## POLICIES TO DRIVE DIVERSIFICATION FOR SAUDI ARABIA

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### A. Introduction — context and current structure
- Living standards have improved substantially; revenue from oil exports has strongly supported growth in income per capita and Saudi Arabia has improved on the Human Development Index.
- Oil remains important:
  - Oil directly accounts for more than 40 percent of GDP.
  - Oil accounts for nearly 70 percent of fiscal revenues.
  - Oil accounts for close to 80 percent of exports.
- Export composition (2017):
  - Oil exports were $170 billion (75 percent of total).
  - Petrochemical exports were $31 billion.
  - Other non-oil exports were $21 billion (less than the $22 billion recorded in 2011).
- Non-oil activity is highly dependent on government outlays financed by oil revenues; petrochemical and plastics sectors benefit from low cost energy inputs, an advantage that may diminish given energy reform plans.

### Box 1 — Authorities’ plans and targets (Vision 2030 summary)
- Macro and private sector targets:
  - Increase the private sector’s contribution to GDP from 40 percent in 2018 to 65 percent by 2030.
  - Enable SME development.
  - Grow the economy from the 19th largest to among the 15th largest economy in the world.
- Priority sectors: Retail, Manufacturing, Mining, Logistics, Renewable energy, Tourism and entertainment.
- Selected sector facts and targets:
  - Retail: employed 1.5 million workers in 2018, of whom only 0.3 million were Saudis.
  - Mining: potential contribution to GDP of nearly SAR 100 billion by 2020 (up from SAR 12.5 billion in 2018) and 90,000 jobs.
  - Renewable energy: aim to generate nearly 60 gigawatts of renewable energy.
  - Tourism and entertainment: aspire to double domestic household spending on entertainment and develop a SAR 30 billion recreational services market.
- Structural reforms and enabling measures:
  - Competitiveness: ranked 39th in 2018 Global Competitiveness Index; aim to be among the top ten.
  - SEZs: establishing SEZs focused on logistics, tourism, industry, and finance (NEOM cited).
  - FDI: aim to increase FDI from under 1 percent to 6 percent of GDP by 2030.
  - Education: 2019 budget allocated SAR 1 billion to support universities.
  - PIF: assets increased from SAR 570 billion to SAR 840 billion; government aims to increase PIF assets to over SAR 7 trillion by 2030; annual return target of 4–5 percent; PIF expects to invest SAR 210 billion (7 percent of GDP) over the coming three years.
- Investment needs:
  - If successful, plans would require close to $1 trillion in investment.
  - NEOM expects to attract investments of $500 billion.
  - NIDLP expects to attract investments of $426 billion.

### B. Why diversification matters — jobs, shocks, and intergenerational resilience
- Jobs:
  - With a young population and rising labor force participation, up to 1 million jobs could be needed over the next five years.
  - Adding 1 million government jobs at the current average government pay for Saudis (about SAR 11,000 per month) would increase the wage bill by 4.5 percent of GDP.
  - The non-oil private sector must ultimately be the source of job creation; large-scale government employment is not feasible.
- Oil-market risks:
  - Important shocks: temporary variations (example: Brent prices doubled to well above $100 a barrel from 2009 to 2011, dipped below $50 a barrel in 2016) and more permanent demand declines.
  - Diversification reduces exposure to oil-price volatility.
  - Strengthening fiscal frameworks to delink government expenditures from oil prices is recommended.
- Intergenerational resilience:
  - Reserves will eventually be exhausted; sustaining living standards in a post-oil world requires financial accumulation or non-oil economic activity and exports.

### Financial diversification — scale and limits
- Financial returns can provide revenue alternatives but require vast asset accumulation.
- Vision 2030 emphasizes expanding the PIF beyond its existing $300 billion in assets.
- Scale considerations and illustrative figures:
  - World’s largest sovereign wealth funds today hold roughly $1 trillion in assets.
  - Oil production of 10 million barrels per day, valued at $65 per barrel, translates to annual oil revenues of about $11,000 per Saudi at present.
  - Saudi population in 2018 was 20.1 million (GASTAT); at an annual growth of 2 percent, population by 2030 would be 26.3 million.
  - Assuming population increases to about 26 million by 2030, accumulated assets of $5–7 trillion would be needed to generate the same level of per capita revenues from financial assets.
  - Main text reports asset base required to provide a per capita annuity of $11,000 per person for real returns ranging from 4-6 percent.
- Key takeaway:
  - Vast accumulation of financial assets would be needed; financial returns alone are unlikely to replace oil-derived income without very large asset scales. Foregone financial diversification is an important opportunity cost of increased real investment.

### D. Policies to drive real sector diversification — objectives and package
- Objective: develop a stronger non-oil economy and export base, create jobs, and provide future external and fiscal revenues.
- Required complementary policies:
  - Structural reforms encouraging private sector activity and investment.
  - Targeted support for entry and development in specific sectors with clear and transparent criteria.
  - Improvements in cost competitiveness and human capital.
- Domestic investments should be evaluated carefully given fiscal and opportunity costs.

### Structural reforms — enabling environment
- Preconditions: stable macroeconomic environment, predictable legal framework, robust institutions, favorable business climate, appropriate incentives, low corruption, strong education system.
- Recent measures and gaps:
  - Bankruptcy and commercial pledge laws implemented.
  - Streamlining procedures for starting a business and clearing containers is underway.
  - Infrastructure investments planned to close gaps.
  - GCC faces high tariffs in export markets; GCC-level trade negotiations could help.
  - Quality of education needs substantial improvement.
- SEZs:
  - SEZs can be temporary tools to address frictions but should not substitute for nationwide reforms in contract enforcement and dispute resolution.

### Cost competitiveness and labor market incentives
- Wages and productivity:
  - Saudis employed in the private sector earn close to $25,000 a year on average.
  - Saudis in the government sector earn about $35,000 a year.
  - Productivity appears below levels in countries with comparable wages.
- Public-private wage differentials:
  - Government wages roughly 50 percent higher than private-sector wages for Saudis; emerging markets average public-private wage premium is 12 percent.
- Policy levers:
  - Improve productivity through education and training.
  - Clearly communicate that government employment will not expand to lower reservation wages.
  - Consider wage subsidies for Saudis within a sustainable fiscal envelope.
  - Allow slow nominal growth (example: nominal growth at 1 percent below inflation would reduce real wages by 10 percent in a decade).
  - Reassess exchange rate policy in principle to align cost structures with competitors (noting distributional costs).
- Fiscal-neutral incentive options:
  - Reassess government spending (wages, healthcare, education, housing, transfers) to support human capital and private-sector-relevant training.
  - Consider mechanisms that keep take-home incomes unchanged while aligning government wages with private-sector skill-level wages.
  - Options include negative taxes on private sector wages with a cap—fiscal costs must be managed.

### Industrial policy and sector selection
- Rationale:
  - Sector-specific support may be needed alongside general reforms (big-push theory; addressing risk and coordination failures).
  - Presence of oil can discourage entry into innovative tradable sectors; industrial policies must recognize opportunity costs.
- Criteria for sector choice:
  - Link with existing strengths, export potential, and innovation capacity.
  - IMF (2018a) finds Saudi non-oil exports are smaller, less diversified, and less sophisticated than peers.
- NIDLP priorities and cautions:
  - High-level priorities: pharmaceuticals, automotive and military production, renewable energy, desalination; emphasis on new technologies (3D printing, automation, big data).
  - Plans should be realistic about existing capacity and overlap with other GCC countries.

### Building clusters, partnerships, and finance
- Clusters and agglomeration:
  - Targeted clusters can generate knowledge spillovers and innovation (examples: Silicon Valley, Singapore’s petrochemical cluster).
- Targeted subsidies and finance:
  - Subsidies, incentives, development banks, venture capital, and matching investments can support infant industries.
  - Export subsidies and tax incentives have been used historically to encourage tradable-sector entry.
- Foreign partners:
  - Joint ventures and foreign investment are crucial for technology transfer and capacity building.
  - Public sector may need to enter joint ventures for large investments.
- PIF role:
  - Where PIF invests, arms-length, commercial management with competition supports efficiency.

### Human capital development and sector prioritization
- Human capital is essential for advanced-sector know-how and must align with prioritized sectors.
- Technical training and apprenticeships can be highly valuable (examples: Switzerland, Germany).
- Singapore’s sequencing: initial focus on technicians, engineers, local managers, then expanded to doctoral scholarships.
- Well-sequenced plans matter: prioritize sectors when education, infrastructure, and technological foundations are ready.
- Discipline in industrial policy:
  - Risks: supporting inefficiency, concentrating rents, and propping up “national champions”.
  - Two enforcement mechanisms: export markets and domestic competition.
  - Best practices: support sectors not firms, use export performance and competition to withdraw support where unsustainable, involve independent experts, support many attempts, and withdraw failing interventions.

### Implications for Saudi Arabia — operational guidance
- Cluster development and FDI:
  - Co-locate industrial cities and logistics hubs with ports/airports and research centers.
  - Improve environment for FDI; licensing requirements may be a current roadblock.
  - Integrate foreign enterprises into the Saudi economy to facilitate technology transfer.
- Use incentives prudently and enforce accountability:
  - NIDLP incentives include loans up to 75 percent of invested capital, equity investments, tax incentives, export financing, low input prices, and subsidies up to 15 percent of value added for car manufacturers.
  - Export markets and domestic competition should be used to enforce accountability (example: Aramco requires suppliers to export at least 30 percent of production without subsidies).
  - PIF involvement should maintain arms-length commercial management and room for competition.
  - Develop a range of financing options and expand venture capital (several VC firms recently licensed).
- Human capital and wages:
  - Improve vocational training linked to industrial entrants (example: Royal Commission in Jubail operates colleges and vocational training aligned with petrochemicals sector).
  - Address high government wages to improve private-sector incentives.
  - Without closing the productivity-wage gap, diversification barriers persist.
- WTO considerations:
  - Design policies mindful of WTO rules that prohibit subsidies with direct export conditionality and domestic content requirements.

### Revenue and fiscal reforms — non-oil revenue measures (implementation and impacts)
- Major measures implemented:
  - VAT introduced January 2018.
  - Excise taxes on tobacco and tobacco products and carbonated and energy drinks implemented July 2017; expansion to SSBs and e-cigarettes announced December 2019.
  - Expatriate worker fees raised starting January 2018; dependent fees introduced July 2017.
  - Fees/taxes introduced on hotel stays, visas, cinemas, and vacant land.
- Aggregate 2018 impact of new non-oil revenue measures:
  - Total SAR 102.7 billion, equal to 3.5 percent of GDP (VAT SAR 46.7 billion, Excises SAR 12.4 billion, Expat levy SAR 28.9 billion, Other revenues SAR 14.7 billion).
  - Memo: Revenues from energy price reforms SAR 41.3 billion (1.4 percent of GDP).
- VAT implementation and administration:
  - GCC VAT agreement (June 2016): single tax rate of 5 percent; zero rating for exports; compulsory registration threshold of $100,000 (voluntary registration above $50,000).
  - Saudi VAT law approved July 2017; mandatory registration threshold set at SAR 1 million in first year; reduced to SAR 375,000 on January 1, 2019.
  - Registration growth: 92,535 on January 1, 2018; 137,139 on October 31, 2018; 158,194 on December 31, 2018; 173,208 on March 31, 2019.
  - VAT department staff at end-2018: around 800 (nearly one half female).
  - 2018 gross VAT collections: SAR 60,163 million; 2018 net VAT collections after refunds: SAR 46.7 billion.
  - VAT revenue in 2018: 1.6 percent of GDP (2.4 percent of non-oil GDP).
  - C-efficiency ratio in 2018: 0.53.
- Excise taxes:
  - 2018 excise revenues: Total SAR 12.4 billion (0.4 percent of GDP).
    - Tobacco and related products SAR 8.5 billion.
    - Carbonated drinks SAR 3.4 billion.
    - Energy drinks SAR 0.5 billion.
  - Around 70 percent of excise revenue came from tobacco products.
  - December 2019 announcement broadened coverage to all SSBs and e-cigarettes.
- Expatriate levies:
  - Fee schedule highlights:
    - 2011: SAR 200 a month per expatriate in firms where expatriates outnumber Saudis.
    - January 2018: increased to SAR 400 a month (SAR 300 per person in enterprises where expatriates ≤ Saudis).
    - January 2019: increased to SAR 600 a month (SAR 500 a month in enterprises with parity).
    - Scheduled January 2020 increase to SAR 800 a month (SAR 700 a month where parity).
    - Dependent fees: introduced July 2017 at SAR 100 a month; increased to SAR 200 a month in July 2018; scheduled to increase to SAR 400 a month by July 2020.
  - Revenues and affected population:
    - Average of 7.2 million expatriates employed in the private sector in 2018 (GOSI data).
    - Around 3 million dependents (General Authority of Statistics data).
    - 2018 revenues from expatriate fee increases/new fees: SAR 28.9 billion (1 percent of GDP).
- Other non-oil revenue measures:
  - Aggregate around SAR 15 billion (0.5 percent of GDP) in 2018, including SAR 10.1 billion from higher electricity tariffs.
  - Higher visa fees generated SAR 3.2 billion in 2018.
  - Fee on vacant land generated ~SAR 1 billion in 2018.
  - Tax on hotel rooms raised ~SAR 0.5 billion in 2018.
- Impact on fiscal structure:
  - 2012–15: Non-oil revenue 4.8 percent of GDP; tax revenues less than 3 percent of GDP.
  - 2018: New non-oil revenue measures raised 3.5 percent of GDP; total non-oil revenues rose to 8.2 percent of GDP and 12.4 percent of non-oil GDP (excluding anti-corruption settlements).
  - Non-oil tax revenues increased to 4.8 percent of GDP in 2018.
  - Staff projection: if announced non-oil revenue reforms implemented in full, non-oil revenues could reach 10 percent of GDP in 2024.

### Macroeconomic and distributional effects — activity, inflation, and mitigation
- Activity and inflation:
  - Monthly indicators strengthened in November–December 2017 (pre-VAT), then turned down in January 2018; PMI fell sharply.
  - Private non-oil GDP growth strengthened in 2017H2 and slowed in 2018Q1; indicators rebounded through 2018 though PMI remained below late-2017 levels.
  - CPI increased by 4 percent (m/m) in January 2018; stripping out gasoline and electricity price increases, CPI rose by 1.6 percent (m/m). Second-round effects were minimal.
- Expatriate departures and consumption:
  - Expatriate employment in the private sector declined by nearly 1 million during 2018 (GOSI data).
  - Non-Saudi consumption accounts for close to 30 percent of total private consumption.
  - Exit of nearly 1 million expatriates could have reduced:
    - real private consumption growth by 2¼ percentage points in 2018; and
    - real GDP growth by around ½-¾ percentage points in 2018 (after accounting for lower imports).
  - Rent component of CPI fell by 11 percent since end-2017.
  - Remittance outflows declined by 7.5 percent in 2018.
- Mitigation measures and net fiscal impact in 2018:
  - Citizens’ Accounts (introduced December 2017) and cost-of-living allowances (decreed January 2018) mitigated household impacts.
  - Fiscal spending on Citizens’ Accounts and cost-of-living allowances totaled SAR 70 billion in 2018.
  - Revenues raised from non-oil revenue and energy price reforms were SAR 144 billion in 2018.
  - Net fiscal impact was around 2.5 percent of GDP in 2018.

### DSGE simulations (SAMA model) — scenarios and outcomes
- Four simulations (relative to baseline of no policy change):
  1. introduction of a 5 percent VAT;
  2. VAT with transfers from government to households;
  3. VAT plus an increase in government consumption so net fiscal impact is zero;
  4. expatriate levy modeled as increases in labor taxes equivalent to 1 percent of GDP.
- Key simulated effects:
  - Real private consumption and real investment are negatively affected by the VAT and expatriate levy.
  - Consumption is more affected by the VAT; investment is more affected by the expatriate levy.
  - Imports decline relative to baseline, limiting negative effects on real GDP.
  - Real GDP growth declines by around 0.5-0.6 percentage points in the first year under the shocks.
  - Employment declines, particularly with the expatriate levy.
  - Inflation jumps with VAT introduction but is temporary; expatriate levy has limited inflation effect.
  - Compensation measures (transfers or higher government consumption) reduce the growth impact (to about 0.2 pp) but erode fiscal benefits.
- SAMA DSGE model features:
  - Two household types, three producer types, oil as endowment industry, government and central bank interactions, and multi-asset financial behavior. Visual flowcharts in the source illustrate flows.

### Policy recommendations — prioritized actions
- Diversification strategy:
  - Pursue reforms that improve the business environment alongside narrowly targeted sector support.
  - Use SEZs as temporary instruments while scaling reforms economy-wide.
- Industrial policy design:
  - Target sectors linked to existing strengths, with export potential and scope for innovation.
  - Support sectors not individual firms; employ export benchmarks and domestic competition to enforce accountability.
  - Use independent experts, support multiple attempts, and withdraw support if progress is lacking.
- Human capital and wages:
  - Invest in targeted human capital development and vocational training tied to priority sectors.
  - Address public-private wage gaps and align incentives so Saudis work in private sector at competitive wages.
- Fiscal and revenue policy:
  - Build on successful VAT implementation: strengthen GAZT capacity, compliance, and risk-based strategies; consider VAT-rate adjustments in GCC coordination.
  - Monitor excise taxes for health and revenue trade-offs; enforce anti-smuggling measures.
  - Implement expatriate-levy increases more gradually to mitigate short-term business and macro effects.
  - Reassess smaller fees for consistency with policy objectives (avoid measures that deter tourism/entertainment without revenue gains).
  - Target compensation to low-income households to preserve net fiscal benefits.
- Evaluation and opportunity costs:
  - Carefully evaluate domestic investment projects against fiscal costs and the opportunity cost of foregone financial diversification (large asset accumulation requirements).

*Source: IMF staff — "POLICIES TO DRIVE DIVERSIFICATION FOR SAUDI ARABIA" (June 21, 2019).*

### References _______________________________________________________________________________ 19

### POLICIES TO DRIVE DIVERSIFICATION FOR SAUDI ARABIA

### A. Introduction — context and current structure
- Living standards have improved substantially over the decades; revenue from oil exports has strongly supported growth in income per capita and Saudi Arabia has improved on the Human Development Index.
- Oil remains important but:
  - Oil directly accounts for more than 40 percent of GDP.
  - Oil accounts for nearly 70 percent of fiscal revenues.
  - Oil accounts for close to 80 percent of exports.
- Non-oil activity is highly dependent on government outlays financed by oil revenues.
- Export composition (2017):
  - Oil exports were $170 billion (75 percent of total).
  - Petrochemical exports were $31 billion.
  - Other non-oil exports were $21 billion (less than the $22 billion recorded in 2011).
- Non-oil exports remain concentrated; petrochemical and plastics sectors benefit from low cost energy inputs, an advantage that may diminish given energy reform plans.

### Box 1 — Saudi Arabia’s plans to grow and diversify the economy (summary of authorities’ plans and targets)
- Vision 2030 targets and priorities:
  - Increase the private sector’s contribution to GDP from 40 percent in 2018 to 65 percent by 2030.
  - Enable SME development.
  - Grow the economy from the 19th largest to among the 15th largest economy in the world.
- Priority sectors identified: Retail, Manufacturing, Mining, Logistics, Renewable energy, Tourism and entertainment.
- Selected sector-specific targets and facts:
  - Retail: employed 1.5 million workers in 2018, of whom only 0.3 million were Saudis.
  - Manufacturing: focus on petrochemicals, plastics, localization in the oil and gas industry, automotive, defense, and pharmaceutical manufacturing.
  - Mining: government sees a potential contribution to GDP of nearly SAR 100 billion by 2020 (up from SAR 12.5 billion in 2018) and 90,000 jobs in the mining sector.
  - Renewable energy: aim to generate nearly 60 gigawatts of renewable energy.
  - Tourism and entertainment: aspire to double domestic household spending on entertainment and develop a SAR 30 billion recreational services market.
- Structural reforms and enabling measures:
  - Competitiveness: in 2018 Saudi Arabia rose two places in the Global Competitiveness Index, to 39th; aim to be among the top ten.
  - Special Economic Zones (SEZs): establishing SEZs focused on logistics, tourism, industry, and finance; NEOM cited as an example.
  - Foreign Direct Investment (FDI): aim to increase FDI from under 1 percent to 6 percent of GDP by 2030.
  - Education: 2019 budget allocated SAR 1 billion to support universities in enhancing skills for a diversified and knowledge-based economy.
  - Mining: centralized surveys and development of a licensing regime.
  - Tourism projects: Qiddiya and the Red Sea project described as domestic and international tourism initiatives respectively.
  - Subsidy reform: reassessing criteria for energy subsidies to maximize government income and eliminate market distortions.
  - Privatization: privatization of state-owned assets, including leading national companies, is being discussed.
  - Local content requirements: increase share of domestic procurement to encourage local supply chains.
  - GCC cooperation: aim to implement a GCC common market and shared infrastructure.
- Role and targets for the Public Investment Fund (PIF):
  - PIF assets increased from SAR 570 billion to SAR 840 billion.
  - Government aims to increase PIF assets to over SAR 7 trillion by 2030.
  - Annual return target of 4–5 percent.
  - PIF expects to invest SAR 210 billion (7 percent of GDP) over the coming three years in advanced technology and R&D, locally and internationally.
  - Mega-project support includes NEOM, Red Sea, and Qiddiya.
- Investment needs to realize Vision 2030:
  - If successful, plans would require close to $1 trillion in investment.
  - NEOM project expects to attract investments of $500 billion.
  - NIDLP expects to attract investments of $426 billion.
  - Significant private sector involvement and training/equipping Saudis with necessary skills and wage expectations are essential.

### B. Why is diversification important? — jobs, shocks, and intergenerational resilience
- Jobs and fiscal constraints:
  - With a young population and rising labor force participation, up to 1 million jobs could be needed over the next five years.
  - Adding 1 million government jobs at the current average government pay for Saudis (about SAR 11,000 per month) would increase the wage bill by 4.5 percent of GDP.
  - The non-oil private sector must ultimately be the source of job creation; accommodating large numbers of young Saudis in government employment is not feasible.
- Managing oil-market risks:
  - Two types of important oil shocks:
    - Temporary variation (example: Brent prices doubled to well above $100 a barrel from 2009 to 2011, dipped below $50 a barrel in 2016).
    - More permanent shifts (demand for oil may decline before reserves are exhausted).
  - Diversification reduces exposure to oil-price volatility and the macroeconomic volatility associated with high oil reliance.
  - Strengthening fiscal frameworks to delink government expenditures from oil prices would minimize transmission of oil price volatility to the economy.
- Sustaining living standards for future generations:
  - Large oil reserves notwithstanding, reserves will eventually be exhausted and their value may decline earlier than expected.
  - Sustaining living standards in a post-oil world will require financial accumulation or economic activity and exports outside of oil.

### C. Structure and sequencing of the paper (as presented)
- Section B examines why progress with diversification is crucial for job creation and reduced oil dependence.
- Section C observes that vast financial accumulation would be needed to provide a meaningful stream of alternative revenues.
- Section D turns to policies to drive diversification and highlights lessons from other countries’ experiences to guide industrial policy implementation.
- Section E concludes with a summary of key policy recommendations.

*Source: IMF staff — "POLICIES TO DRIVE DIVERSIFICATION FOR SAUDI ARABIA" (June 21, 2019).*

### 10.      Financial diversification—through accumulation of financial assets—can significantly

### 10.      Financial diversification—through accumulation of financial assets—can significantly

### Financial diversification: scale and limits
- Returns on financial investments can provide a component of revenues that does not directly rely on oil and can help diversify revenues even if economic activity and exports remain concentrated in oil.
- Vision 2030 emphasizes expanding the Public Investment Fund (PIF) well beyond its existing $300 billion in assets.
- Scale considerations and illustrative figures:
  - World’s largest sovereign wealth funds (SWFs) today holding roughly $1 trillion in assets.
  - Oil production of 10 million barrels per day, valued at $65 per barrel, translates to annual oil revenues of about $11,000 per Saudi at present.
  - Per data from the General Authority of Statistics (GASTAT), the Saudi population in 2018 was 20.1 million. At an annual growth of 2 percent, the population by 2030 would be 26.3 million.
  - Assuming the Saudi population increases to about 26 million by 2030, accumulated assets of $5–7 trillion would be needed to generate the same level of per capita revenues from financial assets.
  - The main text reports the asset base required to provide a per capita annuity of $11,000 per person for real returns ranging from 4-6 percent.

### Key takeaway on financial vs real diversification
- Vast accumulation of financial assets would be needed to provide Saudi Arabia with a meaningful alternative stream of external and fiscal revenues; financial returns alone would not constitute adequate income replacement in a post-oil world unless asset accumulation reached very large scales.
- Foregone financial diversification constitutes an important opportunity cost of increased real investment.

### D. Policies to Drive Real Sector Diversification — objectives
- Real sector diversification is needed to develop a stronger non-oil economy and export base, create jobs, and provide external and fiscal revenues in the future.
- A comprehensive package of complementary policies is required, including:
  - Structural reforms that encourage private sector activity and investment.
  - Support to encourage entry and development in specific sectors with clear and transparent criteria.
  - Improvements in cost competitiveness and human capital.
- Domestic investments to support real sector diversification should be evaluated carefully given potential fiscal costs and opportunity costs.

### Structural reforms — creating an enabling environment
- Preconditions for growth include: a stable macroeconomic environment, a predictable and simple legal framework, robust institutions, a favorable business climate, appropriate incentives, low corruption, and a strong education system.
- Recent reforms and remaining weaknesses:
  - Bankruptcy and commercial pledge laws fill important legal gaps.
  - Efforts to streamline procedures for starting a business and clearing containers through ports should support business formation and trade.
  - Infrastructure has improved, with significant investments in transportation planned to close remaining gaps.
  - GCC countries face high tariffs in export markets; GCC-level trade negotiations and agreements to reduce tariffs could support exports.
  - The quality of education needs substantial improvement to equip workers with skills demanded by the private sector.
- Special Economic Zones (SEZs):
  - SEZs can support private activity and diversification but should be viewed as temporary solutions to frictions in the business environment until broader reforms are extended countrywide.
  - SEZs that offer special legal regimes should not substitute for nationwide improvements in contract enforcement and dispute resolution.

### Cost competitiveness and labor market incentives
- Wages and productivity:
  - Saudis employed in the private sector earn close to $25,000 a year on average.
  - Saudis in the government sector earn about $35,000 a year.
  - Productivity in Saudi Arabia seems to be below levels in countries with comparable wages.
- Public-private wage differentials and incentives:
  - Most Saudis are employed in the government sector, where wages are roughly 50 percent higher than for Saudis working in the private sector.
  - By comparison, the public-private wage premium in emerging markets averages 12 percent.
  - Limited incentives exist for Saudis to work in the private sector; working outside government may involve uncertainty and the need to acquire new skills.
- Policy levers to improve competitiveness and incentives:
  - Improve productivity through better education and training (a long-term endeavor).
  - Clearly communicate that government employment will not grow to lower reservation wages in the private sector.
  - Consider wage subsidies for Saudis to reduce wages private firms must offer, potentially within a sustainable fiscal envelope if combined with other fiscal reforms.
  - Allow slow nominal growth (e.g., nominal growth at 1 percent below inflation) to reduce real wages over time — for instance, such a path would reduce real wages by 10 percent in a decade.
  - Reassess exchange rate policy in principle to align cost structures with competitor countries (noting significant distributional costs).
- Fiscal-neutral and creative incentive solutions:
  - Evaluate government spending (wages, free healthcare and education, housing assistance, transfers) to ensure it supports human capital development and incentives toward private-sector-relevant education and training.
  - Consider mechanisms that keep take-home incomes unchanged while aligning government wages with private-sector skill-level wages.
  - Options to positively incentivize private sector entry include negative taxes on private sector wages with a cap to address distributional concerns — fiscal costs must be carefully managed.

### Industrial policies and sector selection
- Rationale for targeted industrial policy:
  - Meaningful progress may require sector-specific support in addition to general structural reforms (big-push theory; risk and coordination failures).
  - The presence of oil can discourage entry into innovative tradable sectors; well-structured industrial policies recognizing the opportunity cost of domestic investments may aid diversification.
- Criteria for sector choice:
  - Link with existing economic strengths, potential to expand exports, and capacity to innovate.
  - Examples from other countries:
    - Malaysia: vertical expansion in rubber and palm oil value chains.
    - Mexico: horizontal diversification around existing automotive sector.
  - IMF (2018a) finds Saudi Arabia’s non-oil exports are smaller, less diversified, and less sophisticated than in countries with similar fundamentals.
  - Prioritize sectors with significant room for continued innovation to preserve dynamism.
- NIDLP strategy highlights:
  - Industrial policy strategy to promote development in industry, mining, energy, and logistics and create jobs for Saudis.
  - Identified strengths: cost advantage in inputs for petrochemicals and energy, potential mineral resources, and a large domestic market.
  - High-level priorities include pharmaceuticals, automotive and military production, renewable energy, and desalination; specific investment opportunities are sometimes very detailed.
  - Emphasizes new technologies such as 3D printing, automation, and big data techniques.
  - Plans should be realistic about existing capacity and similar sector ambitions in other GCC countries.

### Building expertise, clusters, and international partnerships
- Clusters and agglomeration:
  - Investments in specific clusters can create self-reinforcing cycles of knowledge acquisition and innovation across firms, workers, and shared infrastructure.
  - Successful examples: Silicon Valley (organic development), Singapore’s petrochemical cluster (active policy approach).
- Role of targeted subsidies, incentives, and finance:
  - Targeted subsidies, incentives, and access to finance (development banks, venture capital, matching investments) can enable entrepreneurial risk taking in infant industries.
  - Export subsidies and tax incentives have been used to encourage innovation and entry into tradable sectors in advanced economies.
- Importance of foreign partners:
  - Working with foreign partners, inviting foreign investment, and entering joint ventures with leading foreign companies can be crucial for acquiring technology and improving domestic capacity.
  - When large investments are required, the public sector may need to enter joint ventures.

*Source: IMF staff calculations and country authorities (chapter content provided).*

### 28.      Deliberate investments in human capital, targeted at priority sectors, are essential for

### 28.      Deliberate investments in human capital, targeted at priority sectors, are essential for

### Development of human capital and sector prioritization
- Development of human capital is an essential component of building valuable know-how in advanced sectors.
- Plans to prioritize specific sectors must be accompanied by targeted investments in human capital linked to the same sectors (Callen and others 2014).
- Technical training can be more valuable than other types of higher education in some cases; example: apprenticeship programs are a more common path after high school than university in Switzerland and Germany (Cherif and Hasanov 2016).
- Singapore’s approach:
  - Initially focused on training technicians, engineers, and local managers.
  - Increasing emphasis on scholarships extending to the doctoral level at both local and foreign universities (Yeo 2016).
- Well-sequenced plans with long-term ambition matter:
  - Singapore chose precision engineering, chemicals, and most recently biomedical sciences as priorities, eschewing more advanced sectors until human capital, infrastructure, and technological foundations were ready (Yeo 2016).
  - China experimented with special economic arrangements and zones to identify successful innovations, then applied lessons economy-wide, allowing market forces to play a major role (McMillan and Naughton 1992).

### Ensuring discipline in industrial policy
- Industrial policy risks supporting inefficiency and concentrating rents among small groups or “national champions” without broader economic impact (Callen and others 2014, Studwell 2013).
- Two key mechanisms to enforce discipline: export markets and competition.
- Export markets as objective benchmark:
  - Exporting to consumers with choice provides an external benchmark to assess sustainability without ongoing support.
  - Support can be discontinued where sustainability seems unachievable; export markets are also a source of demand at scale.
- Korea’s experience:
  - Under the Heavy and Chemical Industrialization Plan in the 1970s, access to favorable bank credit required letters of credit from foreign buyers and meeting export-related criteria including export volumes, minimum number of export items, destinations, and overseas branches (Woo 2016).
  - Industrial groups unable to meet these conditions did not receive continued support (Studwell 2013).
- Support sectors, not individual firms:
  - Domestic competition helps ensure discipline; supporting a single firm makes withdrawal of support difficult even if inefficient.
  - Japan and Korea supported multiple industrial groups that competed against each other (Studwell 2013).
  - State subsidies in China targeting more competitive sectors generated stronger positive effects on productivity and innovation (Aghion 2016).
  - Decentralized implementation in the United States was vital for development of general-purpose technologies.
  - Best practices: call on independent experts to identify narrow objectives, support many attempts to achieve objectives, and withdraw support in absence of sufficient progress (Mazzucato 2013).

### Implications for Saudi Arabia
- Cluster development and foreign partnerships:
  - Saudi Arabia plans to co-locate industrial cities and logistics hubs with access to ports or airports, supplemented by research centers.
  - FDI remains low despite an increase in new FDI licenses; creating an attractive environment for FDI is an important policy goal.
  - Licensing requirements for foreign investors may be a roadblock, even though foreign investment is formally permitted in most sectors.
  - Once foreign investment is attracted, integrating enterprises into the Saudi economy is important to facilitate technological capacity improvements.
- Use incentives prudently; enforce accountability with export and domestic competition:
  - The NIDLP outlines incentives including loans for up to 75 percent of invested capital, equity investments, tax incentives, export financing through an Exim bank, low prices for energy and other inputs, and subsidies as large as 15 percent of value added for car manufacturers.
  - Export markets and domestic competition should be used to enforce accountability and avoid inefficiency.
  - Example: when Aramco offers access to finance to encourage domestic suppliers, it requires these suppliers to export at least 30 percent of their production without subsidies to ensure global competitiveness.
  - Where the PIF plays a role, arms-length management on a commercial basis, with room for competition, will support efficiency.
  - Having a range of financing options tailored to new and established companies is important; significant efforts are under way to develop the venture capital ecosystem with several venture capital firms recently obtaining licenses to operate.
- Human capital and wages:
  - Improvements in human capital targeting specific skills needed in priority sectors are essential.
  - Precedent: The Royal Commission in Jubail operates colleges and vocational training with curricula designed to meet labor needs of specific industrial entrants focused in the petrochemicals sector.
  - Addressing high government wages will improve incentives for Saudis to work in the private sector and avail themselves of vocational training opportunities.
  - Without addressing the productivity-wage gap among nationals, barriers to diversification will be difficult to overcome.
  - Government interventions through infrastructure development and industry support will be less effective unless education and training are improved and wages paid to nationals by the private sector are in line with productivity.
- WTO consideration:
  - As Saudi Arabia is a WTO member, policies should be carefully designed in view of rules that prohibit subsidies with direct export conditionality and domestic content requirements.

### Conclusion and policy lessons
- Further diversification is important:
  - Many young Saudis will enter the labor market in coming years and will need jobs outside the government sector.
  - Oil prices are highly volatile with an uncertain long-term outlook; vast financial resource accumulation would be needed to sustain current Saudi incomes in the absence of diversification.
- Complementary policy mix required:
  - Reforms that improve the business environment should be pursued alongside policies that narrowly support specific sectors.
  - SEZs can temporarily address key constraints while broader reforms are pursued, but lessons from SEZ regulatory changes should be applied to the broader economy.
- Two main lessons from international experience:
  - Policies should aim to build expertise in specific clusters of innovative activity; strengthening human capital for export-oriented, competitive industries is essential, account for regional capacity and overlap with other GCC countries’ plans, and integrate innovative foreign ventures into the economy.
  - Export markets and competition should hold recipients of support accountable; comprehensive incentives should come with clear conditions and be withdrawn in absence of progress; encourage sectors, not firms, to preserve competition.
- Skills and wage incentives are necessary for success:
  - Policies are unlikely to succeed unless Saudis have the right skills and incentives to offer them at competitive wages; creative solutions will be needed to ensure government spending achieves social and economic objectives without impeding private sector employment.
- Fiscal costs and opportunity cost:
  - Efforts to drive economic diversification can be fiscally costly; foregone financial diversification is an important opportunity cost of domestic investments and these investments need careful evaluation.

*International Monetary Fund — Saudi Arabia staff report (excerpts).*

### 4.      A series of non-oil revenue reforms have been implemented as part of the recent fiscal

### 4.      A series of non-oil revenue reforms have been implemented as part of the recent fiscal

### Overview of reforms
- Major measures implemented:
  - Value-added tax (VAT) introduced January 2018.
  - Excise taxes on tobacco and tobacco products and carbonated and energy drinks implemented July 2017; announced expansion to sugar-sweetened beverages (SSBs) and e-cigarettes in December 2019.
  - Fees on expatriate workers raised starting January 2018 and fees introduced on dependents starting July 2017.
  - Various fees/taxes introduced on hotel stays, visas, cinemas, and vacant land.
- Aggregate 2018 impact of new non-oil revenue measures:
  - Total SAR 102.7 billion, equal to 3.5 percent of GDP (VAT SAR 46.7 billion, Excises SAR 12.4 billion, Expat levy SAR 28.9 billion, Other revenues SAR 14.7 billion).
  - Memo: Revenues from energy price reforms SAR 41.3 billion (1.4 percent of GDP).

### VAT: legal framework, implementation, administration, and collections
- GCC VAT agreement (June 2016):
  - Single tax rate of 5 percent.
  - Allows countries to decide tax treatment of six sectors: education, health, real estate, domestic transportation, financial services, and oil and gas.
  - Allows zero rating for certain domestic food items from a common list (~100 items using HS codes), medicines and medical equipment; exports zero rated.
  - Compulsory registration threshold of $100,000 (voluntary registration above $50,000).
  - Agreement became effective when ratified by two members (Saudi Arabia and UAE).
- Saudi Arabia implementation:
  - VAT law approved and published July 2017; implementing regulations published September 2017.
  - Exemptions/zero-rated items limited to medicines and medical equipment, exports, and international transportation; residential rents and some financial services exempted.
  - Public services not subject to VAT.
  - Mandatory registration threshold set at SAR 1 million ($267,000) in the first year; reduced to SAR 375,000 ($100,000) on January 1, 2019.
  - For taxpayers with taxable supplies above SAR 40 million, VAT paid monthly; others quarterly.
- Registration and administration:
  - Comprehensive registration by General Authority of Zakat and Taxes (GAZT).
  - Registered businesses: 92,535 on January 1, 2018; 137,139 on October 31, 2018; 158,194 on December 31, 2018; 173,208 on March 31, 2019.
  - Growth concentrated in small and medium taxpayer segment (< SAR 40 million).
  - On-time filings: large taxpayers averaged over 99 percent in 2018; small and medium taxpayers around 84 percent.
  - VAT department staff at end-2018: around 800 (nearly one half female).
  - GAZT reorganized and further reorganization underway to integrate VAT with Zakat and corporate income tax functions.
- Collections and efficiency:
  - 2018 gross VAT collections: SAR 60,163 million (Table 2 total SAR 60,163 before refunds).
  - 2018 net VAT collections after refunds: SAR 46.7 billion.
  - Two-thirds of 2018 revenue collected from domestic transactions; one-third from imports.
  - VAT revenue in 2018: 1.6 percent of GDP (2.4 percent of non-oil GDP).
  - C-efficiency ratio in 2018: 0.53 (median level relative to advanced and emerging market countries).

### Excise taxes: scope, rates, and revenues
- GCC Agreement for Excise Taxes (May 2017) forms regional common framework.
- Saudi Arabia excise implementation:
  - Law affected June 2017; taxes implemented July 2017.
  - Rates: tobacco and related products taxed (contributing most revenue); energy drinks taxed at 100 percent; carbonated drinks taxed at 50 percent.
  - Announced broadening to cover all SSBs and e-cigarettes in December 2019.
- 2018 excise revenues:
  - Total SAR 12.4 billion (0.4 percent of GDP).
  - Revenue breakdown (Table 3):
    - Tobacco and related products SAR 8.5 billion.
    - Carbonated drinks SAR 3.4 billion.
    - Energy drinks SAR 0.5 billion.
  - Around 70 percent of excise revenue came from tobacco products.
- Observations:
  - Current coverage left some SSBs outside the tax net before December 2019 announcement, with substitution and health/revenue implications.
  - High excise rates heighten the need for enforcement to address smuggling and bootlegging where neighboring jurisdictions have not introduced excises.

### Levy on expatriate workers and dependents
- Historical and recent fee schedule:
  - 2011: SAR 200 a month per expatriate in firms where expatriates outnumber Saudis.
  - January 2018: increased to SAR 400 a month (SAR 300 per person in enterprises where expatriates ≤ Saudis).
  - January 2019: increased to SAR 600 a month (SAR 500 a month in enterprises with parity).
  - Scheduled January 2020 increase to SAR 800 a month (SAR 700 a month where parity).
  - Dependent fees: introduced July 2017 at SAR 100 a month per person; increased to SAR 200 a month in July 2018; scheduled to increase to SAR 400 a month by July 2020.
  - Fees are paid for the full year ahead at visa renewal, affecting household and company liquidity.
- Revenue and population affected:
  - Average of 7.2 million expatriates employed in the private sector in 2018 (GOSI data).
  - Around 3 million dependents (General Authority of Statistics data).
  - 2018 revenues from expatriate fee increases/new fees: SAR 28.9 billion (1 percent of GDP).
  - Revenues are budgeted to rise if scheduled fee increases are maintained, subject to expatriate departures.

### Other non-oil revenue measures
- Aggregate: around SAR 15 billion (0.5 percent of GDP) in 2018, which includes SAR 10.1 billion from higher electricity tariffs.
- Specific measures and 2018 revenue effects:
  - Higher visa fees (vary by nationality): generated SAR 3.2 billion in 2018; some 3-month multiple-entry business visas cost over $500 for certain nationalities.
  - Additional sales tax of 25 percent on cinema tickets introduced May 2018: raised negligible revenue in 2018.
  - Fee on vacant (white) land implemented March 2017 at 2.5 percent on undeveloped urban land; generated ~SAR 1 billion in 2018.
  - Tax on hotel rooms and serviced apartments introduced early 2018: 5 percent on 4- and 5-star hotels and 2.5 percent on other hotels; raised ~SAR 0.5 billion in 2018.
- Policy note:
  - Some fees (vacant land) have explicit economic objectives; others (visa, cinema, hotel taxes) appear to have limited economic rationale and provide little fiscal gain.

### Impact on non-oil revenues and fiscal structure
- Historical and 2018 figures:
  - 2012–15: Non-oil revenue 4.8 percent of GDP (8.2 percent of non-oil GDP); tax revenues less than 3 percent of GDP.
  - 2018: New non-oil revenue measures raised 3.5 percent of GDP; total non-oil revenues rose to 8.2 percent of GDP and 12.4 percent of non-oil GDP (both excluding anti-corruption settlements).
  - Non-oil tax revenues increased to 4.8 percent of GDP in 2018.
  - VAT revenues 2018: 1.6 percent of GDP (similar to UAE 1.7 percent of GDP).
- Staff projection:
  - If announced non-oil revenue reforms are implemented in full, staff estimates non-oil revenues will be 10 percent of GDP in 2024.
- Comparative position:
  - With VAT and excises, Saudi Arabia collects considerably more non-oil tax revenues (particularly on goods and services) than other GCC countries, but still less than some oil exporters in the comparator group.
  - Non-oil non-tax revenues in Saudi Arabia (excluding anti-corruption campaign revenues) are lower than the GCC average and similar to the comparator group.

### Macroeconomic effects: inflation and growth
- Implementation timing and identification challenges:
  - Multiple measures introduced simultaneously (VAT and expatriate fee increases in January 2018 along with gasoline and electricity price increases), complicating disentangling impacts.
  - Expatriate fee effects are staggered due to visa-renewal payment timing.
- Inflationary impact:
  - CPI increased by 4 percent (m/m) in January 2018; most of this due to energy price increases.
  - Stripping out gasoline and electricity price increases, CPI rose by 1.6 percent (m/m).
  - Second-round effects were minimal, attributed to credible monetary policy and weak domestic demand.
  - Comparative January 2018 CPI changes: UAE CPI increased 2.7 percent in January 2018; Bahrain CPI increased 1 percent in January 2019 (with no energy price or other fee changes introduced).

### Administrative and broader fiscal effects
- GAZT gains and spillovers:
  - Improved information on the corporate sector due to VAT administration has been used to strengthen tax administration; example: Zakat collections increased by 31 percent in 2018.
- Operational arrangements within GCC customs union:
  - Intended centralized automated clearing for intra-GCC VAT not yet designed; interim treatment: intra-GCC transfers treated same as non-GCC (exports zero rated, import VAT levied at point of entry).

*Source: Extract from the provided IMF content unit.*

### 23.      There appears to have been a

### 1sauea2019002 - 23.      There appears to have been a

### Impact of VAT and other reforms on activity and inflation
- Monthly economic indicators generally strengthened in November and December (likely pre-VAT purchases), then turned down in January 2018, with the PMI falling particularly sharply.
- Private non-oil GDP growth strengthened in 2017H2 and slowed in 2018Q1; indicators rebounded quite quickly, although the PMI remained below its level in late 2017 throughout 2018.
- The inflationary impact of the VAT was modest and temporary (Figure references in source).

### Expatriate fees and macroeconomic effects
- Expatriate employment in the private sector declined by nearly 1 million during 2018 (GOSI data).
- Consumption by non-Saudis accounts for close to 30 percent of total private consumption.
- The exit of nearly 1 million expatriates could have reduced:
  - real private consumption growth by 2¼ percentage points in 2018; and
  - real GDP growth by around ½-¾ percentage points in 2018 (after accounting for the impact of lower consumption on imports).
- Housing market effects: the rent component of the CPI has fallen by 11 percent since end-2017.
- Remittance outflows declined by 7.5 percent in 2018.
- The expatriate levy raises employment costs of expatriate workers and will reduce growth, at least in the short term, with an unclear impact on the employment of nationals.

### Mitigation measures and net fiscal impact in 2018
- Citizens’ Accounts (introduced December 2017) and cost-of-living allowances (decreed January 2018) were used to mitigate the reforms’ impact on households.
- Cost-of-living allowances covered government workers, military personnel, students, pensioners, and those on social security; originally introduced for one year and subsequently extended to end-2019.
- Fiscal spending on the Citizens’ Accounts and the cost-of-living allowances totaled SAR 70 billion in 2018.
- Revenues raised from the non-oil revenue and energy price reforms (including electricity tariff reform) were SAR 144 billion in 2018 (without accounting for improved administration of other taxes).
- The net fiscal impact was therefore around 2.5 percent of GDP in 2018.

### DSGE simulations (SAMA model) — scenarios and aggregate outcomes
- Four simulations presented (all relative to a baseline of no change in policies):
  1. introduction of a 5 percent VAT;
  2. the VAT with transfers from government to households;
  3. the VAT plus an increase in government consumption so the net fiscal impact is zero;
  4. an expatriate levy modelled through increases in labor taxes equivalent to 1 percent of GDP.
- Key simulated effects:
  - Real private consumption and real investment are negatively affected by the VAT and the expatriate levy.
  - Consumption is more affected by the VAT; investment is more affected by the expatriate levy (given it raises costs of production).
  - Imports decline relative to baseline as consumption and investment are import-intensive, thus limiting negative effects on real GDP growth.
  - Real GDP growth declines by around 0.5-0.6 percentage points (pp) in the first year under the shocks.
  - Employment declines, particularly with the expatriate levy.
  - Inflation jumps with the introduction of the VAT but the increase is temporary; the inflation impact of the expatriate levy is much more limited.
  - When government introduces compensation measures through transfers and/or increases its own consumption, the growth impact is lessened (to about 0.2 pp), but the fiscal benefits decline.

### Policy recommendations
- Build on the successful implementation of the VAT:
  - GAZT should continue to build its own and taxpayers’ capacities and ensure compliance remains high as the tax is expanded to more companies.
  - A robust revenue forecasting mechanism is needed as a basis for target setting in GAZT.
  - The compliance strategy should increasingly become risk-based and ensure it is not overly burdensome to companies or GAZT.
  - Consideration should be given to raising the VAT rate (described as very low by international standards), in consultation with other GCC countries.
- Continue to monitor the impact of excise taxes to balance health and revenue benefits.
- Implement planned increases in the levy on expatriate workers more gradually:
  - The levy supports reducing the wage gap between expatriates and nationals and both labor market and fiscal objectives.
  - Pace and timing could be reconsidered to mitigate impacts on businesses and the economy.
- Assess smaller fees and taxes for consistency with policy objectives:
  - High visa fees and taxes on hotels and the cinema tax do not raise significant revenues but may deter development in tourism and entertainment sectors.
- Ensure the social safety net is well targeted:
  - Mitigate costs of non-oil revenue and energy price reforms to low-income households through effective compensation mechanisms.
  - Targeting compensation is important to maximize net fiscal benefits.

### Appendix — SAMA DSGE model key features
- Purpose: support simulation analysis of longer-run macro developments and interactions with fiscal and monetary policies.
- Main sectors and agents:
  - Two types of households: intertemporally optimizing households and hand-to-mouth households.
  - Three types of producers: producers of local intermediate goods, producers of consumption goods, and producers of investment goods.
  - Primary exporters of oil (endowment industry).
  - The government and the central bank.
- Optimizing households have access to several types of financial and nonfinancial assets, can issue financial liabilities, purchase investment goods to accumulate physical capital, purchase local-currency government or foreign-issued foreign-currency bonds, or issue foreign-currency bonds to the rest of the world.
- Local production: two-stage supply chain where local producers of intermediate goods combine imported inputs with local labor and capital; final goods sold locally to households and government.
- Exporting industry: oil extraction is an endowment industry; sales revenue net of costs transferred to the government budget.
- Production sectors are delegated sectors (no net worth, do not issue debt or hold assets; revenues/losses transferred immediately to principals).
- Government finances: purchases consumption and investment goods, levies taxes (including VAT, input/excise tax, labor tax, windfall tax) and collects profit revenues from primary exports; makes net transfers to or collects net taxes from households; maintains a cash reserve at the central bank.
- Central bank builds official reserves by investing in foreign-issued foreign-currency debt.
- Three flowcharts (Figures A1–A3 in source) visualize goods/services/factor flows, government receipts and outlays, and financial positions.

*Source: IMF staff summary of Saudi Arabia Selected Issues chapter and SAMA DSGE model simulations as provided in the source content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1sauea2019002.pdf_