - Eighth decile receives minimum amount of 300 SAR/month. - Individual full entitlement amount: SAR 382/month. - Household transfer computed as multiple of individual amount using equivalence scale (OECD modified-scale): 1 for household head, 0.5 for household members aged above 18, 0.3 for household members aged 18 and below. - Example: family of 6 (3 adults above 18 and 3 children below 18) eligible to full entitlement receives 1,108 SAR/month (i.e., 382*2.9). - Implementation and fiscal cost: - In April 2018, 3.7 million households (83 percent of all registered) received a cash transfer, fiscal cost SAR 2.2 bn for that month. - Of beneficiaries, 57 percent received a full compensation that averaged SAR 933/month. *Source: IMF staff.* ### 7. Lacking the data and methodology underlying the calibration of the benchmark ### 7. Lacking the data and methodology underlying the calibration of the benchmark ### Benchmark calibration and components - The benchmark compensation level was calibrated on fair energy (gasoline and electricity) and food consumption levels of a representative household of six members (3 aged above 18 years old, 3 aged below) with two cars and one house. - The benchmark compensation has three components: - Energy component: (electricity price increase X fair electricity consumption level) + (gasoline price increase X fair gasoline consumption level). - VAT component: VAT rate X fair food basket. - Indirect component: 0.3 X (energy component + VAT component). - The equivalence scale used is the OECD-modified one, with the total weight of the representative household of 6 members equal to 1 + 2*0.5 + 3*0.3 = 2.9. - Fair consumption levels set for the representative household: - Electricity: 2,890 kWh/month. - Gasoline: 498 liters/month. - The VAT rate applied in the benchmark is 5 percent (used in the VAT component calculation). ### Data limitations and implications for adequacy assessment - Lack of disclosure on the data and precise benefit formula underlying the benchmark compensation makes it difficult to assess adequacy in compensating actual household welfare losses. - The total compensation amount reported for the CA compensation (item (1) in staff calculations) differs from 1,108 SAR/month because of lack of information on the precise benefit formula, notably on the price change accounted for by the Ministry of Labor and Social Development. - Electricity, gasoline, and food fair consumption levels are the key drivers of the cash benefit received by eligible households; uncertainty in these inputs limits confidence in distributional adequacy. ### Comparison with alternative compensation calculations (methodologies) - Compensation (2): Based on average electricity and gasoline expenditure shares from the 2013 household survey adjusted to 2017 expenditure levels. Direct welfare losses computed as: - gasoline budget share X gasoline price increase (%) X average total household expenditure. - electricity budget share X electricity price increase (%) X average total household expenditure. - food budget share X 0.05 X average total household expenditure. - Compensation (3) — equivalized compensation: Based on 2017 average per capita electricity and gasoline consumption using equivalized compensation (multiplier 2.9). Direct welfare losses computed as: - gasoline per capita consumption X gasoline price increase X 2.9. - electricity per capita consumption X electricity price increase X 2.9. - Compensation (4) — non-equivalized compensation: Based on 2017 average per capita electricity and gasoline consumption using non-equivalized compensation (multiplier 6). Direct welfare losses computed as: - gasoline per capita consumption X gasoline price increase X 6. - electricity per capita consumption X electricity price increase X 6. ### Staff assessment of adequacy and distributional uncertainty - Based on the data available to staff, the compensation provided through the citizens’ accounts appears adequate to cover the average welfare losses from the increase in energy prices at the beginning of 2018. - Detailed information is not available to assess whether the distribution of this compensation across income groups is adequate. - “No” transfer can mean either that the household is non-eligible, or the household is eligible but belongs to the top income quintile (20 percent richest). ### Policy recommendations on compensation and transparency - It is paramount to strike a balance between fiscal revenues and adequate compensation to households through the CA. - Assess the current transfers with respect to: - (i) the adequacy of its amount and coverage of low and middle-income households; and - (ii) its progressivity, to build confidence in the CA as a redistribution instrument. - Authorities should confirm that the CA transfer is commensurate to welfare losses at the bottom of the income distribution; for example, electricity users with consumption below 2,000 kWh/month faced a price increase of 260 percent (from 5 halala to 18 halala/kWh) and are most likely to belong to low-income households. - The details of the CA compensation and its adequacy should be made public and broadly communicated through examples. Failure to do so will undermine the credibility of the CA and increase the risk of fiscally costly mitigating measures. - As regular price updates are introduced to remove consumer subsidies, authorities should increase transparency and explicitly report subsidies given to energy suppliers. ### Energy sector governance and transparency recommendations - Consumer prices of fuel products and electricity should reflect efficient production costs. - Electricity tariffs reflect production costs that are heavily subsidized through opaque transfers from the government to SEC and through lower fuel prices paid to ARAMCO. - Recommendations: - Give a stronger role to a truly independent regulator with the power to set consumer tariffs and audit electricity providers. - Improve transparency of the fuel price structure by publishing its various components (ARAMCO supply cost, oil product fee, distributors’ margins, VAT). - Undertake a fuel market study to determine the appropriate level of fuel distributors’ margins. - Regular publication and full disclosure of the fuel pricing formula to educate the public on price drivers. ### Key external and fiscal context points referenced in the section - Current account (CA) and oil price context: - CA moved to a surplus of 2.2 percent of GDP in 2017 compared to a deficit of 3.7 percent of GDP in 2016. - The CA balance is projected to improve to a surplus of 9.3 percent of GDP in 2018. - Oil price assumptions: $70.7 in 2018; $59.2 in 2023; $53.2 in 2017. - Foreign reserves and net international position: - Further drawdown of fx reserves of $40 billion in 2017 (fx reserves fell by $80 billion in 2016). - SAMA’s net foreign assets stood at $489 billion (71 percent of GDP, 28 months of imports, 102 percent of broad money and 470 percent of the Fund’s reserve adequacy metric) at end-2017. - Net IIP estimated at 81 percent of GDP at end-2017, with external assets at 135 percent of GDP and external liabilities at 54 percent of GDP. - NIIP projected to increase to around 92.6 percent of GDP in 2023. - External sustainability assessment: - Current account norms in 2023 under the external sustainability approach are estimated at 5.5 percent of GDP (constant real per capita annuity) and 2.7 percent of GDP (constant real annuity), subject to uncertainty and sensitivity to parameters including oil prices. *Source: IMF staff analysis in "7. Lacking the data and methodology underlying the calibration of the benchmark" (cr18263-sa).* ### 11.1 million barrels in 2030 and then decline at a rate of 1 percent, along with consumption and exports. Oil prices ### cr18263-sa - 11.1 million barrels in 2030 and then decline at a rate of 1 percent, along with consumption and exports. Oil prices ### Oil production, price, and macro assumptions - Oil production path: 11.1 million barrels in 2030 and then decline at a rate of 1 percent (along with consumption and exports). - Oil price assumptions and effects: - Oil price is assumed to be $70.7 in 2018, declining to $59.2 in 2023 ($53.2 in 2017). - A $1 change in the oil price results in a 0.4 percent of GDP first-round change in the current account. - If oil prices increase by 2 percent, the GDP deflator increases by 2.1 percent, and real non-oil GDP grows by 3.2 percent after 2023. - Discounting and demographics: - Future oil revenues are discounted at 5.5 percent, the assumed rate of return on externally held financial wealth/NFA. - Population growth is 0.5 percent. ### Current account norms, gaps, and estimates - External sustainability (annuity rules) estimates (In percent of GDP): - Current account norm (annuity real per capita): 5.5 - Current account norm (annuity real): 2.7 - Average current account norm: 4.1 - Actual current account balance: 2.2 - Current account gap (annuity real per capita): -3.3 - Current account gap (annuity real): -0.5 - Current account gap (average): -1.9 - EBA-lite approach (coefficient on fiscal balance = 0.527): - Current account norm: 4.6 percent of GDP - Current account gap: -2.4 percent of GDP - Policy gap: -3.4 percent of GDP - EBA-oil approach II (coefficient on fiscal balance = 0.919): - Current account norm: 3.8 percent of GDP - Current account gap: -1.6 percent of GDP - Policy gap: -8.2 percent of GDP - Staff assessment and ranges: - The current account norm for 2017 is estimated at 4.6 percent of GDP (EBA-lite) compared with an actual current account of 2.2 percent of GDP, producing an estimated current account gap of -2.4 percent of GDP. - An alternative oil-exporter specification suggests a current account norm of 3.8 percent of GDP and a current account gap of -1.6 percent of GDP. - Using multiple methodologies, the estimated CA gap in 2017 is -2.4 percent (macro-balance/EBA-lite), -1.9 percent (external sustainability), and -1.6 percent (alternative oil-exporter specification). - Staff assesses a CA gap in a range of -1 to -3 percent of GDP in 2017. ### Current account actuals and trade developments - Actual CA and trade changes: - The current account moved back into a surplus of 2.2 percent of GDP in 2017 from a deficit of 3.7 percent of GDP in 2016. - Imports of goods fell by 7 percent in 2017 as the economy contracted; import volumes fell by 9 percent. - Exports increased by 20 percent in 2017; export volumes decreased by 1 percent. - Terms of trade improved by 22.2 percent in 2017 and are projected to improve by a further 29 percent in 2018. - The trade balance rose to 15 percent of GDP. - The CA surplus is expected to increase to 9.3 percent of GDP in 2018 as oil revenues increase further and then to narrow over the medium-term as the oil price declines. ### Real Effective Exchange Rate (REER) and exchange rate regime - Exchange rate regime and peg: - The Riyal has been pegged to the U.S. dollar at a rate of 3.75 since 1986 (formally pegged to the U.S. dollar effective January 2003; classified as a conventional peg). - REER movements and gaps: - The REER weakened by 2 percent as of end-of May 2018 relative to the 2017 average. - The REER in 2017 was on average 15 percent above its 10-year average, but this gap declined to 10 percent by year-end. - Staff estimates a REER gap in 2017 in the range of 10–20 percent, but at the lower end of this range by end-2017. - Estimates through May 2018 show that the REER has depreciated by 2 percent relative to the 2017 average. - The REER has generally been negatively correlated with oil prices; a fitted REER series is based on a regression of the REER and the real oil price using monthly data from January 1989 to December 2017. - Assessment: - The Riyal peg provides a longstanding and credible policy anchor. - Exchange rate movements have a limited impact on competitiveness in the short run because most exports are oil or oil-related products and there is limited substitutability between imports and domestically produced goods. - As fiscal consolidation proceeds, the REER gap would be expected to continue to narrow. ### External assets, liabilities, reserves, and NIIP trajectory - Net external assets and changes: - Net external assets were 81 percent of GDP at end-2017. - External assets declined by 10 percent of GDP during 2017 and 17 percent of GDP since their 2015 peak, largely due to a decline in central bank FX reserves. - External liabilities rose by 1.1 percent of GDP in 2017 mainly because of new government borrowing. - Projections suggest the NIIP-to-GDP ratio will increase over the medium-term to around 92.6 percent of GDP in 2023 as the current account remains in surplus. - Technical note: The NIIP may be underestimated given large errors and omissions in the balance of payments over many years and inconsistencies between the BoP and IIP data. - Reserves level: - Reserves fell to $489 billion (71 percent of GDP, 28 months of imports, and 470 percent of the IMF’s reserve metric) at end-2017, down from $727 billion in 2014. - Most of the government’s foreign assets are still held at the central bank within international reserves, though the government is developing a SWF by broadening the mandate of the Public Investment Fund (PIF). - Financial flows and BOP measurement: - Recorded net financial outflows increased in 2017. - Errors and omissions declined to 0.6 percent of GDP in 2017 compared to 10.3 percent of GDP in 2016. - FX reserves continued to fall, but at a slower pace. - Analysis of the financial account is complicated by the large errors and omissions in the balance of payments in some years. - Assessment: - The external balance sheet remains very strong; substantial accumulated assets represent both savings of exhaustible resource revenues for future generations and protection against vulnerabilities from oil price volatility. - Despite the substantial drawdown since 2015, reserves remain very comfortable when judged against standard Fund metrics. - External savings are not sufficient from an intergenerational equity perspective. - Under the government’s planned fiscal adjustment, reserves will increase over the medium term. ### Policy recommendations and potential responses - Fiscal policy and consolidation: - Continued fiscal consolidation is necessary over the short- and medium-term to strengthen the current account and increase saving for future generations. - The authorities’ planned fiscal adjustment is based on further energy price reforms, non-oil revenue measures, and expenditure restraint. - The non-exported oil primary fiscal deficit is expected to narrow substantially over the medium-term and reduce the external gap. - Fiscal adjustment should be supported by reforms to strengthen the fiscal framework. - Structural reforms: - Structural reforms that help diversify the economy and boost the non-oil tradeable sector over the medium-term will also support a stronger external position over time. - Exchange rate policy: - The peg to the U.S. dollar serves Saudi Arabia well by providing a credible policy anchor; external adjustment will be driven primarily by fiscal policy rather than the exchange rate. *Source: IMF staff estimates and assessments as presented in the Saudi Arabia staff report (Informational Annex), June 28, 2018.* ### Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016. ### Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016 ### Tax policy missions and related technical assistance - Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016. - Tax Administration (VAT and excises), May and October-November 2016. - Energy Price Reforms, September 2016. - Excise Tax Implementation, January 2017 and February–April 2017. - Policy Support, jointly with MCD/MCM, December 2015, and jointly with MCD, January 2017. - Strengthening the Macro-Fiscal Unit and the Fiscal Framework, May, July, and October 2017, and April 2018. - VAT Implementation, July and November 2017. ### Financial sector assessments (FSAP) and AML/CFT work - FSAP chronology and documentation: - An FSAP mission took place in January 2004. - The FSSA was published on June 5, 2006. - The FSSA-update was published on April 18, 2012. - FSAP-update, April 2011. Detailed Assessment of Observance was published on July 19, 2013. - FSAP missions were held in November 2016 and February 2017. - The FSSA was published on October 5, 2017. - AML/CFT engagements: - AML/CFT Diagnostic Mission, November 2015. - AML/CFT Threat Analysis Workshop, March 2016. - AML/CFT, March and September 2016. - AML/CFT, September 2017. - VAT Policy design: May–June 2016. ### Resident representation - No resident representative is stationed in Saudi Arabia. ### Relations with the World Bank Group - World Bank TCP has provided policy advice, capacity development, and implementation support on a reimbursable basis since 1975. - Reimbursable Advisory Services (RAS) objectives: - Address development challenges of generating productive jobs for a fast-growing population. - Improve performance of education and health systems. - Improve business climate and investment appeal. - Enhance provision of public services including water, electricity, and transport. - Strengthen capacity in national, municipal institutions, and tourism. - Areas of ongoing World Bank advisory work include: - Strengthening macro econometric modelling capacity and fiscal policy analysis. - Assessment of key implementation pillars and their results in support of Vision 2030. - Public financial management. - Business climate and foreign direct investment. - Small and medium enterprise strategy. - Urban development. - Social protection issues. - Employment policy including a focus on unemployment assistance. - Enhancing quality and relevance of the education system. - Health sector efficiency. - Energy efficiency. - Electricity sector legislation and policies. - Advising on the financial and economic cost/value of water resources. - Technical assistance on road maintenance and road safety. - Advisory support to the Public Transport Authority. ### International Finance Corporation (IFC) engagements - IFC strategy focuses on: - (i) partnering with regional champions to mobilize cross-border investments into the MENA region and other emerging markets; - (ii) providing advisory support, especially in the areas of Public Private Partnerships (PPPs), capacity building, and corporate governance; - (iii) supporting selective direct investments in high development impact areas such as access to finance for MSMEs, low-income housing, insurance, education, and climate friendly infrastructure. - Investment Program: - As of end of April 2018, IFC’s committed portfolio in Saudi Arabia stands around $132 million across the insurance, healthcare, and housing finance sectors. - Over the last decade, IFC has committed a total of around $2.5 billion with Saudi sponsors for investments in the MENA region, as well as in emerging markets including in Africa and East Asia. - Advisory Services Program highlights: - IFC advisory engaged on the PPP front and signed a mandate with the Ministry of Health to increase access to imaging services in underserved remote areas. - Prior IFC support: Medina Airport PPP (helped mobilize over $1 billion), successes with the Hajj Terminal and a captive desalination project at Jeddah Airport. - IFC advisory work to increase access to finance for SMEs: capacity building, corporate governance support, trainings for banks on SME financial services, risk management, and mortgage finance. - Advisory support to SAGIA: improve business environment, implement Doing Business–measured reforms, provide quality assurance support for NTP objectives, and capacity building focusing on investor services and investment promotion. ### Statistical issues — assessment of data adequacy for surveillance (as of June 11, 2018) - General assessment: - Data provision has some shortcomings, but is broadly adequate for surveillance. - Most affected areas are: government finance statistics, monetary and financial statistics, and external sector statistics. - Real sector statistics: - National accounts: - Estimates of annual GDP were rebased to 2010 from the previous base year of 1999. - The revision increased the 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, and the timeliness of publication will be improved this year. - Price statistics: - The CPI has been rebased to 2013 from the previous base year of 2007. - The weight reference period for the wholesale price index has recently been updated to 2014. - A quarterly real estate price index is now being published. - Labor market statistics: - No official time series providing a breakdown of employment between the private and public sector. - A new classification for economic activity and a new employment series were introduced in 2016Q4; data prior to 2016Q4 has not yet been revised to be consistent with the new series. - Government finance statistics: - Authorities have reclassified the budget in line with GFSM 2014. - The GFSM 2014 framework is being used to report and publish fiscal data. - Data only covers the budgetary central government. - Monetary and financial statistics: - Quality of monetary data has improved and information is made available in the Saudi Arabian Monetary Authority (SAMA) Monthly Statistical Bulletin. - SAMA reports monetary data for the central bank and deposit money banks to the Fund, which are published in IFS. - Authorities have not yet adopted the Standardized Report Forms (SRFs) as recommended in the Monetary and Financial Statistics (MFS) Manual and Compilation Guide. - Detailed data providing a breakdown of corporate and household deposits and credit-by-sector is not available. - Data is not published on corporate and household balance sheets. - 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, which are published on the IMF’s FSI website (fsi.imf.org). - The reported FSIs comprise all 19 core FSIs and 10 encouraged FSIs for deposit takers. - External sector statistics: - Quarterly IIP data are published although IIP statistics are highly aggregated and coverage in the capital and financial accounts, particularly for the private sector, needs improvement. - Official data may underestimate the net international investment position of Saudi Arabia, likely reflecting unrecorded private financial outflows on the asset side along with under-recording of debt liabilities. - Errors and omissions were reduced to near zero in 2017 through better data coverage of some large government-related institutions. - Authorities are continuing to work 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 27, 2018) — key entries - Exchange rates: Date of latest observation 6/27/2018; Date received 6/27/2018; 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 4/2018; Date received 5/28/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Reserve/base money: Date of latest observation 4/2018; Date received 5/28/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Broad Money: Date of latest observation 4/2018; Date received 5/28/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Central Bank balance sheet: Date of latest observation 4/2018; Date received 5/28/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Consolidated balance sheet of the banking system: Date of latest observation 4/2018; Date received 5/28/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Interest rates: Date of latest observation 6/27/2018; Date received 6/27/2018; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - Consumer price index: Date of latest observation 5/2018; Date received 6/27/2018; 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 2018; Date received 5/7/2018; 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 2018; Date received 5/7/2018; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - External current account balance: Date of latest observation Q4 2017; Date received 3/28/2018; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Exports and imports of goods: Date of latest observation 3/2018; Date received 5/31/2018; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - GDP/GNP: Date of latest observation Q4 2017; Date received 5/21/2018; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Gross external debt (BIS): Date of latest observation Q4 2017; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - International investment position: Date of latest observation Q4 2017; Date received 5/28/2018; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. *International Monetary Fund — Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016 (cr18263-sa).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18263-sa.pdf_