## 1sauea2019001 - Saudi Arabia: Staff Report for the 2019 Article IV Consultation (selected excerpts) ## Source details **Canonical URL:** [1sauea2019001 - Saudi Arabia: Staff Report for the 2019 Article IV Consultation (selected excerpts)](https://www.imf.org/-/media/files/publications/cr/2019/1sauea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1sauea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1sauea2019001.pdf.json) --- ### Fiscal consolidation, fiscal framework, and recent fiscal developments - Findings and recent developments: - Overall fiscal balance narrowed to 5.9 percent of GDP in 2018 from 9.2 percent of GDP in 2017. - Oil and non-oil revenues increased by 40 percent and 59 percent, respectively; non-oil revenue buoyed by the VAT, excises, expatriate levy, and proceeds from settlement agreements. - Current expenditures increased by 23 percent due to January 2018 Royal Decree allowances equivalent to 1.4 percent of GDP and higher social benefits through the Citizens’ Account Program equivalent to 1 percent of GDP. - The non-exported oil primary deficit (NEOPD) increased to 39.5 percent of non-oil GDP in 2018 from 38.5 percent in 2017. - Public Investment Fund (PIF) invested SAR 32 billion during 2018-19Q1 (just over 1 percent of GDP). - In 2019Q1, strong revenue performance and modest growth in expenditures resulted in a budget surplus. - Key fiscal figures (selected, preserved): - Nominal GDP (SARs billions): 2018 = 2,934; Nominal Non-oil GDP (SARs billions): 2018 = 1,929. - Revenue (percent of GDP): 2018 = 30.9; Oil: 2018 = 20.8; Non-oil: 2018 = 10.1. - Expenditure (percent of GDP): 2018 = 36.8; Current: 2018 = 30.4; Capital: 2018 = 6.4. - Overall Balance: 2018 = -5.9 (Percent of GDP). - Land sale in 2017 amounting to SAR 70 billion (2.7 percent of GDP). - Outlook and projections: - 2019 fiscal deficit projected to widen to 6.5 percent of GDP; NEOPD projected to narrow to 38.4 percent of non-oil GDP. - Budget proceeds from settlement agreements estimated by the authorities at 1.7 percent of GDP in 2019. - Expenditures projected to rise by 8.5 percent in 2019 reflecting expected pickup in capital spending and increased spending for the Private Sector Stimulus Program. - Medium term: overall fiscal deficit projected to narrow to 5.7 percent of GDP in 2024; NEOPD projected to narrow to 26.6 percent of non-oil GDP in 2024. - Staff’s fiscal outlook: central government debt-to-GDP was 19.1 percent and CGNFA was 0.1 percent of GDP at end-2018. ### Revenue reforms, social compensation, and VAT/energy reforms - Implementation and effects: - VAT introduction (January 2018) and energy price reforms have been implemented and are beginning to yield results; VAT introduction exceeded expectations. - Citizens’ Account Program provides payments to around 3.5 million households (covering 14.3 million individuals), with monthly payments varying by income and household size. - Recommendations and design issues: - Continue with planned energy and water price reforms and increases in expatriate labor fees. - Reforms should be inclusive and vulnerable households protected; compensate low- and middle-income households through the Citizens’ Account Program. - Staff suggested considering raising the VAT rate from 5 to 10 percent, in consultation with the GCC. - Estimated impact of selected reforms (Percent of GDP): VAT rate Increase 2.0; Water price reforms 0.7; Wage bill reforms 1.0; Capital spending savings 0.5; Interest payments savings 0.2; Total impact of reforms 4.3. - Social assistance: - Total fiscal cost of non-contributory social assistance schemes estimated at about 2.9 percent of GDP in 2018. - Programs and spending (2018, percent of GDP): Income Guarantee Program 0.8; Cost of living allowance 0.1; Social Care Programs 0.2; School Programs (Takaful) 0.2; Citizen's Account 1.0; Other programs 0.6. Memorandum item: Royal Decree Allowances 1.4. - Recommendations: consolidate, streamline, and monitor programs; develop a single beneficiary registry; establish and publish an official poverty line and reliable poverty data. ### Expenditure management, procurement, and fiscal transparency - Observations and reforms: - Spending has increased despite reforms; need to contain government wage bill and adopt more measured increases in capital spending. - Progress: medium-term fiscal framework, online expenditure management system (Etimad), strengthened fiscal risk analysis. - Public procurement law (expected effect in July 2019) and associated reforms to modernize procedures, enhance transparency and accountability, strengthen role of the Ministry of Finance, and establish a Strategic Procurement Unit (SPU). - Recommendations: - Implement public procurement law with no exemptions for entities that use budget funds; integrate procurement with Etimad. - Strengthen fiscal transparency: publish more detailed budget and spending execution data; reconcile projections with outcomes; broaden institutional coverage of fiscal reporting. - Develop a robust sovereign asset/liability management framework; integrate investment and borrowing decisions of different government entities. ### Promoting non-oil growth, diversification, and labor market reforms - Structural reforms and measures (selected): - Capital markets: primary dealer agreements (August 2018); issuance of first domestic sovereign 30-year sukuk (April 2019); reduction of denomination size and trading fees (June 2019). - Foreign investment: restrictions removed for five sectors (October 2018); entry of five new foreign banks (October 2018–April 2019). - Legal framework: Bankruptcy Law (August 2018); Public Procurement Law expected from July 2019; Draft Private Sector Participation Law released July 2018. - Doing Business / labor: Updated Competition Law (March 2019); new residency regime for expatriates (May 2019); SMEs access to expatriate visas (February 2019). - Labor market and productivity issues: - Staff estimates suggest wages of Saudi workers are above those consistent with their productivity; productivity-wage gap needs narrowing. - Suggested labor-market reforms: align wages and productivity; reduce availability and attractiveness of government work; strengthen education and training; ensure active labor market programs are effective; increase mobility of expatriates via visa reform; increase female employment. - After the mission, authorities announced a new visa and residency program for skilled foreign workers and owners of capital. - SMEs and entrepreneurship: - SMEs account for 97 percent of businesses; micro enterprises (1–5 employees) account for 85 percent. - SMEs predominantly employ expatriates (75 percent of SME labor force) and account for 34 percent of private sector employment; SMEs’ contribution to GDP is 22 percent (National Transformation Program, 2018). - Share of bank lending to SMEs is low at about 5 percent; SMEA initiatives include tax/fee reimbursements and support funds (e.g., SAR 2.8 billion Venture Capital fund). ### Financial sector resilience, inclusion, AML/CFT, and housing risks - Financial sector health and reforms: - Banking system is well capitalized and liquid; bank NPLs edged up to 2 percent in 2018Q4 but remain low; average pretax return on assets 2.1 percent (2018). - SAMA raised reverse repo and repo rates four times in 2018 to 2.5 percent and 3 percent, respectively. - IFRS9 has had no significant impact on banks’ balance sheets. - Capital market reforms: inclusion in global equity and bond market indices; DMO published Annual Borrowing Plan and extended yield curve; first foreign investor permitted into the debt market. - Financial access and FSDP: - Development of agency banking and Fintech could broaden access; entry of 5 new foreign banks expected to boost competition. - Staff advised against setting lending targets for specific sectors and cautioned about concentration risks from bank mergers and common ownership. - Box 7 highlights potential effects of common ownership in banks and the importance of competition for FSDP objectives. - AML/CFT: - Authorities strengthening AML/CFT framework; recent membership of the Financial Action Task Force; staff urged continued work on customer due diligence of politically exposed persons, filing of suspicious transaction reports, and pursuing financial investigations. - Housing and real estate: - Residential real estate prices fell by 5.8 percent (y/y) in 2019Q1 and are down 19 percent since end-2014; rents fell by 8.5 percent (y/y) in May 2019. - Mortgage lending expanding rapidly; mortgage loans were 17 percent of total bank credit to private sector at end-2018. - Staff recommended vigilance on financial and fiscal risks from the housing market and close attention to prudential and fiscal impact of housing programs. ### Exchange rate, external sector, reserves, and external sustainability - Exchange rate and oil developments: - Given the current structure of the economy, the exchange rate peg to the U.S. dollar continues to serve the economy well; peg reviewed regularly. - Brent oil price movements: peaked at $85 a barrel in October 2018, fell to $55 a barrel in December 2018, rebounded to close to $75 a barrel in April 2019, and was trading around $60–65 a barrel at the time referenced. - Saudi oil output: rose by 1 mb/d from May to November 2018 to a record 11.1 mb/d and declined to 9.8 mb/d in April 2019. - External position and reserves: - Current account surplus increased to 9.2 percent of GDP in 2018; current account (US$ billions): 2018 = 72.3; 2019 projection = 54.4. - SAMA’s NFA increased slightly to $490 billion (26.7 months of imports) at end-2018; SAMA’s total net foreign assets (US$ billions, memorandum): 2018 = 489/490. - Reserve adequacy: reserves at end-2018 were 414 percent of the Fund’s ARA metric; projected to decline to 247 percent by 2024 but remain above recommended ranges. - NIIP estimated at 86 percent of GDP at end-2018; projected to increase to around 91 percent by 2024. - Current account and model-based gaps: - Actual CA in 2018: 9.2 percent of GDP; projected CA in 2019: 6.9 percent of GDP. - EBA-lite CA norm: 9.4 percent of GDP (2018); EBA-lite CA gap: -0.6 percent of GDP. - Consumption-based allocation model: CA gap -0.2 percent (constant real annuity) and -3.4 percent (constant real per capita annuity). - Investment-needs model: CA gap 0.3 percent of GDP. - Staff assessment: CA gap of -1.7 percent of GDP with a range from 0 to -3.4 percent of GDP. - Sensitivity: a $1 change in the oil price results in a 0.5 percent of GDP first-round change in the CA balance. ### Macroeconomic outlook and key projections - Real GDP growth (annual): 2017: -0.7; 2018: 2.2; 2019: 1.9; 2020: 3.0. - Non-oil growth expected to accelerate to 2.9 percent in 2019; medium term non-oil growth projected at 3–3¼ percent; real GDP growth to settle around 2½ percent. - CPI Inflation (avg): 2017: -0.9; 2018: 2.5; 2019: -1.1; 2020: 2.2. - Monetary and credit: Broad money (% change): 2017: 0.2; 2018: 2.8; 2019: 3.0; Credit to private sector (% change): 2017: -0.8; 2018: 3.0; 2019: 3.3. - Fiscal projections (selected): - Central government net lending/borrowing (percent of GDP): 2018: -5.9; 2019: -6.5; 2020: -5.1; 2024: -5.7. - Revenue (percent of GDP): 2018: 30.9; 2019: 31.2; 2020: 33.2. - Expenditure (percent of GDP): 2018: 36.8; 2019: 35.4; 2020: 39.7. - Central government gross debt (percent of GDP): 2018: 19.1; 2019: 23.0; 2020: 24.7; 2024: 35.6. - Government net financial assets (percent of GDP): 2018: 0.1; 2019: -7.2; 2020: -12.4; 2024: -35.6. - External projections (selected): - Current account (percent of GDP): 2018: 9.2; 2019: 6.9; 2020: 6.0; 2024: 0.3. - WEO oil price (US$/barrel): 2018: 68.3; 2019: 65.5; 2020: 63.9; 2024: 57.4. - Oil production (million barrels per day): 2018: 10.3; 2019: 10.2; 2020: 10.5; 2024: 10.6. ### Risks, spillovers, and the Risk Assessment Matrix (RAM) - Main identified risks and policy responses: - Large swings in energy prices (Likelihood/Time Horizon: Medium/Short-to-medium-term; Expected impact: High). Policy response: anchor fiscal policy in a medium-term framework; use buffers and external borrowing to smooth shocks; accelerate structural reforms. - Rising protectionism and retreat from multilateralism (Likelihood/Time Horizon: High/Short-to-medium-term; Expected impact: High). Policy response: support multilateral rules-based trading system. - Weaker than expected global growth (Likelihood/Time Horizon: Medium-to-High/Short-to-medium-term; Expected impact: High). Policy response: as above. - Slippages in the reform agenda (Likelihood/Time Horizon: Medium/Medium-term; Expected impact: High). Policy response: complete structural reforms; implement gradual but sustained fiscal adjustment. - Intensification of security risks (Likelihood/Time Horizon: High/Short-to-medium-term; Expected impact: Medium/Low). Policy response: contingent on shock; ensure liquidity in banking system. - Spillovers: - Saudi Arabia’s actions under OPEC+ and regional financial assistance are important; real spillovers significant for Bahrain; equity market spillovers affect all GCC countries. ### Productivity, structural reform priorities, and Appendix II findings - Productivity trends and decomposition: - "Productivity growth in Saudi Arabia has declined since the global financial crisis." - Non-oil growth averaged around 6.3 percent a year in 2000–08 and 4.7 percent a year since 2009. - Growth accounting (2000–18): non-oil growth largely attributed to physical capital accumulation and employment growth, with limited contribution from TFP; during 2009–18, TFP growth turned negative. - Firm-level evidence: - Firm-level TFP growth declined across many industries since the global financial crisis; electricity and water supply, construction, and manufacturing led the decline; ICT, mining, and transportation saw positive TFP growth. - Firms in Saudi Arabia are on average less productive than firms in the U.S. in all sectors except transportation; distance to the productivity frontier increased since the financial crisis in most industries. - Policy recommendations to boost productivity: - Product and labor market reforms to reduce misallocation and promote productivity growth. - Remove barriers to entry, enhance competition, eliminate price distortions. - Labor market policies to change incentives for Saudis to work outside the government and improve human capital and innovation. ### Staff appraisal — consolidated policy recommendations and priorities - Fiscal policy: - Fiscal consolidation needed to rebuild fiscal buffers and reduce medium-term vulnerabilities; balance fiscal sustainability with social and development spending. - Implement announced measures: further energy and water price reforms; increases in expatriate levies (phased-in gradually over 2020–22 recommended); allow cost-of-living allowances to expire end-2019. - Reduce government wage bill; adopt more measured increase in capital spending; consider raising VAT in consultation with GCC. - Expenditure and procurement: - Improve expenditure management; maintain spending sustainable across oil price environments; emphasize NEOPD to delink spending from oil volatility; implement procurement reforms. - Transparency and sovereign balance sheet: - Publish more detailed budget and spending execution data; produce consolidated fiscal information; strengthen PIF disclosure. - Develop sovereign asset/liability management framework and integrate government entities' investment/borrowing decisions. - Structural and market reforms: - Target government support to priority sectors (time bound, strict performance criteria); ensure crowding-in of private sector. - Labor market reforms to align wages and productivity, strengthen training, increase female employment, and reform expatriate visa mobility. - Financial sector and inclusion: - Improve financial access for SMEs, women, and youth through agency banking and Fintech; avoid sector lending targets; ensure strong regulation as innovation proceeds. - Monitor mortgage lending and real estate exposure; use prudential tools if risks rise. - External stability: - Fiscal consolidation and spending efficiency to strengthen the external position; continue to assess exchange rate peg appropriateness. *International Monetary Fund — Selected excerpts from "1sauea2019001" (Staff Report for the 2019 Article IV Consultation).* ### introduction of the value-added tax and energy price reforms. Directors noted that reforms have ### 1sauea2019001 - introduction of the value-added tax and energy price reforms. Directors noted that reforms have ### Fiscal consolidation and fiscal framework - Reforms have started to yield results and the outlook for the economy is positive; however, volatility in global oil prices poses uncertainty. - Directors underscored that fiscal consolidation is key to rebuilding fiscal buffers and reducing medium-term fiscal vulnerabilities. - Recommended actions: - Continue with planned energy and water price reforms and increases in expatriate labor fees. - Implement additional fiscal measures as needed, including containing the government wage bill and a more measured increase in capital spending. - Develop and use a robust asset-liability management framework to guide analysis of the public sector balance sheet, cash flows, and risk/return tradeoffs. - Strengthen the fiscal framework and improve fiscal transparency, including publishing more detailed budget and spending execution data. ### Expenditure management and procurement - Directors encouraged continued improvement in expenditure management, noting that despite reforms, spending has increased. - Welcomed reforms to strengthen public procurement to improve the efficiency of government spending and reduce the risks of corruption in procurement. - The forthcoming public procurement law and associated reforms are expected to improve the efficiency of government spending and reduce risks of corruption. ### Revenue reforms and social compensation - VAT introduction and energy price reforms have been implemented and are beginning to yield results. - Directors emphasized that reforms should be inclusive and vulnerable households protected from any negative effects. - Welcomed review of social assistance programs to ensure they provide adequate support and are well targeted. - Noted the Citizens’ Account Program provides payments to around 3.5 million households, with the size and income of the household determining the level of entitlement. ### Promoting non-oil growth, diversification, and labor market reforms - Directors welcomed ambitious reforms to develop the non-oil economy and the efforts to strengthen the business environment. - Careful implementation of industrial policies could encourage development of new sectors; any government support should be sectoral, time bound, and have strict performance criteria. - Labor market policy recommendations: - Ensure wages and productivity are well aligned. - Set clear expectations about the limited employment prospects in the public sector. - Strengthen education and training. - Increase female employment. - Directors considered that policies to develop new sectors will be successful if Saudi workers have the needed skills and incentives to offer them at competitive wages. ### Financial sector resilience, inclusion, and AML/CFT - Directors welcomed the continued resilience of the financial sector and ongoing capital market reforms. - Development of agency banking and Fintech could help broaden financial access. - Improving financial access for young and growing companies, women, and youth is important, but specific sector lending targets should be avoided. - Welcomed Saudi Arabia’s ongoing strengthening of the AML/CFT framework and its recent membership of the Financial Action Task Force. - Directors agreed the banking system is well capitalized and liquid; noted a careful eye should be kept on rapidly growing mortgage lending. ### Exchange rate and external sector - Given the current structure of the economy, Directors agreed the exchange rate peg to the U.S. dollar continues to serve the economy well. - Oil markets have been volatile: Brent oil price peaked at $85 a barrel in October 2018, fell to $55 a barrel in December, rebounded to close to $75 a barrel in April, and is currently trading around $60–65 a barrel. - Saudi oil output rose by 1 mb/d from May to November 2018 to a record 11.1 mb/d and declined to 9.8 mb/d in April 2019. ### Data, statistics, and transparency - Directors emphasized further improving the quality and availability of data. - Encouraged by the authorities’ commitment to subscribe to the Fund’s SDDS by the end of the year. - Welcomed efforts to enhance fiscal transparency, including publication of a first-ever pre-budget statement in 2018 and Aramco financial data in its bond prospectus, while noting continued need for improvement. ### Key statistics and projections (selected figures as reported) - Population: 33.4 million (2018) - Quota: SDR 9,992.6 million (2.10% of total) - Literacy: 95% (2015, adults) - Main products and exports: Oil and oil products (79%) - Real GDP growth: -0.7 (2017), 2.2 (2018), 1.9 (2019), 3.0 (2020) - CPI Inflation (%): -0.9 (2017), 2.5 (2018), -1.1 (2019), 2.2 (2020) - Central government finances (as % GDP): - Revenue: 24.1 (2017), 30.9 (2018), 33.2 (2019), 33.2 (2020) - Expenditure: 33.3 (2017), 36.8 (2018), 39.7 (2019), 38.2 (2020) - Fiscal balance: -9.2 (2017), -5.9 (2018), -6.5 (2019), -5.1 (2020) - Public debt: 17.2 (2017), 19.1 (2018), 23.0 (2019), 24.7 (2020) - Non-exported oil primary balance (% Nonoil GDP): -38.5 (2017), -39.5 (2018), -38.4 (2019), -34.6 (2020) - Money and credit: - Broad money (% change): 0.2 (2017), 2.8 (2018), 3.0 (2019), 3.5 (2020) - Credit to the private sector (% change): -0.8 (2017), 3.0 (2018), 3.3 (2019), 3.4 (2020) - Balance of payments: - Current account (% GDP): 1.5 (2017), 9.2 (2018), 6.9 (2019), 6.0 (2020) - FDI (% GDP): 0.2 (2017), 0.4 (2018), 0.4 (2019), 0.4 (2020) - Reserves (months imports): 27.9 (2017), 26.7 (2018), 26.5 (2019), 25.8 (2020) - External debt (% GDP): 27.7 (2017), 28.3 (2018), 30.2 (2019), 31.1 (2020) - REER (% change): -6.5 (2017), 4.1 (2018), 1.1 (2019) - Unemployment rate overall (% total labor force): 6.0 (2017), 6.0 (2018), 5.7 (2019) - Nationals (% total labor force) unemployment: 12.8 (2017), 12.7 (2018), 12.5 (2019) - Labor market highlights: - Unemployment rate of nationals: 12.5 percent in 2019Q1. - Female unemployment rate: 31.7 percent (2019Q1). - Male unemployment rate: 6.6 percent (2019Q1). - Female participation rate: 20.5 percent in 2019Q1. - Expatriate employment (excluding domestic workers) fell by 10 percent (0.75 million) in the year to 2019Q1 while employment of nationals declined by 1.2 percent. - Staff estimate: the departure of expatriates could have reduced real GDP growth by ½-¾ percentage points in 2018. *SAUDI ARABIA: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION* ### 5. The fiscal deficit narrowed ### 5. The fiscal deficit narrowed ### Fiscal developments (2017–2018) - Overall fiscal balance narrowed to 5.9 percent of GDP in 2018 from 9.2 percent of GDP in 2017. - Oil and non-oil revenues increased by 40 percent and 59 percent, respectively; non-oil revenue buoyed by the VAT, excises, expatriate levy, and proceeds from the settlement agreements. - Current expenditures increased by 23 percent due to: - January 2018 Royal Decree allowances equivalent to 1.4 percent of GDP. - Higher social benefits through the Citizens’ Account Program equivalent to 1 percent of GDP. - Capital spending weakened relative to 2017 (excluding the land sale recorded as a disposal of a non-financial asset in 2017). - The non-exported oil primary deficit (NEOPD) increased to 39.5 percent of non-oil GDP in 2018 from 38.5 percent in 2017. - The Public Investment Fund (PIF) invested SAR 32 billion (just over 1 percent of GDP) during 2018-19Q1. - In 2019Q1, strong revenue performance and modest growth in expenditures resulted in a budget surplus. - Notes on settlement agreements: reached with individuals by the anti-corruption committee; proceeds estimated at SAR 55 billion and SAR 50 billions in 2018 and 2019 respectively (see staff table notes). ### Key fiscal and nominal statistics (selected table entries, preserved) - Revenue: 2018 = 30.9 (Percent of GDP) - Oil: 2018 = 20.8 (Percent of GDP) - Non-oil: 2018 = 10.1 (Percent of GDP) - Expenditure: 2018 = 36.8 (Percent of GDP) - Current: 2018 = 30.4 (Percent of GDP) - Capital: 2018 = 6.4 (Percent of GDP) - Overall Balance: 2018 = -5.9 (Percent of GDP) - NEOPB: 2018 = -26.0 (Percent of non-oil GDP) and staff NEOPD measure = 39.5 percent of non-oil GDP (as discussed in prose) - Nominal GDP (SARs billions): 2018 = 2,934 - Nominal Non-oil GDP (SARs billions): 2018 = 1,929 - Land sale amounting to SAR 70 billion (2.7 percent of GDP) took place in 2017. ### Balance of payments and external position - Current account surplus increased to 9.2 percent of GDP in 2018. - Drivers: higher oil exports and lower remittance outflows; partly offset by increased service imports. - Financial account: large overseas investments by public institutions and enterprises partly offset by government and PIF external borrowing. - SAMA’s NFA increased slightly to $490 billion (26.7 months of imports) at end-2018. - Balance of Payments (selected): - Current account: 2018 = 72.3 ($ billions) - Financial account (net): 2018 = -65.8 ($ billions) - Direct investment: 2018 = -18.0 ($ billions) - Portfolio investment: 2018 = -6.6 ($ billions) - Change in reserves: 2018 = 0.7 ($ billions) - Memo: Public Institutions and enterprises borrowing = 30.0 ($ billions) in 2018. ### Financial sector developments - Credit growth picked up with recovery in lending for construction and manufacturing and robust mortgage lending growth. - Bank NPLs edged up to 2 percent in 2018Q4 but remain low. - Bank capital and return on assets are strong. - IFRS9 has had no significant impact on banks’ balance sheets. - SAMA raised reverse repo and repo rates four times in 2018 to 2.5 percent and 3 percent, respectively; interbank rates moved up. - Bank profitability does not appear sensitive to changes in policy rates (Box 1 findings). ### Prices and real estate - CPI and real estate prices are declining. - May 2019 CPI: fell by 1.5 percent (y/y); rents fell by 8.5 percent (y/y). - Excluding rents, the CPI increased by 0.1 percent (y/y). - Residential real estate prices fell by 5.8 percent (y/y) in 2019Q1 and are down 19 percent since end-2014. - Contributing factors: slower non-oil GDP growth vs pre-2014 period, increasing supply from government housing programs, reduced demand from expatriates. - Commercial real estate prices have declined due to oversupply in major cities. ### Outlook (staff projections) - 2019: Fiscal deficit projected to widen to 6.5 percent of GDP; NEOPD projected to narrow to 38.4 percent of non-oil GDP. - Oil revenues expected broadly unchanged from 2018. - Non-oil revenues projected to increase due to higher VAT revenues, a further increase in the expatriate levy, and previously earmarked revenues being brought on budget (0.8 percent of GDP; offset by equivalent spending increase). - Budget proceeds from settlement agreements estimated by the authorities at 1.7 percent of GDP in 2019. - Expenditures projected to rise by 8.5 percent reflecting expected pickup in capital spending and increased spending for the Private Sector Stimulus Program. - Medium term: - Fiscal consolidation assumed: increases in energy prices and expatriate levies in the Fiscal Balance Program assumed to take place; Royal Decree allowances assumed to expire at end-2019. - Wage bill growth assumed restrained; capital spending declines after 2022 as VRPs complete. - Revenues from oil exports decline over the projection period given the oil price path embedded in financial markets. - Overall fiscal deficit projected to narrow to 5.7 percent of GDP in 2024. - NEOPD projected to narrow to 26.6 percent of non-oil GDP in 2024. - Staff’s fiscal outlook is less favorable than at the 2018 Article IV due mainly to a higher path of government spending; authorities project stronger revenues and more limited expenditure growth and expect to balance the budget in 2023. - Real economy: - Non-oil growth expected to accelerate to 2.9 percent in 2019. - Real GDP growth projected to slow to 1.9 percent in 2019 as real oil GDP growth eases to 0.7 percent. - For 2020, real oil GDP growth projected to rise as crude oil production increases and Jizan refinery becomes fully operational, while non-oil growth slows with fiscal consolidation. - Medium term non-oil growth projected to strengthen to 3–3¼ percent; real GDP growth to settle around 2½ percent. - Inflation and credit: - Inflation projected to be negative in 2019: CPI expected to decline by 1.1 percent in 2019. - Inflation expected to turn positive in 2020 driven by increases in domestic energy prices and continued non-oil growth. - Credit growth expected to strengthen with stronger non-oil activity; bank liquidity to remain comfortable. - Current account projected to narrow in 2019 and over the medium term as oil export revenues decline and imports pick up with stronger non-oil growth; net financial outflows expected to continue at a slower pace than in 2017–18. - SAMA’s NFA (in months of imports) projected to decline but remain at a very comfortable level. ### Risks and spillovers - Main global risk: uncertainty in global oil markets. Downside risks if U.S. production exceeds expectations or global trade tensions sharply slow oil demand; upside from geopolitical tensions or declining output elsewhere. - Domestic risks: reform impacts could be larger than assumed; weak growth and job creation could prompt fiscal expansion undermining fiscal sustainability; expatriate departures could have larger short-term impact on growth; public sector’s significant role could crowd out private sector. - Spillovers: Saudi Arabia’s actions under OPEC+ and regional financial assistance are important; real spillovers significant for Bahrain; equity market spillovers affect all GCC countries. Decline in remittance outflows in 2018 affected some MENA countries. ### Policy discussions and staff recommendations (summary) - Discussions focused on: - Achieving fiscal consolidation and reducing the procyclicality of government spending. - Reforms to support diversification, job creation, and inclusive growth. - Financial sector development, inclusion, and stability. - External stability. - Authorities’ stance: - VRPs have moved from design to implementation and are having significant impact: accelerating growth, increasing female participation rates and non-oil budget revenues, and reducing gasoline and electricity consumption following energy price reforms. - Gasoline prices adjusted quarterly in line with international benchmarks. - Authorities expect stronger growth than staff and are adjusting reform implementation to support the corporate sector and protect low- and middle-income households. - Staff’s assessment: - Fiscal policy swung toward supporting near-term growth and reform implementation; NEOPD rose making policy expansionary in 2018. - While some fiscal space remains, it is substantially less than at end-2014; central government debt-to-GDP was 19.1 percent and CGNFA was 0.1 percent of GDP at end-2018 (compared with below 2 percent debt-to-GDP and around 50 percent CGNFA at end-2014). - Staff recommends a tighter fiscal policy with a larger reduction in the NEOPD than in the baseline to reduce vulnerabilities and create fiscal space while accommodating increased capital spending if adjustment focuses on current spending and non-oil revenues. *International Monetary Fund — Selected excerpts from "5. The fiscal deficit narrowed" (PDF chapter).* ### 0.9 percent of GDP (1.3 percent of non-oil GDP) ### 0.9 percent of GDP (1.3 percent of non-oil GDP) ### Fiscal adjustment and short-run impact - Staff baseline targets a fiscal adjustment of 0.9 percent of GDP (1.3 percent of non-oil GDP) a year during 2020–24 relative to the baseline. - Estimated short-run impact on non-oil growth: "around 0.4 percent" in 2020–21. - The adjustment is argued to support stronger growth over the medium term. ### Priority: implementation of announced fiscal measures - First priority: implement announced measures including: - further energy price reforms; - increases in the expatriate levies; - allowing the 2018 cost-of-living allowances to expire at end-2019 as planned. - These measures are incorporated in staff’s projection with a fiscal impact of 6 percent of GDP by 2024. - Recommendation: the increase in labor fees could be phased-in gradually over 2020–22 to mitigate the impact on businesses and the economy. ### Additional fiscal measures (non-oil revenue and taxes) - VAT introduction (January 2018) exceeded expectations; reduction in the registration threshold at beginning of 2019 went smoothly. - Staff suggested considering raising the VAT rate from 5 to 10 percent, in consultation with the GCC. - Announcement: excise taxes to be broadened to include sugar-sweetened beverages and e-cigarettes in December 2019. - Estimated impact of selected reforms (Percent of GDP): - VAT rate Increase 2.0 - Water price reforms 0.7 - Wage bill reforms 1.0 - Capital spending savings 0.5 - Interest payments savings 0.2 - Total impact of reforms 4.3 ### Government spending: areas for containment and reallocation - Water price reforms: - Move ahead to raise water prices to cost recovery levels once billing and metering issues are resolved. - Compensate low and middle-income households through the Citizens’ Account Program. - Government wage bill: - Wage bill has continued to increase and is high in a global context. - Use the civil service review to map a strategy encompassing review of allowances and benefits to contain the wage bill and align staffing/pay with efficient service delivery. - Capital spending: - Capital spending is high given the level and quality of existing infrastructure. - Staff welcomed the Spending Efficiency Realization Center and suggested scaling up capital spending gradually given the new public investment framework has not been tested over full project cycles. - Social assistance programs: - Ongoing review welcomed; main goal is to ensure adequate protection for the less well-off while identifying fiscal savings from better targeting. - Importance of establishing a commonly agreed poverty line based on reliable income distribution information. - Citizens’ Account Program could be strengthened by bringing assets into compensation calculation and removing opportunities for double dipping. ### Authorities’ views and fiscal stance - Authorities disagreed with staff’s fiscal outlook, noting: - Fiscal deficit in 2018 was lower than budgeted and the budget was in surplus in 2019Q1. - Oil price assumptions in staff’s baseline seen as pessimistic. - Ability to re-phase planned spending if oil prices are lower than budgeted and to receive higher dividends from public entities. - Use of higher oil revenues over the past two years to accelerate spending in priority areas, with identified spending that could be delayed. - Fiscal buffers and fiscal space believed larger due to substantial financial assets beyond the budgetary central government; deposits at SAMA might not need to be used as assumed by staff. - Authorities reiterated commitment to balancing the budget in 2023 and described measures to contain the wage bill: - controlling wage inflation; - modestly reducing the size of the civil service (by not replacing all retiring employees); - replacing leavers with new hires who would initially receive lower wages; - introduction of a new performance management system for civil servants. - On capital spending, authorities confident the new public investment management process has improved investment efficiency and will identify further measures if needed. ### Social assistance programs (Box 2): structure, costs, and reform priorities - Total fiscal cost of non-contributory social assistance schemes estimated at about 2.9 percent of GDP in 2018. - Programs and spending (2018) (In percent of GDP): - Income Guarantee Program 0.8 - Cost of living allowance 0.1 - Social Care Programs 0.2 - School Programs (Takaful) 0.2 - Citizen's Account 1.0 - Support for Charities n.a - Other programs 0.6 - Total 2.9 - Memorandum item: - Royal Decree Allowances 1.4 - Features and recommendations: - Citizens’ Account Program covers around 3.5 million households (covering 14.3 million individuals) with monthly payments varying by income and household size. - Social assistance system characterized by fragmentation, group-based targeting, and multiple implementing entities. - Recommendations: consolidate, streamline, and monitor programs; develop a single beneficiary registry; establish and publish an official poverty line and reliable poverty data; assess adequacy and coverage to reduce leakage to higher income groups. ### Strengthening fiscal framework, procurement, and transparency - Progress in strengthening the fiscal framework: medium-term fiscal framework, online expenditure management system (Etimad), and strengthened fiscal risk analysis. - Concern: procyclicality — spending has increased with higher oil prices in recent years; fiscal framework needs to maintain spending at sustainable levels across oil price environments. - Recommendation: greater emphasis on the NEOPD to delink spending from oil price volatility and rebuild fiscal buffers during periods of higher oil prices. - Public procurement: - New public procurement law (expected to come into effect in July) and reforms should strengthen spending efficiency and reduce corruption risks. - Key features: modernized procedures, institutional arrangements, transparency and accountability mechanisms, strengthened role of the Ministry of Finance, establishment of Strategic Procurement Unit (SPU), and integration with Etimad. - Recommendation: no exemptions for entities or projects that use budget funds; procurement should be implemented through Etimad. - Fiscal transparency and macro-fiscal policy: - Macro-Fiscal Policy Unit steps to improve transparency and analysis; suggested "quick wins" include publishing more detailed budget and spending execution data and reconciling projections with outcomes. - Authorities committed to publishing a midyear budget update for the first time and noted improved transparency of Aramco following its bond prospectus (April 2019). - PIF transparency remains limited; lack of information on PIF asset structure hampers assessment of liquidity and fiscal buffers. ### Sovereign asset/liability management and next steps - Staff reiterated importance of a robust sovereign asset/liability management framework to assess impacts on the public sector balance sheet and cash flows and to account for risk and return considerations. - Authorities reported progress by the Debt Management Office (DMO) in developing the debt management framework and coordination of borrowing decisions; asset and liability decisions coordinated by the high-level Finance Committee. - Next steps in fiscal transparency: - Provide more detailed data on budget projections, outturns, and fiscal risks; broaden institutional coverage of fiscal reporting. - Budget Statement enhancements: outturns and projections by economic category and by ministry/program; decompose variances; cost new policy proposals; detail impact of budget financing on composition and cost of debt. - Publish more detailed annual final or audited financial statements for the budgetary central government and expand publication to extrabudgetary funds and public corporations over time. - Medium-term: strengthen legal framework for public financial management, formalize budget processes, and consolidate public sector reporting. - IMF’s Fiscal Transparency Code (FTC) 2019 recommendations: specify governance and operational rules of natural resource funds and national resource companies in law and publish annual reports on operations, finances, and investment performance; Aramco has disclosed substantial financial and operational information and should update regularly; improved disclosure by the PIF would signal progress. *Prepared from "1sauea2019001 - 0.9 percent of GDP (1.3 percent of non-oil GDP)".* ### 27. Oil-exporting countries have struggled to develop diversified non-oil sectors while ### 1sauea2019001 - 27. Oil-exporting countries have struggled to develop diversified non-oil sectors while ### Diversification challenges and incentives - Companies prefer to produce non-tradeable goods and services aimed at the government market (contracts and public sector employee consumption) rather than riskier tradeable goods while employing low-wage expatriate labor. - Workers prefer employment in the government rather than private sector because wages and working conditions are generally better. - The economic footprint of the public sector has expanded through higher government spending, the increased role of the PIF, and numerous other programs, including subsidies for housing, mortgages, and SME development. - Authorities state policies are designed to "crowd in the private sector" and government interventions occur only in areas where the private sector was unwilling to enter on its own. ### Vision 2030 policies and staff assessment - Vision 2030 recognizes the need to diversify the economy and a broad range of policies are being implemented: improve the business environment, develop new economic sectors, broaden financing options for businesses, and strengthen human capital of Saudi nationals. - Staff welcomed these efforts and suggested more needs to be done to change current incentives for workers and businesses and improve cost competitiveness of Saudi labor. - Staff view: government support works best when made available to priority sectors rather than specific companies, is time bound, and has strict performance criteria attached. ### Structural reforms: July 2018–Present (selected measures and dates) - Capital markets: - Primary dealer agreements with five domestic banks — August 2018 - Sukuk issued to finance Saudi Real Estate Refinancing Company — December 2018 - Trading of sovereign debt by first approved Qualified Foreign Investor — March 2019 - Issuance of first domestic sovereign 30-year sukuk — April 2019 - Reduction of denomination size for government listed debt and reduction of trading fees for listed debt to encourage retail participation and sukuk funds — June 2019 - Foreign investment: - Foreign investment restrictions removed for five sectors: recruitment, real estate brokerage, media services, commission agents, land transport services — October 2018 - Entry of five new foreign banks — October 2018–April 2019 - Legal framework: - Bankruptcy Law (13 cases under way as of May 2019) — August 2018 - Public Procurement Law — Expected to be in effect from July 2019 - Draft Private Sector Participation Law released for public comment — July 2018 - Doing Business / labor: - Updated Competition Law approved by Council of Ministers — March 2019 - New regime for permanent and renewable residence permits for expatriates approved by Council of Ministers — May 2019 - SMEs: Access to expatriate visas for Saudi entrepreneurs that work full time at their new firm — February 2019; 20 venture capital firms licensed to enter Saudi Arabia — April 2019 ### Wages, productivity, and labor-market reforms - Staff estimates suggest wages of Saudi workers are above those consistent with their productivity; the productivity-wage gap for nationals will need to be narrowed. - Authorities plan to boost productivity of Saudi workers by strengthening education and training; staff note spending on education is high but outcomes are not commensurate with this spending. - Suggested labor-market reform elements: - Reducing the availability and attractiveness of government work; signal that government employment will not increase in the future to reduce reservation wages for nationals. - Ensuring effectiveness of active labor market programs; wage subsidies can support private sector employment but should be well targeted, integrated with social assistance programs, and closely monitored. - Increasing mobility of expatriate workers through reform of the visa system to enable expatriates to move freely between jobs, increasing expatriate wages and reducing wage differentials with nationals. - After the mission concluded, authorities announced a new visa and residency program for skilled foreign workers and owners of capital. - Authorities emphasize increasing female employment; staff suggested reviewing regulations, creating programs for female entrepreneurs under SME initiatives, and expanding programs to defer transportation and childcare costs if needed. ### Governance, legal reforms, and private participation - Authorities adopted a new anti-corruption strategy and amended the anti-bribery law to eliminate the statute of limitations on prosecutions of current and former ministers and grant powers to the Public Prosecutor to prosecute foreign corrupt acts in Saudi Arabia. - Further work needed: enhance anti-corruption commission’s ability to detect and investigate offenses; enhance Public Prosecutor’s Office to prosecute cases and seize illegal assets; establish financial disclosure policy for senior public officials and procuring officers; cover bribery of foreign officials in the anti-bribery law. - Legal and business environment reforms undertaken: - Bankruptcy and commercial pledge laws filled important gaps; 13 cases are moving through the bankruptcy process. - FDI licensing requirements and procedures for starting a business have been streamlined; negative investment list narrowed. - Competition policy law approved and will cover all sectors and firms; passing the private sector participation law remains important. - Privatization and PPP programs have started transactions; fiscal risks from PPPs should be carefully managed. ### SMEs, entrepreneurship, and housing policy - SME sector characteristics: - SMEs account for 97 percent of businesses in Saudi Arabia; micro enterprises (1–5 employees) account for 85 percent of businesses. - SMEs predominantly employ expatriates (75 percent of labor force) and account for 34 percent of private sector employment. - SMEs’ contribution to GDP is 22 percent (National Transformation Program, 2018). - Financial access and entrepreneurship: - The share of bank lending going to SMEs is low at about 5 percent. - SMEA initiatives: reimbursement of government taxes and fees for three years for businesses registered between 2016 and 2021; increase in capital of Kafalah; indirect funding of SAR 1.6 billion to investment institutions other than banks; a Venture Capital fund of SAR 2.8 billion targeting startups. - The new public procurement law will include preferences for SMEs. - Housing policies and objectives: - Government policies: mortgage guarantee and interest subsidy schemes for first-time buyers; provide developers access to land and financing; strengthen and streamline regulations including for construction permits; partner with NGOs to increase housing programs for the less well-off. - Staff encouraged focus on regulating the market and providing support to low-income households. ### Financial sector stability and housing market risks - Banking sector and macroprudential posture: - Banks are well positioned to weather asset quality and liquidity shocks. - SAMA has kept macroprudential policies unchanged over the past year. - New bank licensing guidelines issued in December 2018; guidelines for rescheduled and restructured loans are being drafted; MoUs being discussed with several central banks. - SAMA has developed liquidity management framework—producing weekly and monthly liquidity forecasts. - Mortgage and real estate: - Mortgage lending is expanding rapidly against the backdrop of declining house prices. - Staff encouraged SAMA to monitor quality of real estate lending and to reduce, if needed, the LTV ratio for first-time buyers which was increased to 90 percent in early 2018. - SAMA: mortgage loans are a small share of bank credit; average LTV is comfortably below SAMA’s limit; risks reduced by salary-assignment of loans and government guarantees on a large share of new mortgages. - SAMA has fined financial institutions for violating responsible lending policies (which limit monthly credit obligations as a share of borrower income). - Capital markets and debt-market development: - Inclusion in global equity and bond market indices in the year of the report. - DMO published an Annual Borrowing Plan and issuance calendar for domestic debt for the first time; extended the yield curve through issuance of a 30-year sukuk; established the primary dealer system; first foreign investor permitted into the debt market. - Domestic investor base broadened through issuance of small denomination sukuks. - CMA indicated work is underway to launch a derivatives market by year-end. - Housing market specifics (Box 6): - Real estate prices have fallen by around 20 percent since 2014. - New supply driven by government initiatives to build affordable homes; departure of expatriates may have slowed housing demand. - A SAR 120 billion mortgage market plan was introduced in February 2018 to provide subsidized loans and support for developers. - Banks’ exposure to real estate sector: mortgage loans were 17 percent of total bank credit to private sector at end-2018. - Maximum loan-to-value (LTV) ratio for first-time buyers was increased from 85 to 90 percent in January 2018; risk weights on mortgage loans have been reduced. - PIF has set up a mortgage refinance company. - Staff recommendation: continue vigilance on financial and fiscal risks from the housing market; prudential policies should pay close attention and fiscal impact of housing programs including PPPs should be carefully assessed. _International Monetary Fund — Saudi Arabia staff report content unit._ ### 40. Staff welcomed efforts to improve financial access under the Financial Sector ### 1sauea2019001 - 40. Staff welcomed efforts to improve financial access under the Financial Sector ### Financial access and the Financial Sector Development Program (FSDP) - Staff welcomed efforts to improve financial access under the Financial Sector Development Program (FSDP). - Authorities are exploring agency banking and Fintech to broaden channels of access to financial services and increase market competition, particularly in areas outside of the major cities. - Entry of 5 new foreign banks over the past year is expected to boost competition. - Staff advised against setting lending targets for specific sectors and cautioned that mergers between large banks would increase market concentration. - Staff noted that common ownership of banks could reduce incentives for competition and innovation (Box 7). ### Box 7 — The Possible Effects of Common Ownership in Banks - Common ownership may reduce incentives for banks to compete; greater competition may help develop a more dynamic financial sector that supports private sector growth. - Emerging literature argues that firms with common ownership compete less; as investors diversify and index investing grows, ownership overlap becomes more common. - Empirical findings cited: - Depositors in markets served by banks with more common ownership receive lower interest rates. - Airlines with more common ownership charge higher prices. - In Saudi Arabia: - Government entities have significant ownership stakes in Saudi banks (the PIF and the two pension funds have significant ownership in most Saudi banks). - Ownership of Saudi banks is concentrated more broadly with large, but not necessarily overlapping, block holdings (individual stakes larger than 5 percent) by other investors. - The competitive environment is in flux: bank mergers have been approved or are under consideration and new banks are entering the market. - Implications for the FSDP: - Competition will be important to help achieve the goals of the FSDP, which aims to develop a financial system to support private sector development and diversification, including by improving access to finance for SMEs. - Greater competition supports financial inclusion. - Greater competition may afford depositors a larger share of the value created by the banking system. - Success in achieving the FSDP’s objectives may require a review of the banking sector, including its ownership structures, to ensure competition is sufficient to deliver desired outcomes. - As increased competition may raise risk taking, continued strong bank regulation and supervision would be needed. ### AML/CFT framework - Authorities are continuing to work to strengthen their AML/CFT framework in line with the recommendations of the September 2018 mutual evaluation report and believe they are making good progress. - The National AML/CFT strategy aims to further improve the effectiveness of AML/CFT policy and operations, support anti-corruption policies, and promote the availability of information on beneficial ownership. - Authorities indicated Saudi banks have not seen any change in their correspondent banking relations and have worked over the past year to ensure compliance with regulatory and any additional requirements of correspondent banks. - Staff urged authorities to continue to address issues raised in the mutual evaluation report, including on: - customer due diligence of politically exposed persons, - filing of suspicious transaction reports, - pursuing financial investigations. ### Exchange rate and external adjustment - The current account was in a large surplus in 2018, and SAMA’s reserves increased and are high compared to Fund ARA metrics. - The team assesses the external position in 2018 as having been moderately weaker than consistent with desirable medium-term fiscal policy settings (Appendix V). - Fiscal consolidation and increased spending efficiency are needed to strengthen the external position. - Staff agreed with authorities that the peg remains the best exchange rate option for Saudi Arabia given the current structure of the economy. - A more flexible exchange rate would: - boost fiscal revenues in riyal terms, - could over time support the development of the non-oil tradable sector, - would enable SAMA to follow a more independent interest rate policy, - would enable the real exchange rate to move more closely with the terms of trade. - However, a move away from the peg would: - remove a credible monetary anchor, - increase uncertainty, - have limited benefits for competitiveness in the near term. - Most exports are oil or oil-related products and substitutability between imports and domestically-produced products is limited. - The peg should be reviewed regularly to ensure it remains appropriate. ### Statistical issues - Availability of economic data has improved considerably, but further efforts are needed. - Saudi Arabia does not yet subscribe to the IMF’s Special Data Dissemination Standards (SDDS) and efforts should continue to do so as soon as possible. ### Staff appraisal — Key findings and policy recommendations Findings: - Authorities are making good progress in implementing their reform agenda. - Non-oil growth has picked up. - Female labor force participation and employment have increased over the past two years. - The successful introduction of the value-added tax has underpinned an increase in non-oil fiscal revenues. - Energy price reforms have helped reduce per capita consumption of gasoline and electricity. - Fiscal transparency has increased. - Banks are profitable, liquid, and well capitalized. - Mortgage lending is growing strongly against the backdrop of the decline in real estate prices in recent years; SAMA should continue to monitor the quality of real estate lending. - Capital market reforms have advanced quickly; inclusion in global equity and bond market indices will increase inflows and demand for debt. Policy recommendations and priorities: - Fiscal consolidation is needed to rebuild fiscal buffers and reduce medium-term vulnerabilities; policy must balance fiscal sustainability and social and development spending. - Implement already announced reforms and identify additional fiscal measures: - Proceed with planned energy and water price reforms, supported by compensation for low- and middle-income households. - Increases in expatriate labor fees should proceed, though they can be implemented more gradually to mitigate impacts. - Allow cost-of-living allowances introduced in January 2018 Royal Decree to expire as planned at end-2019. - Reduce the government wage bill and adopt a more measured increase in capital spending to yield fiscal savings. - Consideration should be given to raising the VAT rate in consultation with other GCC countries. - Continue improvements in expenditure management: - Maintain spending at a level sustainable across different oil price environments. - Place greater emphasis on the NEOPD to better delink fiscal policy from oil price volatility. - Implement the forthcoming public procurement law with no exemptions for any entity that uses budget funds. - Strengthen fiscal transparency: - Publish more detailed budget and spending execution data and reconcile budget projections with outcomes. - Produce fiscal information on a consolidated public sector basis. - Develop a robust sovereign asset/liability management framework: - Integrate the investment/borrowing decisions of different government entities into one framework to enable full analysis of the public sector balance sheet and cash flows and the risk/return tradeoffs. - Manage industrial policy and public sector footprint: - Target government support to priority sectors rather than specific companies, ensure support is time bound, and attach strict performance criteria. - Ensure government spending and interventions crowd in rather than crowd out the private sector. - Labor market and human capital: - Reduce the gap between wages and productivity. - Focus labor market policies on setting clear expectations about future government employment, strengthening training and education, improving labor market support program effectiveness, and increasing mobility of expatriates through visa reform. - Continue supporting gains in female participation and employment. - Legal, governance, and inclusion reforms: - Continue reforms to strengthen the legal framework and reduce constraints to business, including bankruptcy and commercial pledge laws, streamlining procedures for starting a business and port clearances, reviewing FDI licensing requirements, and accelerating privatization and PPP programs. - Continue efforts to strengthen governance and AML/CFT frameworks to reduce corruption risks. - Ensure reforms are inclusive and protect lower income households; review social assistance programs to ensure adequate, well-targeted support. - Financial access and regulation: - Improve financial access for SMEs, women, and youth; avoid specific sector lending targets. - Develop agency banking and Fintech to broaden access and increase competition, particularly outside major cities. - Regulators must balance innovation and stability as reforms proceed. - Capital markets: - Continue deepening the domestic debt market (primary dealer system, extension of government yield curve to long-dated maturities) to provide savers with a broader range of instruments. *Source: 1sauea2019001 - 40. Staff welcomed efforts to improve financial access under the Financial Sector* ### 60. It is recommended that the next Article IV consultation take place on the standard ### 1sauea2019001 - 60. It is recommended that the next Article IV consultation take place on the standard ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector: developments and projections - Real GDP growth (annual): 2016: 1.7; 2017: -0.7; 2018: 2.2; 2019: 1.9; 2020: 3.0; 2021: 2.4; 2022: 2.4; 2023: 2.5; 2024: 2.5. - Oil contribution to growth (annual): 2016: 3.6; 2017: -3.1; 2018: 2.8; 2019: 0.7; 2020: 3.5; 2021: 1.3; 2022: 1.3; 2023: 1.4; 2024: 1.5. - Non-oil growth (annual): 2016: 0.2; 2017: 1.3; 2018: 2.1; 2019: 2.9; 2020: 2.7; 2021: 3.1; 2022: 3.1; 2023: 3.2; 2024: 3.2. - Public vs private real GDP (annual): public sector: 2016: 0.6; 2017: 0.7; 2018: 2.8; 2019: 2.7; 2020: 1.7; 2021: 1.0; 2022: 1.0; 2023: 1.1; 2024: 1.1. Private sector: 2016: 0.1; 2017: 1.5; 2018: 1.7; 2019: 3.0; 2020: 3.2; 2021: 4.0; 2022: 4.0; 2023: 4.1; 2024: 4.1. - Consumer price index (avg): 2016: 2.0; 2017: -0.9; 2018: 2.5; 2019: -1.1; 2020: 2.2; 2021: 2.1; 2022: 2.1; 2023: 2.1; 2024: 2.1. ### Fiscal developments, balances, and projections - Central government net lending (+)/borrowing (-) (percent of GDP): 2016: -17.2; 2017: -9.2; 2018: -5.9; 2019: -6.5; 2020: -5.1; 2021: -7.3; 2022: -6.8; 2023: -6.4; 2024: -5.7. - Revenue (percent of GDP): 2016: 21.5; 2017: 24.1; 2018: 30.9; 2019: 31.2; 2020: 33.2; 2021: 33.2; 2022: 31.1; 2023: 31.1; 2024: 30.8; 203? (table ends at 2024). - Expenditure (percent of GDP): 2016: 38.7; 2017: 33.3; 2018: 36.8; 2019: 35.4; 2020: 39.7; 2021: 38.2; 2022: 38.4; 2023: 37.9; 2024: 36.7. - Excluding oil revenue (percent of GDP): 2016: -31.0; 2017: -26.1; 2018: -26.7; 2019: -27.5; 2020: -26.0; 2021: -27.8; 2022: -27.7; 2023: -27.2; 2024: -26.8. - Non-exported oil primary balance/non-oil GDP: 2016: -44.6; 2017: -38.5; 2018: -39.5; 2019: -38.4; 2020: -34.6; 2021: -34.9; 2022: -31.9; 2023: -29.1; 2024: -26.6. - Central government deposits at SAMA (SAR billions): 2016: 30.2; 2017: 24.8; 2018: 19.2; 2019: 15.8; 2020: 12.3; 2021: 7.8; 2022: 2.2; 2023: 0.0; 2024: 0.0. - Central government gross debt (percent of GDP): 2016: 13.1; 2017: 17.2; 2018: 19.1; 2019: 23.0; 2020: 24.7; 2021: 27.2; 2022: 27.9; 2023: 31.1; 2024: 35.6. - Government net financial assets (percent of GDP): 2016: 17.1; 2017: 7.7; 2018: 0.1; 2019: -7.2; 2020: -12.4; 2021: -19.4; 2022: -25.7; 2023: -31.1; 2024: -35.6. ### External sector and balance of payments - Current account (US$ billions): 2016: -23.9; 2017: 10.5; 2018: 72.3; 2019: 54.4; 2020: 48.8; 2021: 32.3; 2022: 21.6; 2023: 10.4; 2024: 3.1. - Current account (percent of GDP): 2016: -3.7; 2017: 1.5; 2018: 9.2; 2019: 6.9; 2020: 6.0; 2021: 3.9; 2022: 2.5; 2023: 1.2; 2024: 0.3. - Trade balance (US$ billions): 2016: 55.7; 2017: 98.5; 2018: 170.5; 2019: 155.3; 2020: 150.8; 2021: 135.2; 2022: 124.0; 2023: 112.9; 2024: 106.5. - Exports (US$ billions): 2016: 183.6; 2017: 221.9; 2018: 294.5; 2019: 284.2; 2020: 284.7; 2021: 275.3; 2022: 270.8; 2023: 267.0; 2024: 268.8. - Oil exports (US$ billions): 2016: 136.2; 2017: 170.2; 2018: 231.6; 2019: 221.3; 2020: 221.6; 2021: 212.2; 2022: 206.4; 2023: 201.2; 2024: 200.8. - SAMA's total net foreign assets (US$ billions, memorandum): 2016: 528.6; 2017: 488.9; 2018: 489.6; 2019: 500.3; 2020: 504.7; 2021: 496.1; 2022: 484.2; 2023: 457.0; 2024: 442.9. - WEO oil price (US$/barrel): 2016: 42.8; 2017: 52.8; 2018: 68.3; 2019: 65.5; 2020: 63.9; 2021: 60.7; 2022: 58.5; 2023: 57.6; 2024: 57.4. - Average Saudi oil price (US$/barrel): 2016: 41.5; 2017: 53.2; 2018: 67.9; 2019: 65.5; 2020: 63.9; 2021: 60.7; 2022: 58.5; 2023: 57.6; 2024: 57.4. - Oil production (million barrels per day): 2016: 10.5; 2017: 10.0; 2018: 10.3; 2019: 10.2; 2020: 10.5; 2021: 10.6; 2022: 10.6; 2023: 10.6; 2024: 10.6. ### Monetary and financial sector - Monetary survey (M3, SAR billions): 2016: 1,787; 2017: 1,791; 2018: 1,841; 2019: 1,897; 2020: 1,963; 2021: 2,042; 2022: 2,129; 2023: 2,233; 2024: 2,347. - Net foreign assets (SAMA + commercial banks, SAR billions): 2016: 2,128; 2017: 1,981; 2018: 1,961; 2019: 1,992; 2020: 1,998; 2021: 1,956; 2022: 1,901; 2023: 1,789; 2024: 1,727. - Claims on private sector (SAR billions): 2016: 1,405; 2017: 1,394; 2018: 1,435; 2019: 1,482; 2020: 1,533; 2021: 1,600; 2022: 1,674; 2023: 1,761; 2024: 1,858. - Money and quasi-money (percent change): 2016: 0.8; 2017: 0.2; 2018: 2.8; 2019: 3.0; 2020: 3.5; 2021: 4.1; 2022: 4.3; 2023: 4.9; 2024: 5.1. - Financial soundness indicators (selected, 2018): regulatory capital to risk-weighted assets: 20.4 percent; gross NPLs to gross loans: 2.0 percent; total provisions to gross NPLs: 157.2 percent; average pretax return on assets: 2.1 percent. ### Inflation, financial markets, and real estate - CPI components and contributions (figures plotted): headline and core contributions with rental, food; CPI inflation (y-o-y) series shown across 2009–2019. - Sovereign bond yields: spreads to US T-bills shown for 5yr, 10yr, 30yr international bonds (figures plotted). - Real estate: real estate index (y-o-y percent change) with residential/commercial/agricultural contributions; rental component of the CPI (y-o-y percent change) plotted; REITs performance index (Jan 2018=1) series provided. ### Oil market developments and scenarios - Oil production and exports series plotted (million barrels per day). - Output of major oil producers plotted: Russia, Saudi Arabia, US/Iran, Iraq (million b/d). - Consensus Brent crude price forecasts (US$/barrel) presented with historical, baseline, high, low scenarios. - Upside/Downside oil price scenarios illustrated for sensitivity analysis. ### Social spending, labor market, and inclusive growth - Government spending—sectoral composition 2018: Defence & Security 31.5%; Local Administration 5.2%; Education 19.9%; Health & Social Development 15.4%; Economic Resources, Infrastructure & Transportation 15.6%; Other 12.3%. - Education and health indicators (latest available): government education expenditure and teacher-student ratios; health indicators including life expectancy and hospital beds per 1,000. - Labor market (selected): unemployment rate (nationals, 2019 or latest) 12.3 percent (Table 1 notes unemployment series); Saudi nationals unemployment by sex/education (as of 2018Q4) plotted; youth (ages 15-24) unemployment 45.8 percent (Table 7). - Inclusive growth indicators (Table 7 highlights): GDP per capita growth (2015-18 average): -0.1; unemployment rate (nationals): 12.5; female labor force participation: 20.5 percent; youth labor force participation: 15.4 percent. ### SME sector and real estate market - SME lending: share of SME loans to total lending (latest available) plotted across regions and peers. - Bank credit to construction: y-o-y growth and share in total bank credit plotted (2008–2018). - New business entry density and Global Entrepreneurship Index component scores plotted. ### Key tables and memoranda (selected highlights) - Nominal GDP (SAR billions): 2016: 2,419; 2017: 2,582; 2018: 2,934; 2019: 2,947; 2020: 3,048; 2021: 3,117; 2022: 3,206; 2023: 3,322; 2024: 3,458. - Nominal GDP (US$ billions): 2016: 645; 2017: 689; 2018: 782; 2019: 786; 2020: 813; 2021: 831; 2022: 855; 2023: 886; 2024: 922. - Population (millions): 2016: 31.8; 2017: 32.6; 2018: 33.4; 2019: 34.1; 2020: 34.8; 2021: 35.5; 2022: 36.2; 2023: 36.9; 2024: 37.6. - SAMA's total net foreign assets (US$ billions, Table 5 memorandum): 2016: 528.6; 2017: 488.9; 2018: 489.6; 2019: 500.3; 2020: 504.7. *Source: Saudi Arabia — IMF staff report figures and tables as presented in the provided content unit.* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### Overview of RAM methodology - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline: - “low” is meant to indicate a probability below 10 percent, - “medium” a probability between 10 and 30 percent, and - “high” a probability between 30 and 50 percent. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. - Non-mutually exclusive risks may interact and materialize jointly. ### Main identified risks, likelihood/time horizon, expected impact, and policy response - Large swings in energy prices, reflecting offsetting—but large and uncertain—supply and demand shocks. - Likelihood/Time Horizon: Medium/Short-to-medium-term - Expected impact on the economy if risk is realized: High - "A substantial decline in oil prices would lead to a further widening of the fiscal deficit. If the price decline is persistent, additional fiscal adjustment would be needed with negative consequences for growth, employment, credit, and banking system liquidity. Asset quality in the banking system would deteriorate. A higher oil price would lead to stronger fiscal, growth and employment outcome in the near-term. However, if accompanied by a further increase in spending, fiscal vulnerabilities would rise over the medium-term." - Policy Response: - "Fiscal policy should be anchored in a medium-term framework to reduce the risks of procyclical expenditure policies." - "Existing buffers together with external borrowing could be used to smooth the fiscal adjustment in the short term in the event of a large shock." - "There should also be close monitoring of disruptions to banking system liquidity and signs of banking stress." - "Structural reforms should be accelerated to reduce the impact of oil price fluctuations on the economy over the longer term." - Rising protectionism and retreat from multilateralism - Likelihood/Time Horizon: High/Short-to-medium-term - Expected impact on the economy if risk is realized: High - "The negative consequences of escalating and sustained trade actions would reduce global growth including through adverse confidence effects for financial markets, which will likely lead to a substantial decline in oil prices. This would lead to a deterioration in external and fiscal balances with adverse effects for growth, employment, and the financial sector (see above)." - Policy Response: "As above, while continuing to support the multilateral rules-based trading system." - Weaker than expected global growth - Likelihood/Time Horizon: Medium-to-High/Short-to-medium-term - Expected impact on the economy if risk is realized: High - "Weaker than expected global growth would lead to a decline in oil prices and ultimately a deterioration in external and fiscal balances with adverse effects for growth, employment, and the financial sector (see above)." - Policy Response: "As above." - Slippages in the reform agenda would reduce prospects for stronger growth and employment over the medium-term - Likelihood/Time Horizon: Medium/Medium-term - Expected impact on the economy if risk is realized: High - "The failure to deliver on the planned fiscal consolidation and ambitious structural reforms would adversely affect growth and employment. The failure to turn reforms into jobs for Saudis in the private sector will lead to pressures to increase public employment with negative implications for fiscal sustainability. Changes in investor risk sentiment could also affect external financing and increased government involvement in the economy may crowd-out the private sector." - Policy Response: - "Complete the structural reforms to boost non-oil growth and labor market reforms to increase the competitiveness of Saudi nationals in the private sector." - "Implement a gradual but sustained fiscal adjustment that balances the need for public investment to support the economic reforms with the need to limit medium-term fiscal vulnerabilities." - "Carefully calibrate public sector support to ensure the private sector is crowded-in and drives diversification and growth." - Intensification of security risks including in the Middle East - Likelihood/Time Horizon: High/Short-to-medium-term - Expected impact on the economy if risk is realized: Medium/Low - "The impact on the Saudi economy would depend on the nature of the event. The impact on oil prices is the most likely channel of transmission, although pressures on military and security spending could also increase." - Policy Response: - "The needed policy response would depend on the nature of the shock. Fiscal policy could respond, and the authorities would need to ensure adequate liquidity in the banking system." *Source: Appendix I. Risk Assessment Matrix (text as provided in the content unit).* --- ### Appendix II. Productivity Growth in Saudi Arabia ### Summary and key findings - "Productivity growth in Saudi Arabia has declined since the global financial crisis." - "Employment remains largely concentrated in low-productivity industries while most firms have moved further away from the productivity frontier." - "Product market and labor reforms are needed to improve resource allocation across and within sectors. Investments in human capital and innovation are crucial for improving productivity over the long term." - Prepared by Anta Ndoye and Yang Yang. Tian Zhang provided research assistance. ### Non-oil GDP and growth decomposition - Non-oil growth: - "In the period 2000–08, non-oil growth averaged around 6.3 percent a year and since 2009 it has averaged 4.7 percent a year." - "Since the decline in oil prices in 2014, the rate of non-oil growth has slowed further." - "Non-oil growth has continued to outperform oil sector growth." - Growth accounting (2000–18): - "A growth accounting exercise indicates that growth in the non-oil sector can be largely attributed to physical capital accumulation and employment growth, with a limited contribution from total factor productivity (TFP) growth." - "In the 2000s, the ratio of non-oil investment to non-oil GDP increased significantly, partly reflecting government investments in the non-oil sector, which were made possible by higher oil revenues." - "Employment growth was also significant, reflecting higher employment growth for Saudi workers compared to non-Saudi workers." - "However, during 2009–18, TFP growth turned negative while both employment and capital accumulation growth slowed, resulting in an average non-oil growth rate of 4.7 percent in 2009–018, relative to 6.3 percent in 2000–08." ### Firm-level TFP evidence - "Firm-level data confirms negative TFP growth across most industries since the global financial crisis." - Methodology and data notes: - "The Orbis database is used to estimate firm-level TFP in Saudi Arabia for the period 2009–17." - "The methodology proposed in Gandhi, Navarro and Rivers (2018) is used to estimate firm-level TFP." - "Gross output is assumed to be a function of two types of inputs—flexible inputs including material inputs and costs of labor and capital as the inflexible input." - Note on input shares estimation: "The number of observations for Saudi Arabia is too small to directly estimate TFP by industry. Instead, input shares are estimated for 28 countries for which there are enough observations and the necessary data for TFP estimation. Averages of the estimated input shares are taken to estimate firm TFP in Saudi Arabia. Input shares and firm TFP are estimated at the two-digit industry level." - Empirical results: - "Average firm TFP growth in many industries has declined since the global financial crisis." - "Electricity and water supply, construction, and manufacturing led the decline in productivity, whereas ICT, mining, and transportation saw positive TFP growth." - "The aggregate TFP constructed from firm-level data correlates positively with TFP estimated from aggregate data." ### Distance to the productivity frontier - Benchmarking: - "Similar to Aghion and Howitt (2006), the U.S. is used as the benchmark for the 'productivity frontier'." - Findings: - "Firms in Saudi Arabia are on average less productive than firms in the U.S. in all sectors except transportation." - "Saudi Arabia’s distance to the productivity frontier has increased since the financial crisis in most industries except transportation and ICT." ### Labor productivity decomposition and sectoral patterns - Decomposition method: - Uses a variant of the canonical decomposition originating from Fabricant (1942): (equation provided in source text) - Definitions: S_i is the share of sector i in overall employment; P_i the labor productivity level of sector i; superscripts 0 and T refer to initial and final period. - The change in aggregate productivity is decomposed into: - within-effect, - labor reallocation (shift effect), - cross or interaction term. - Results: - "Results indicate that labor productivity growth has also been falling (Figure 4)." - "The decline in non-oil output growth and the unchanged sector shares in total employment led to a decline in labor productivity growth during 2008–16." - "Within the non-oil economy, shift effects stemming from the declining share of the retail and public sectors have, however, boosted labor productivity growth." - "Labor remains mainly concentrated in lower productivity sectors. Indeed, the public sector and the construction sector represent half of the total employment in the economy, but labor productivity is relatively low in these sectors." - "In contrast, the two most productive sectors in the non-oil economy, finance and transport, represent a small share of employment." - "The shift of labor from low to higher productivity sectors has been an important source of aggregate productivity growth for both advanced and emerging economies... This has not happened in Saudi Arabia." ### Data limitations - "Limitations of the employment data in Saudi Arabia prevent a more up-to-date analysis of sectoral labor productivity." - "The statistical agency stopped publishing sectoral employment data from the labor force survey (LFS) after 2016Q3 and has now stopped publishing all employment data from the LFS since 2018Q3." - "Instead, it is publishing employment data based on contributors to the private sector pension fund and data from the Ministry of Civil Service, which is only available from 2016Q3." - "It is possible, and indeed quite likely given the sharp decline in the number of expatriates, that labor productivity has increased, particularly in the construction and retail sectors, over the past two years. However, data limitations prevent further analysis." ### Policy recommendations to boost productivity - "Policies to boost productivity should focus on product and labor market reforms and investments in human capital and innovation." - Specific measures: - "Product and labor market reforms reduce the misallocation of resources both within and across industries and promote productivity growth (Dabla-Norris et al., 2015)." - "Removing barriers to entry, enhancing economic competition, and eliminating price distortions are key to improving productivity growth." - "Labor market policies that focus on changing the incentives for Saudis to work outside the government and for firms to hire nationals and improvements in human capital are also needed to boost productivity growth (IMF, 2019)." *Source: Appendix II. Productivity Growth in Saudi Arabia (text as provided in the content unit).* ### Appendix III. Fiscal and External DSAs ### Appendix III. Fiscal and External DSAs ### Public Sector Debt Sustainability — Baseline Scenario (Key metrics and projections) - Nominal gross public debt: 7.3 (2017), 17.2 (2018), 19.1 (2019), 23.0 (2020), 24.7 (2021), 27.2 (2022), 27.9 (2023), 31.1 (2024), 35.6 (projection horizon shown). - Public gross financing needs (in percent of GDP): -1.1 (2017), 9.7 (2018), 6.0 (2019), 6.6 (2020), 6.5 (2021), 8.1 (2022), 9.1 (2023), 9.6 (2024), 6.3 (later year shown). - Real GDP growth (in percent): 4.1 (2017), -0.7 (2018), 2.2 (2019), 1.9 (2020), 3.0 (2021), 2.4 (2022), 2.4 (2023), 2.5 (2024). - Inflation (GDP deflator, in percent): 1.7 (2017), 7.6 (2018), 11.2 (2019), -1.5 (2020), 0.4 (2021), -0.1 (2022), 0.5 (2023), 1.1 (2024), 1.6 (later year). - Nominal GDP growth (in percent): 6.1 (2017), 6.8 (2018), 13.6 (2019), 0.4 (2020), 3.4 (2021), 2.3 (2022), 2.8 (2023), 3.6 (2024), 4.1 (later year). - Effective interest rate (in percent): 5.3 (2017), 2.8 (2018), 3.4 (2019), 3.9 (2020), 3.8 (2021), 4.0 (2022), 3.9 (2023), 4.2/4.1 (two-year entries shown). - Change in gross public sector debt (cumulative): -0.4 (2017), 4.1 (2018), 1.9 (2019), 3.9 (2020), 1.7 (2021), 2.5 (2022), 0.7 (2023), 3.3 (2024), 4.5 (later cumulative), 16.5 (total). - Identified debt-creating flows (cumulative): -0.5 (2017), 6.8 (2018), 3.0 (2019), 4.6 (2020), 2.4 (2021), 3.0 (2022), 1.1 (2023), 3.5 (2024), 4.6 (later), 19.2 (total). - Primary deficit (in percent of GDP): -1.6 (2017), 11.1 (2018), 6.6 (2019), 6.5 (2020), 4.9 (2021), 6.9 (2022), 6.2 (2023), 5.5 (2024), 4.6 (later), 34.5 (cumulative). - Primary (noninterest) revenue (in percent of GDP): 36.5 (2017), 21.9 (2018), 29.7 (2019), 32.5 (2020), 32.5 (2021), 30.6 (2022), 30.6 (2023), 30.6/30.9 (other years), 187.7 (cumulative). - Primary (noninterest) expenditure (in percent of GDP): 35.0 (2017), 33.0 (2018), 36.3 (2019), 39.0 (2020), 37.4 (2021), 37.5 (2022), 36.8 (2023), 36.1/35.5 (other years), 222.3 (cumulative). - Automatic debt dynamics contribution (overall): -0.2 (2017), -0.5 (2018), -1.5 (2019), 0.7 (2020), 0.1 (2021), 0.4 (2022), 0.3 (2023), 0.2 (2024), 0.0/1.6 (additional entries). - Of which: real interest rate contributions and real GDP growth contributions provided in detail (e.g., real interest rate: 0.0, -0.6, -1.2, 1.0, 0.8, 1.0, 0.9, 0.8, 0.8; real GDP growth: -0.3, 0.1, -0.3, -0.4, -0.7, -0.6, -0.6, -0.7, -0.8, -3.7). - Other identified debt-creating flows (including accumulation of deposits negative): 1.3 (2017), -3.8 (2018), -2.0 (2019), -2.5 (2020), -2.6 (2021), -4.3 (2022), -5.4 (2023), -2.1 (2024), 0.0 (later), -16.9 (cumulative). - Residual, including asset changes: 0.0 (2017), -2.8 (2018), -1.1 (2019), -0.7 (2020), -0.6 (2021), -0.6 (2022), -0.4 (2023), -0.3 (2024), -0.1 (later), -2.7 (cumulative). ### Alternative Fiscal Scenarios and Composition of Public Debt - Baseline scenario underlying assumptions (selected): - Real GDP growth: 1.9 (2019), 3.0 (2020), 2.4 (2021), 2.4 (2022), 2.5 (2023), 2.5 (2024). - Inflation: -1.5 (2019), 0.4 (2020), -0.1 (2021), 0.5 (2022), 1.1 (2023), 1.6 (2024). - Primary Balance: -6.5 (2019), -4.9 (2020), -6.9 (2021), -6.2 (2022), -5.5 (2023), -4.6 (2024). - Effective interest rate: 3.9 (2019), 3.8 (2020), 4.0 (2021), 3.9 (2022), 4.2 (2023), 4.1 (2024). - Historical scenario underlying assumptions (selected): - Real GDP growth: 1.9 (2019), 3.2 (2020), 3.2 (2021), 3.2 (2022), 3.2 (2023), 3.2 (2024). - Inflation: same series as baseline. - Primary Balance: -6.5 (2019), -3.2 (2020), -3.2 (2021), -3.2 (2022), -3.2 (2023), -3.2 (2024). - Effective interest rate: 3.9/4.0/3.9/3.9/3.9/3.5 (2019–2024 entries). - Constant Primary Balance scenario: - Primary Balance held at -6.5 for 2019–2024. - Other variables same as baseline for real GDP growth and inflation; effective interest rate: 3.9/4.0/4.0/3.8/4.3/4.1. - Composition of public debt, by currency and maturity, and net debt (in percent of GDP) are presented in graphical forms across 2017–2024 (figures show breakdowns by medium and long-term vs short-term and local currency vs foreign currency). ### External Debt Sustainability — Baseline and Stress Tests - Baseline external debt (in percent of GDP): 13.1 (2014), 13.8 (2015), 24.6 (2016), 27.7 (2017), 28.3 (2018), 30.2 (2019), 31.1 (2020), 31.7 (2021), 32.5 (2022), 30.3 (2023), 31.8 (2024), 2.2 (debt-stabilizing entry). - Change in external debt: -4.3 (2014), 0.7 (2015), 10.8 (2016), 3.0 (2017), 0.6 (2018), 1.9 (2019), 1.0 (2020), 0.6 (2021), 0.8 (2022), -2.3 (2023), 1.5 (2024). - Identified external debt-creating flows (summary): -8.0 (2014), 11.4 (2015), 5.9 (2016), 0.5 (2017), -8.6 (2018), -1.2 (2019), -1.0 (2020), 0.3 (2021), 0.9 (2022), 1.6 (2023), 2.2 (2024). - Current account deficit, excluding interest payments: -9.8 (2014), 8.6 (2015), 3.5 (2016), -1.9 (2017), -9.3 (2018), -4.5 (2019), -3.9 (2020), -2.8 (2021), -2.0 (2022), -1.2 (2023), -0.4 (2024). - Denominator for automatic debt dynamics: 1.0 (2014), 0.9 (2015), 1.0 (2016), 1.1 (2017), 1.1 (2018), 1.0 (2019), 1.0 (2020), 1.0 (2021), 1.0 (2022), 1.0 (2023), 1.0 (2024). - Contribution from nominal interest rate: 0.1 (2014), 0.1 (2015), 0.2 (2016), 0.5 (2017), 1.0 (2018), 1.1 (2019), 1.2 (2020), 1.3 (2021), 1.3 (2022), 1.4 (2023), 1.3 (2024). - Contribution from real GDP growth: -0.6 (2014), -0.6 (2015), -0.2 (2016), 0.2 (2017), -0.5 (2018), -0.5 (2019), -0.9 (2020), -0.7 (2021), -0.7 (2022), -0.8 (2023), -0.7 (2024). - Residual, including change in gross foreign assets: 3.7 (2014), -10.7 (2015), 4.9 (2016), 2.6 (2017), 9.2 (2018), 3.1 (2019), 2.0 (2020), 0.3 (2021), -0.1 (2022), -3.8 (2023), -0.7 (2024). - External debt-to-exports ratio (in percent): 27.9 (2014), 41.5 (2015), 79.1 (2016), 79.6 (2017), 71.0 (2018), 84.2 (2019), 89.2 (2020), 93.2 (2021), 97.2 (2022), 92.7 (2023), 99.6 (2024). - Gross external financing need (in billions of US dollars): -31.9 (2014), -31.9 (2015), 111.0 (2016), 66.5 (2017), 39.7 (2018), -12.0 (2019), 30.5 (2020), 37.5 (2021), 49.1 (2022), 57.4 (2023), 66.3 (2024). - Scenario with key variables at their historical averages: 30.2 (2019), 30.8 (2020), 31.4 (2021), 32.0 (2022), 29.4 (2023), 30.5 (2024), 2.2 (debt-stabilizing entry). ### External DSA — Stress Tests (Selected scenario outcomes and shocks) - Individual shocks are permanent one-half standard deviation shocks; other scenario notes: - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2020. - Boxed scenario averages (examples shown): - Baseline and scenario averages presented for growth shock, interest-rate shock, CA shock, combined shock, and real depreciation shock. - Growth shock values in boxes: Baseline: 2.1; Scenario: -3.6; Historical: 10.6 (labels correspond to average projections for respective variables shown in the figures). ### External Sustainability Assessment — Key findings and projections - Staff assessment: the external position in 2018 was moderately weaker than the level consistent with desirable fiscal policy settings; fiscal adjustment needed over the medium-term to strengthen the current account and increase saving for future generations. - Current account (CA) and trade developments: - CA surplus: 9.2 percent of GDP in 2018 versus 1.5 percent of GDP in 2017. - Exports increased by 33 percent in 2018; export volumes increased by 8.6 percent. - Imports of goods increased marginally by 0.5 percent; import volumes fell by 2.1 percent. - Terms of trade improved by 23.5 percent in 2018; trade balance improved by 7.5 percent of GDP. - Projection: CA surplus expected to decline to 6.9 percent of GDP in 2019 as oil revenues decline; terms of trade projected to decline by 4.4 percent. - Oil price assumptions: $65.5 in 2019, declining to $57.4 in 2024, with $67.9 in 2018. - Financial flows and reserves: - Government bond issuance in international markets in 2018: $19 billion (central government) and $11 billion (PIF). - Errors and omissions: 0.6 percent of GDP in 2018 versus 10 percent of GDP in 2016. - Foreign exchange reserves: slight increase of $0.7 billion in 2018 (reserves fell by $40 billion in 2017). - SAMA’s net foreign asset stood at $490 billion (63 percent of GDP, 26.7 months of imports, 100 percent of broad money, and 414 percent of the Fund’s reserve adequacy metric) at end-2018. - Reserve adequacy and projections: - Reserve coverage relative to ARA metric: 414 percent in 2018, declining to 247 percent by 2024 (as CA surplus narrows and public sector overseas investments continue). - Under adjusted ARA metric (including additional buffer for oil export losses), reserve coverage remains above recommended range at 170 percent in 2024 under a scenario of oil price 33 percent lower than baseline. - Selected ARA table entries (Actual Net Foreign Reserves in $ billion): 71 (2013), 72 (2014), 60 (2015), 95 (2016), 29 (2017), 489/490 (2018 entry shows 489/490 variations), projections through 2024 include values like 500, 505, 496, 484, 457, 443. - Foreign Reserves as a % of the ARA metric (in percent): 755/732/684/563/474/414/397/382/367/348/323/247 (series across 2013–2024). - Foreign Reserves in percent of GDP: 96.0 (2013), 95.8 (2014), 93.1 (2015), 82.0 (2016), 71.0 (2017), 62.6 (2018), 63.7 (2019), 62.1 (2020), 59.7 (2021), 56.6 (2022), 51.6 (2023), 48.0 (2024). - Net International Investment Position (NIIP): - Net IIP estimated at 86 percent of GDP at end-2018, down from 91 percent in 2017. - Projections suggest NIIP-to-GDP ratio increases to around 91 percent in 2024 as CA remains in surplus in near term and moves to broad balance by 2024. - Average return estimates in 2018: return on assets 1.8 percent; return on liabilities 2.8 percent. - Consumption-based model and current account norms: - Proven oil reserves at end-2018: 257 billion barrels (staff projection assumptions include oil production growth assumptions and discount rate). - Two allocation rules used to derive current account norms: (i) constant real per capita annuity; and (ii) constant real annuity. - Current account norms in 2018: 12.6 percent of GDP (constant real per capita annuity) and 9.4 percent of GDP (constant real annuity). - Current account gaps in 2018: -3.4 percent of GDP (per capita annuity gap) and -0.2 percent of GDP (constant annuity gap). - Staff note: these estimates are subject to considerable uncertainty and sensitive to assumed parameters, including oil prices. ### Bank Regulation, Liquidity, and Macroprudential Policy — Progress on 2017 FSSA Recommendations (selected updates) - Banking Oversight: - Update Banking Charter and Banking Control Law; revoke Article 21: internal SAMA review concluded some laws need updating and a new Banking Secrecy Law needs introduction; drafts being reviewed for submission to legislature. - Codify and publish bank legislative circulars: SAMA developed an internal Circulars Portal currently being tested; will be made available on SAMA website. - Strengthen supervisory approach (risk and control ratings, supervisory planning, loan examination documentation): new risk-based supervisory framework rolled out; banks' risk rating now based on inherent risk and control rating; supervisory planning aligned with bank risk profiles; loan examination documentation enhanced. - Licensing manual and guiding principles: revised licensing requirements and guidelines approved in December 2018 and published on SAMA’s website. - Guidance on mapping Islamic products to Basel framework: guidelines developed, banks consulted, being finalized for publication. - Loan classification regulation and reporting on rescheduled/restructured loans: draft modified; restructuring guidelines and practices awaiting approval; regulations to be issued for consultation once approved. - Require formal policies for rescheduling/refinancing/restructuring and prudential returns: restructured loans project completed; restructuring guidelines and practices awaiting approval. - Strengthen cross-border cooperation via MoUs: approvals obtained for MoU with FSC and FSS in the Republic of Korea; MoU with United Arab Emirates in Financial Services and Market cooperation signed. - Liquidity Management: - Establish liquidity-forecasting framework: liquidity forecasting model developed, tested, results presented to the Monetary policy committee; forecast added to regular monetary policy update. - Financial Safety Nets: - Adopt and implement Draft Resolution Law (DRL): DRL and explanatory notes submitted to the Royal Court for approval. - Establish Emergency Liquidity Assistance (ELA) framework: in progress. - Establish timeframe for DPF deposit payouts and ensure backup funding line: discussions ongoing with the World Bank for Technical Assistance. - Macroprudential Policy: - Broaden debt service to income definition to include all types of debt and income: principles issued in May 2018 and fully implemented in August 2018. - Strengthen data collection for household, corporate, and real estate sectors: work ongoing; monthly residential new mortgages finance data now published. *Source: IMF staff.* ### 6. An investment-based model indicates that there is a small current account gap over the ### 6. An investment-based model indicates that there is a small current account gap over the medium-term. ### Investment-based model findings - The investment-based model predicts an average current account gap of 0.3 percent over the medium-term. - The model accounts for allocating part of resource wealth to finance investment, which is not explicitly considered by the consumption-based model. - Investment efficiency is an important parameter determining optimal investment and thus the current account norm. - A value of 0.4 (i.e. 40 percent) is assumed for investment efficiency (mid-point of regional estimates for the Middle-East and North Africa region and lower than in high-income countries). Increasing the efficiency of public investment would reduce the current account norm over the medium-term. ### Current account (CA) levels and methodological estimates - Actual CA in 2018: 9.2 percent of GDP. - CA in 2017: 1.5 percent of GDP. - CA in 2015: deficit of close to 9 percent of GDP. - Trade balance improvement in 2018: 7.5 percent of GDP (driven by a 36 percent increase in oil export revenues more than offsetting a 10 percent increase in imports of services). - Terms of trade change in 2018: improved by 23.5 percent. - Projected CA in 2019: 6.9 percent of GDP (terms of trade projected to decline by 4.4 percent). - Medium-term expectation: gradual decline in oil exports and import growth should push the CA into broad balance. - Estimated CA gaps by methodology for 2018: - EBA-lite cyclically-adjusted CA norm: 9.4 percent of GDP; cyclically-adjusted current account: 8.9 percent of GDP; EBA-lite CA gap: -0.6 percent of GDP. - Consumption-based allocation model: CA gap of -0.2 percent of GDP (constant real annuity rule) and -3.4 percent of GDP (constant real per capita annuity rule). - Investment-needs model: CA gap of 0.3 percent of GDP. - Staff assessment: CA gap of -1.7 percent of GDP with a range from 0 to -3.4 percent of GDP. - Sensitivity of CA to oil price: At current oil production, a $1 change in the oil price results in a 0.5 percent of GDP first-round change in the CA balance. - Oil price assumptions: $67.9 in 2018; $65.5 in 2019; $57.4 in 2024. ### Real Effective Exchange Rate (REER) and competitiveness - Riyal pegged to the U.S. dollar at a rate of 3.75 since 1986. - REER movements: - REER depreciated by 1 percent in 2018 (y-o-y). - REER was on average 7 percent above its 10-year average in 2018. - As of May 2019, the REER depreciated by about 0.7 percent relative to the 2018 average. - REER valuation estimates for 2018: - REER regression model indicates an overvaluation of 15 percent compared to fundamentals and desirable policies, but the model fits poorly for Saudi Arabia. - An alternative regression using oil price suggests a smaller overvaluation of 1 percent for 2018. - Staff estimates a REER gap in 2018 in the range of 5–10 percent. - Exchange rate assessment: exchange rate movements have limited short-run impact on competitiveness because most exports are oil or oil-related and substitutability between imports and domestically-produced products is limited. - Fiscal consolidation is expected to help narrow the REER gap as domestic absorption is restrained. ### External balance sheet, reserves, and financial flows - Net external assets (NIIP) estimated at 86 percent of GDP at end-2018, down from 91 percent of GDP in 2017 and 105 percent in 2015. - Projections suggest the NIIP-to-GDP ratio will increase slightly over the medium-term (to around 91 percent of GDP by 2024) as the CA remains in surplus in the near-term and moves to broad balance by 2024. - NIIP and balance sheet table entries (as presented): NIIP 85.5; Gross Assets-- Res. Assets 63.2; Gross Liab.--Debt Liab. 28.3. - Reserves and reserve metrics: - Reserves at end-2018: $490 billion (63 percent of GDP, 26.7 months of imports and 414 percent of the Fund’s reserve adequacy metric). - Reserves down from $724 billion in 2014. - Reserve coverage expected to decline to 247 percent of the Fund’s ARA metric by 2024 (above the Fund’s recommended range of reserves of 100 to 150 percent). - Recorded net financial outflows increased in 2018 as public sector institutions continued to accumulate external assets. - Errors and omissions: around 0.6 percent of GDP in 2018 (compared to 10.3 percent of GDP in 2016). - Assessment: external balance sheet remains very strong; reserves are more than adequate for precautionary purposes by Fund metrics, but external savings are not sufficient from an intergenerational equity perspective. Reserves expected to decline over the medium-term as the CA moves to broad balance and public sector overseas investments continue. ### Policy recommendations and potential responses - Fiscal consolidation is needed to strengthen the current account and increase saving for future generations. - Fiscal adjustment should be based on: - further energy price reforms, - non-oil revenue measures, - expenditure restraint and increased efficiency of spending, - reforms to strengthen the fiscal framework. - Structural reforms to diversify the economy and boost the non-oil tradeable sector over the medium-term can support a stronger external position over the long run. - Increasing the efficiency of public investment would reduce the current account norm over the medium-term. *Source: 1sauea2019001 - 6. An investment-based model indicates that there is a small current account gap over the* ### Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016. ### Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016 ### IMF Technical Assistance, Missions, and Policy Support - VAT and excise-related engagements: - "Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016." - "Tax Administration (VAT and excises), May and October-November 2016." - "VAT Policy design, May–June 2016." - "VAT Implementation, July and November 2017, and October 2018." - "Excise Tax Implementation, January 2017 and February–April 2017." - Energy and fiscal policy engagements: - "Energy Price Reforms, September 2016." - "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, April and October 2018, and March 2019." - Financial sector and AML/CFT engagements: - FSAP activity: missions in January 2004; FSSA published June 5, 2006; FSSA-update published April 18, 2012; FSAP-update April 2011; Detailed Assessment of Observance published July 19, 2013; FSAP missions in November 2016 and February 2017; FSSA published October 5, 2017. - "AML/CFT Diagnostic Mission, November 2015." - "AML/CFT Threat Analysis Workshop, March 2016." - "AML/CFT, March and September 2016, September 2017, and April 2019." - Resident representation: - "No resident representative is stationed in Saudi Arabia." ### Relations with the World Bank Group - World Bank Technical Cooperation Program (TCP): - Provided policy advice, capacity development, and implementation support on a reimbursable basis since 1975. - Reimbursable Advisory Services (RAS) objectives include: generating productive jobs for a fast-growing population; improving education and health systems; improving business climate and investment appeal; enhancing provision of public services including water, electricity, and transport; strengthening capacity in national, municipal institutions, and tourism. - Areas of ongoing World Bank advisory work: - 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; road safety; advisory support to the Public Transport Authority. - Support to the Saudi G20 Secretariat for assuming the presidency of the G20 in 2020. ### International Finance Corporation (IFC) Engagements - IFC strategy focus: - (i) partnering with regional champions to mobilize cross-border investments into the MENA region and other emerging markets; - (ii) providing advisory support, especially in 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: - "IFC commitments in Saudi Arabia stand at around $250 million across the leasing, insurance, healthcare, and housing finance sectors." - "Over the last decade, IFC has committed over $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: - Active on the PPP front, including a mandate with the Ministry of Health to increase access to imaging services in underserved remote areas. - Past IFC mobilization: Medina Airport PPP where IFC helped mobilize over $1 billion; successes with the Hajj Terminal and a captive desalination project at Jeddah Airport. - Advisory work to increase access to finance for SMEs via capacity building and corporate governance support; trainings for banks on SME financial services, risk management, and mortgage finance. - Work with the Saudi Arabian General Investment Authority (SAGIA) to improve the business environment, implement reforms measured by Doing Business, provide quality assurance for National Transformation Program (NTP) objectives, and capacity building to SAGIA. ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of June 19, 2019) - Overall assessment: - "Data provision has some shortcomings but is broadly adequate for surveillance." - Most affected areas: "government finance, labor market, monetary and financial, and external sector statistics." - Real sector statistics: - National accounts: GDP rebased to 2010 from 1999; revision increased coverage of services (distribution and financial services) and resulted in upward revisions to the level of GDP and relative contributions by activity. - "This rebasing increased the share of oil GDP in 2013 to 43 percent from 21 percent previously." - Quarterly GDP by production (current and constant 2010 prices) available from "2010Q1 to 2018Q4." - Quarterly GDP by expenditure: current prices "2010Q1 to 2018Q4"; constant 2010 prices "2017Q1 to 2018Q4." - Quarterly industrial production index first published in 2016; timeliness improving. - Price statistics: - "The CPI has been rebased to 2013." - Wholesale price index weight reference period updated to 2014; sample coverage limited to three cities. - PPI work plan agreed in March 2019 with goal for initial publication of the PPI in "August 2020." - "The sample of establishments will be selected in June 2019 and data collection will begin in November 2019." - A quarterly real estate price index is now published. - Labor market statistics: - Breakdown of employment between private and public sector available only from "2018Q3." - New classification for economic activity and a new employment series introduced in "2016Q4"; data prior to "2016Q4" has not yet been revised for consistency. - The statistical agency stopped publishing employment data from the labor force survey (LFS) since "2018Q3"; instead publishes employment data based on contributors to the private sector pension fund and Ministry of Civil Service data, which is available only from "2016Q3." - Government finance statistics: - Authorities reclassified the budget in line with "GFSM 2014." - GFSM 2014 framework is used to report and publish fiscal data. - Data coverage: "data only covers the budgetary central government." - Monetary and financial statistics: - Quality of monetary data has improved; information available in the "Saudi Arabian Monetary Authority (SAMA) Monthly Statistical Bulletin." - Detailed breakdown of corporate and household deposits is not available. - SAMA’s published balance sheet has a large and growing "other liabilities" item that hinders analysis. - SAMA submitted preliminary monetary and financial statistics based on the Standardized Report Forms (SRFs) for review by Statistics Department. - SAMA reports some Financial Access Survey (FAS) series and indicators, including two indicators adopted by the UN to monitor Target 8.10 of the SDGs. - Financial sector surveillance: - "SAMA reports quarterly financial soundness indicators (FSIs) to the IMF" published on the IMF’s FSI website. - Reported FSIs comprise "all 12 core FSIs and 8 encouraged FSIs for deposit takers." - External sector statistics: - Quarterly balance of payments (BOP) and international investment position (IIP) data are published. - IIP statistics are "highly aggregated" and coverage in capital and financial accounts, particularly for the private sector, needs improvement. - Official data may underestimate the net international investment position, reflecting likely unrecorded private financial outflows on the asset side and under-recording of debt liabilities. - "Errors and omissions have been reduced to near zero in 2017 and 2018 through better data coverage of some large government-related institutions." - Authorities are working to strengthen financial account data where positions and flows for FDI and other investment are weak. ### Participation in Data Standards - 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 19, 2019) — Selected entries - Exchange rates: latest observation "6/19/2019"; date received "6/19/2019"; Frequency of Data/Reporting/Publication: "D D D" - International reserve assets and reserve liabilities of the monetary authorities: latest observation "4/2019"; date received "5/28/2019"; Frequency: "M M M" - Reserve/base money: latest observation "4/2019"; date received "5/28/2019"; Frequency: "M M M" - Broad Money: latest observation "4/2019"; date received "5/28/2019"; Frequency: "M M M" - Central Bank balance sheet: latest observation "4/2019"; date received "5/28/2019"; Frequency: "M M M" - Consolidated balance sheet of the banking system: latest observation "4/2019"; date received "5/28/2019"; Frequency: "M M M" - Interest rates: latest observation "6/19/2019"; date received "6/19/2019"; Frequency: "D D D" - Consumer price index: latest observation "5/2019"; date received "6/19/2019"; Frequency: "M M M" - Revenue, expenditure, balance and composition of financing — central government: latest observation "Q1 2019"; date received "5/2/2019"; Frequency: "Q Q Q" - Stocks of central government and central government-guaranteed debt: latest observation "Q1 2019"; date received "5/2/2019"; Frequency: "Q Q Q" - External current account balance: latest observation "Q4 2018"; date received "3/28/2019"; Frequency: "Q Q Q" - Exports and imports of goods: latest observation "3/2019"; date received "5/31/2019"; Frequency: "M M M" - GDP/GNP: latest observation "Q4 2018"; date received "3/31/2019"; Frequency: "Q Q Q" - Gross external debt (BIS): latest observation "Q4 2018"; Frequency: "Q Q Q" - International investment position: latest observation "Q4 2018"; date received "3/28/2019"; Frequency: "Q Q Q" *Source: 1sauea2019001 - Introduction of VAT and Excises: Key Policy Design Issues, April-May 2016 (IMF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1sauea2019001.pdf_