## 1sauea2022001 - 2030. They called for further efforts to strengthen non-oil revenue mobilization through tax policy

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### Fiscal policy and public finances
- Called for further efforts to strengthen non-oil revenue mobilization through tax policy measures—including by maintaining the current VAT rate—and enhancing revenue administration.
- Commended authorities for ongoing reforms to strengthen social safety nets through targeted schemes, which should help sustain energy price reforms.
- Welcomed continued improvements in public financial management and encouraged further efforts to increase fiscal transparency.
- Given the increasing role of the Public Investment Fund, encouraged quick completion of the ongoing work to establish a sovereign-asset liability management framework.
- Welcomed efforts to develop a fiscal rule, based on a long-term fiscal anchor, and encouraged broader coverage of the public sector to help reinforce commitment to fiscal sustainability.
- Fiscal outcomes and projections (central government):
  - Revenue (% GDP): 29.6 (2020), 30.9 (2021), 31.8 (2022), 32.0 (2023)
  - Expenditure (% GDP): 40.8 (2020), 33.2 (2021), 26.4 (2022), 27.1 (2023)
  - Fiscal balance (% GDP): -11.2 (2020), -2.3 (2021), 5.5 (2022), 4.9 (2023)
  - Public debt (% GDP): 32.4 (2020), 30.0 (2021), 24.3 (2022), 24.5 (2023)
  - Non-exported oil primary balance (% Nonoil GDP): -37.6 (2020), -29.0 (2021), -24.8 (2022), -22.0 (2023)
- Staff appraisal highlights:
  - The 2022 fiscal outturn will overperform the budget, with spending ceilings under the medium-term fiscal framework remaining appropriate to sustain fiscal adjustment while allowing for increased and targeted social spending.
  - Fiscal consolidation should continue to be pursued through non-oil revenue mobilization, energy price reforms, and the continued rollout of transformative structural fiscal reforms already initiated under Vision 2030.
  - Implementing a fiscal rule would help sustain a fiscal anchor over the medium term. An integrated asset-liability management framework would help the government assess Saudi Arabia’s fiscal stance and position.

### Outlook and risks
- Context: Saudi Arabia is recovering strongly from the pandemic-induced recession. Higher oil prices provide an opportunity for accelerating further the strong reform drive brought about under Vision 2030.
- Growth and inflation projections:
  - Real GDP growth: -4.1 (2020), 3.2 (2021), 7.6 (2022), 3.7 (2023) — overall GDP projected to grow by 7.6 percent in 2022.
  - Non-oil GDP growth: -2.5 (2020), 4.9 (2021), 4.2 (2022), 3.8 (2023) — non-oil growth projected to increase to 4.2 percent in 2022 before returning to medium-term potential of 4 percent.
  - CPI Inflation (avg, %): 3.4 (2020), 3.1 (2021), 2.8 (2022), 2.2 (2023) — headline inflation expected to pick up to 4 percent (yoy) in the second half of the year and remain contained at 2.8 percent on average in 2022; core inflation remains at 2.4 percent.
- External sector:
  - Current account (% GDP): -3.2 (2020), 5.3 (2021), 17.2 (2022), 13.8 (2023) — current account surplus expected to triple to around 17.2 percent of GDP in 2022.
  - Reserves (months imports): 25.3 (2020), 22.1 (2021), 25.3 (2022), 26.8 (2023)
  - Net foreign assets expected to increase by 22 percent in 2022 reaching a cover of 25.3 months of imports and the equivalent of 52 percent of GDP, with reserve buffers eventually stabilizing at about 27 months of imports in the medium term.
- Risks: Risks to the outlook are balanced. The war in Ukraine has increased commodity prices but should not slow down or reverse diversification efforts.

### Financial sector and monetary policy
- Welcomed continued resilience of the financial sector and central bank’s strong supervision.
- Welcomed progress toward implementing the Basel III standards in line with the internationally agreed timeline.
- Encouraged further enhancing supervisory scrutiny of credit risks, as warranted, including from rising mortgage lending, and continued strengthening of the AML/CFT framework.
- Agreed that the exchange rate peg to the U.S. dollar continues to serve Saudi Arabia’s economy well given the current economic structure.
- Financial indicators and developments:
  - Broad money (% change): 8.3 (2020), 7.4 (2021), 8.5 (2022), 7.6 (2023)
  - Credit to the private sector (% change): 14.0 (2020), 15.4 (2021), 13.4 (2022), 12.8 (2023)
  - External debt (% GDP): 33.8 (2020), 34.4 (2021), 28.5 (2022), 29.0 (2023)
  - Banking system: non-performing loan ratio 1.8 percent as of end-March 2022, provisioning exceeding 160 percent; credit to private sector expanded by 13.9 percent (y/y) in May 2022, mainly driven by mortgages and SME lending.
  - Liquidity actions: In June, SAMA reportedly deposited SAR50 bn ($13 bn) with commercial banks and lengthened the maturity of its repo instruments.

### Structural reforms and social policies
- Commended authorities for significant progress in implementing ambitious structural reform agenda.
- Welcomed the impressive pace of labor market reforms, particularly the doubling of female labor force participation, and encouraged continued actions in this area.
- Advised continued efforts to improve the regulatory and business environment, promote private investment, boost productivity, and address corruption.
- Welcomed the authorities’ ambitious climate commitments outlined in the Green Initiative and looked forward to the specific steps to achieve its goals.
- Commended ongoing reforms to strengthen social safety nets through targeted schemes to help sustain energy price reforms.
- Structural priorities highlighted:
  - increase women labor force participation further,
  - ensure PIF interventions play a catalytic role,
  - strengthen governance, and
  - roll out the Saudi green initiative.

### Key economic and social statistics
- Population: 34.1 million (2021)
- Quota: SDR 9,992.6 million (2.10% of total)
- Main products and exports: Oil and oil products (73%)
- Unemployment rate:
  - Overall (% total labor force): 7.4 (2020), 6.9 (2021), 6.0 (2022), ...
  - Nationals (% total labor force): 12.6 (2020), 11.0 (2021), 10.1 (2022), ...
- Other selected indicators:
  - FDI (% GDP): 0.8 (2020), 2.3 (2021), 0.8 (2022), 0.8 (2023)
  - REER (% change): 1.0 (2020), 0.9 (2021), 4.8 (2022), ...
  - Current account drivers: higher oil prices and stepped-up oil production improved the current account; current account registered a 5.3 percent of GDP surplus in 2021.

### Major macroeconomic projections and key statistics (Selected Economic Indicators, 2022–27)
- Real GDP (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 7.6; 3.7; 2.9; 2.9; 2.9; 3.0
- Non-oil real GDP (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 4.2; 3.8; 4.0; 4.0; 4.0; 4.0
- Consumer price index (average) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 2.8; 2.2; 2.0; 2.0; 2.0; 2.0
- Current account balance (percent of GDP) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 17.2; 13.8; 10.8; 7.9; 5.4; 2.9
- SAMA's total net foreign assets (US$ billions) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 535.5; 610.3; 685.5; 743.1; 780.6; 800.7
- SAMA's total net foreign assets, in months of imports of goods and services (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 25.3; 26.8; 28.0; 28.1; 27.1; 26.8
- Sources: Saudi Arabian authorities; and IMF staff estimates and projections.

### Upside scenarios and potential gains
- Higher than expected oil production and accelerated implementation of structural reforms and investments under Vision 2030 could further improve the outlook.
- Baseline is relatively conservative and does not fully incorporate the National Investment Strategy (NIS) potential.
- If well-executed, the SAR12.4 trillion NIS investment ramp-up, combined with:
  - improvements in public investment efficiency,
  - a modest improvement of the fiscal balance, and
  - growth dividends from the deepening of ongoing labor market reforms,
  could deliver a sustainable rise in non-oil potential GDP growth to about 8.8 percent by 2025 (Selected Issues Paper III).

### Downside risks
- Epidemiological: another COVID surge, domestically or abroad.
- External demand: lower oil prices due to lower global activity if the war in Ukraine has lasting effects; risks of an abrupt slowdown in China.
- Financial conditions: even tighter-than-expected global financial conditions.
- Fiscal and policy risks: pressures to spend oil windfalls and deviate from fiscal prudence (including through the PIF or National Development Fund (NDF)).
- Reform risks: risks to the reform agenda including due to inflationary pressures.
- Supply chains: further global supply chain pressures could constrain investment imports and thus hamper the rolling out of the NIS.

### Climate change and energy-transition risks
- Aramco has signaled commitment to significant investment supporting stabilization of the oil market and energy security.
- Saudi Arabia faces energy transition risks (and other climate-related risks such as drought) as the world moves towards a net zero emissions target.
- Achieving emissions targets will likely require both supply and demand policies (e.g., restricting investment flows into oil without CO2 carbon capture and storage; shift to low-carbon consumption), which would imply a more favorable oil price path allowing for more fiscal space.

### Impact of the war in Ukraine (selected findings)
- Direct adverse spillovers on Saudi Arabia from the war in Ukraine are negligible; the main impact is through higher oil prices.
- A $10 per barrel increase in international oil prices could increase non-oil GDP by about ½ percentage points (preliminary estimates using past patterns of government spending), though this impact could be lower if fiscal expenditures respond less than in the past.
- Fiscal position improves significantly with higher oil prices, even if accompanied by higher “implicit” energy subsidies.
- Trade links with Russia and Ukraine are limited:
  - Wheat imports account for only 2.7 percent of all Saudi imports.
  - Russia and Ukraine each accounted for about 2 and 3 percent respectively of the total of Saudi agricultural and food imports in 2021.
  - Russia was the 19th provider of imports (1.5 percent of total imports); Ukraine the 32nd (0.7 percent of total imports).
  - Russia and Ukraine combined accounted for 41 percent of imports of wheat, 25 percent of barley and 20 percent of maize.
- Food price inflation was at 4½ percent in May (year not specified in excerpt); food accounts for 18.8 percent of the CPI.
- Food and agricultural subsidies were 0.4 percent of GDP; an end-2021 one-off advance purchase of wheat acted as a buffer.
- Financial links to Russia are small; PIF exposure to Russia was less than ½ percent of assets under management.

### Authorities’ views and policy priorities
- Authorities agreed with staff’s projections for 2022 growth, noting strong reform momentum and removal of all Covid-19 related restrictions will result in a sustained rebound in non-oil activity.
- Agreed that inflation (as measured by the current basket) will remain contained, and emphasized the significant strengthening of the external position expected.
- Policy priorities include:
  - managing higher oil revenue in a sustainable way to allow for a more diversified and green economy;
  - maintaining fiscal discipline through broad-based fiscal consolidation;
  - ensuring financial stability post-COVID;
  - implementing structural reforms to support strong, sustainable, and inclusive growth.

### Fiscal policy: recent performance and outlook
- Fiscal surplus:
  - For the first time since 2013, a fiscal surplus of 5.5 percent of GDP is expected in 2022.
  - This reflects higher oil prices and production, rebounding non-oil activity (boosting VAT revenue), continued restraint on capital expenditure, reduced current spending from greater private sector participation, wage-bill efficiency improvements, and phasing out of COVID-19 related measures.
- Staff assesses some fiscal space with meaningful temporary fiscal measures possible (such as increases in social spending, preferably targeted).
- July decision measures total ½ percent of GDP (extend provisions for social safety nets, increase food subsidies and restocking of basic commodities).

### Medium-term fiscal stance, PIH consistency and proposed fiscal rule
- Mission’s baseline relies on budget policies and spending ceilings under the medium-term fiscal framework.
- VAT rate has been tripled (to 15 percent); most non-oil fiscal adjustment expected through expenditure cuts, half frontloaded over the next two years.
- Medium-term staff view:
  - Non-oil primary deficit would reach about 20 percent of non-oil GDP by 2027.
  - CGNFA would turn positive by 2024 (and then stabilize in real terms).
- To reach and keep applying the PIH norm beyond 2027, a gradual adjustment of ½ percent of GDP a year would be needed.
- Proposed fiscal rule:
  - An expenditure rule with 1 ½-2 percent real growth in spending, based on a fiscal anchor derived from the PIH, with a norm based on prudent assumptions.
  - Increase institutional coverage to include PIF, NDF and other entities; elements of PIF and NDF spending plans expected to invest SAR 150bn and 50bn annually (or about 3¾ and 1¼ percent of 2022 GDP respectively) should inform rule design.
  - Accelerate work towards a sovereign asset and liability management framework, including an asset liability management committee and a public sector balance sheet encompassing the NDF and PIF (currently recorded as private), government reserves at SAMA and other components.

### Structural and revenue reforms to support long-term consolidation
- Non-oil revenue and tax policy:
  - Non-oil revenue has doubled over the past four years to reach 12.8 percent of GDP in 2021, still well-below the G20 average.
  - Tax gap with Saudi Arabia’s estimated tax capacity was reduced to around 10 percent of non-oil GDP (from 15 percent in 2019).
  - Staff recommended maintaining the new 15 percent VAT rate while broadening reform plans to excises/customs duties, corporate income taxation, expat levies and property taxation.
  - Staff encouraged a full-fledged revenue administration strategy with targets and costing of detailed revenue initiatives (taxpayer registration, compliance improvement, arrears management).
- Energy price reforms:
  - Energy price reforms initiated in 2016 and 2018 helped halve subsidies between 2010 and 2020.
  - With higher international oil prices and a cap on gasoline prices established in July, compensation for energy products is rising; Aramco’s financial statements imply compensation in 2021 of almost 5 percent of GDP.
  - Staff welcomes end-2021 measures (diesel increased by a step of 21 percent; asphalt increases) and supports additional increases envisaged on four products in 2022.
  - Vision 2030 objective: domestic prices gradually reach market prices for all energy products by 2030.
  - Staff recommends: lift the cap on gasoline prices; adjust the current pricing formula to allow faster increases for other fuel prices, water and electricity; regularly disclose estimates of yields from energy price reforms in the budget.
- Social safety net strengthening:
  - Increase targeted social spending in conjunction with energy price and tax reforms.
  - Support stepped-up use of the Damaan program (introduced November 2021) and the Citizens’ Account Program.
  - Efforts to identify gaps and overlaps across subsidy programs and create a streamlined system have been submitted to the Council of Ministers.
  - Plans to provide food support through school meals and food banks in consultation with civil society organizations.

### Social protection coverage and programs
- 2.8 million households covering about 13.1 million citizens. Currently, only 77 percent of those eligible are benefiting from the program and SAR23 billion was disbursed under the program.
- Damaan (reformed):
  - Conditional cash transfer program launched in November 2021; currently targets 394,301 households; expected to be fully functional based on the new eligibility criteria by mid-2023.
- Hafiz: incentive-based program to support job finding, skills and resources.
- Saned: unemployment insurance scheme for Saudi beneficiaries under the age of fifty-nine who have lost employment.
- Non-Saudi citizens: benefit from the occupational hazard program that includes medical care coverage, a daily allowance, and compensation for disability.
- Data and monitoring: publishing data on poverty would be useful to monitor progress in line with Sustainable Development Goals and the government’s own KPIs.

### Public debt management and fiscal framework, PIF and PSPs
- Public debt remains low and is sustainable.
- Over the medium term, public debt is expected to remain constant in nominal terms as the Kingdom plans to refinance existing debt instead of using revenue windfalls for repaying debt.
- Staff supports debt strategy elements:
  - Lengthening debt maturities.
  - Reducing refinancing costs.
  - Pre-financing in favorable times.
  - Building a yield curve in domestic and international markets.
- PSP/PPPs and asset sales:
  - About 211 projects for private sector participation (mostly through PPPs) have been identified and are at various stages of development.
  - Staff welcomes maximum liability caps specified in each contract and urges acceleration of frameworks for monitoring contingent liabilities.
- PIF interventions:
  - PIF interventions should be subjected to rigorous cost-benefit analysis; PIF monitoring of leverage, liquidity and interest coverage ratios is ongoing.

### Monetary policy, banking and financial stability
- SAMA raised its policy rates by 125 basis points since March 2022; further hikes expected in line with the US monetary policy tightening cycle.
- Banking structure characteristics:
  - Low wholesale funding.
  - 65 percent non-interest-bearing deposits.
  - Corporate sector borrowing at variable rates reset every 3 to 6 months.
- Mortgage lending grew by 41 percent over the past year; staff supports enhanced supervisory scrutiny and monitoring of rising mortgage lending.
- Basel III implementation:
  - Frameworks for leverage, operational risk and market risk issued in Q3 2021.
  - Credit risk, counterparty credit risk and disclosure requirements issued in Q1 2022.
  - Planned effective implementation date: early 2023.

### Financial digitalization and capital markets
- Active fintech companies grew by about 37 percent in 2021 to about 82 companies.
- 3 digital banks licensed by SAMA.
- Share of electronic payments in retail exceeded 57 percent of total transactions in 2021.
- Financial inclusion: 83 percent of the adult population now owning a bank account (up from 71 percent in 2019).
- Saudi Arabia became the world’s largest issuer of Sukuk; issuance increased by about 19 percent (yoy) in 2021.

### Energy Price Reform (EPR), subsidies and Aramco mechanics
- EPR objectives: reach market/export prices by 2030 via EPR 1 (2016) and EPR 2 (2018).
- Authorities estimate EPR 1 and EPR 2 yields at 23 and 25 billion SAR respectively, or a total of 1 ½ percent of GDP in 2021.
- Gasoline prices were capped since July 2021 at $0.62 a liter (about 50-75 percent of international gasoline prices).
- Aramco’s “other income related to sales” reached 49.9 bn SAR (13.3 bn USD) in Q1 2022, an increase of 78 percent compared to Q1 2021.
- IMF estimates (2020): estimated level of subsidization for Saudi Arabia around 7 percent of GDP for all fuels, natural gas and electricity in 2020.
- Staff policy recommendations on energy pricing:
  - Continue and resume energy price reforms toward returning energy prices to international levels.
  - Accompany reforms with targeted social safety net spending and use of digitalized registries for compensation.
  - Disclose costs of subsidization in budget processes to improve transparency.

### Inflation passthrough (Annex II) — findings and policy implications
- Inflation has hovered around 2 percent historically; CPI composition notes:
  - Housing rental component about 21 percent of CPI basket (rent for a villa 11.5 percent; rent for a floor in the villa 4.4 percent).
  - Transport about 13 percent of CPI basket; purchase of motor cars about 63 percent of transport basket.
- Pass-through analysis (local projections, Jan 2014–Dec 2021):
  - Low pass-through of international food and oil prices to domestic prices.
  - A 1 percent increase in NEER is estimated to lead to a 0.6 percent decline in inflation after about nine months.
  - A 1 standard deviation increase in the GSCPI is estimated to raise domestic inflation by about 0.02 percentage points 12 months after the shock.
- Policy implications:
  - Anchor fiscal policy in a medium-term framework.
  - Monitor supply chain indicators and consider developing a PPI.
  - Maintain exchange rate peg policy while reviewing periodically; use buffers and external borrowing to smooth fiscal adjustment if needed.
  - Targeted price controls/subsidies for key food items and regulated fuel pricing where appropriate.

### Structural reform priorities under Vision 2030
- Diversification targets and quantitative objectives:
  - SMEs to account for 35 percent of GDP from the current 20 percent.
  - Private sector to contribute 65 percent of GDP from its present 40 percent.
  - Increase FDI from 3.8 percent to 5.7 percent of GDP.
  - Raise the share of non-oil exports in non-oil GDP from 16 percent to 50 percent.
  - Net zero emissions by 2060.
- Industrial policy guidance:
  - Focus on export orientation, technology and innovation, accountability for support received, and minimizing fiscal risks from incentives.
  - SEZs and local procurement strategies should be time-bound with exit criteria and sunset clauses.
- Labor market reforms:
  - Increase female labor participation (female participation for nationals rose to 33.6 percent as of Q1 2022; 34.9 percent in 2021 noted elsewhere).
  - Continue containing public sector employment and address skill mismatches.
  - Reforms to Kafala and development of a skills-based migrant visa system.

### Saudi Green Initiative — targets and initiatives (selected)
- Renewable and hydrogen targets:
  - Install 27.3GW of renewable capacity by 2025, and then 57.8GW by 2030 (0.3GW installed as of 2020).
  - Ambition to produce 4 Mtpa hydrogen by 2030.
  - Increase renewable share to 50 percent of electricity generation by 2030.
  - Updated NDC aiming to reduce, capture and remove emissions by 278mtpa of CO2eq relative to a “dynamic baseline”.
  - Net zero GHG emissions by 2060.
- EV and mobility:
  - Order for up to 100,000 EV from Lucid Motors within the next ten years; Saudi factory completion by 2025 or 2026 with annual capacity of 150,000 EV; 85 percent of production exported.
- Other initiatives:
  - Plant 10 billion trees (Study 2023); Green Mosques (2023); Mangrove Plantation pilot at Jeddah Port (2023); Desert Preservation Initiative (2025); designate 10 biodiversity protection areas of 977 sq.km (2025); raise protected areas to more than 30 percent.
  - Change energy mix with 60-100 bn USD in additional annual capital expenditures.

### Data, statistics and governance
- Data improvements underway: updated national accounts classification (2021), CPI rebase after 2022 census, planned PPI, improved publication of new mortgage and SME finance data.
- Fiscal transparency progress: expanded Budget Statement, pre-budget statement, quarterly budget reports, mid-year review and year-end report; TSA rationalization of 10,000 bank accounts since 2019; enrolment of 188 entities by Q2 2023.
- Anti-corruption and AML/CFT:
  - Adoption of anti-corruption strategy, asset declaration framework and whistleblower protection law under preparation.
  - Since June 2019, Saudi Arabia compliant or largely compliant with 38 out of 40 FATF recommendations; further work needed on effectiveness and updating ML/TF risk assessment.

_Final source: SAUDI ARABIA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION_

### 2030. They called for further efforts to strengthen non-oil revenue mobilization through tax policy

### 1sauea2022001 - 2030. They called for further efforts to strengthen non-oil revenue mobilization through tax policy

### Fiscal policy and public finances
- Called for further efforts to strengthen non-oil revenue mobilization through tax policy measures—including by maintaining the current VAT rate—and enhancing revenue administration.
- Commended authorities for ongoing reforms to strengthen social safety nets through targeted schemes, which should help sustain energy price reforms.
- Welcomed continued improvements in public financial management and encouraged further efforts to increase fiscal transparency.
- Given the increasing role of the Public Investment Fund, encouraged quick completion of the ongoing work to establish a sovereign-asset liability management framework.
- Welcomed efforts to develop a fiscal rule, based on a long-term fiscal anchor, and encouraged broader coverage of the public sector to help reinforce commitment to fiscal sustainability.
- Fiscal outcomes and projections (central government):
  - Revenue (% GDP): 29.6 (2020), 30.9 (2021), 31.8 (2022), 32.0 (2023)
  - Expenditure (% GDP): 40.8 (2020), 33.2 (2021), 26.4 (2022), 27.1 (2023)
  - Fiscal balance (% GDP): -11.2 (2020), -2.3 (2021), 5.5 (2022), 4.9 (2023)
  - Public debt (% GDP): 32.4 (2020), 30.0 (2021), 24.3 (2022), 24.5 (2023)
  - Non-exported oil primary balance (% Nonoil GDP): -37.6 (2020), -29.0 (2021), -24.8 (2022), -22.0 (2023)
- Staff appraisal highlights:
  - The 2022 fiscal outturn will overperform the budget, with spending ceilings under the medium-term fiscal framework remaining appropriate to sustain fiscal adjustment while allowing for increased and targeted social spending.
  - Fiscal consolidation should continue to be pursued through non-oil revenue mobilization, energy price reforms, and the continued rollout of transformative structural fiscal reforms already initiated under Vision 2030.
  - Implementing a fiscal rule would help sustain a fiscal anchor over the medium term. An integrated asset-liability management framework would help the government assess Saudi Arabia’s fiscal stance and position.

### Outlook and risks
- Context: Saudi Arabia is recovering strongly from the pandemic-induced recession. Higher oil prices provide an opportunity for accelerating further the strong reform drive brought about under Vision 2030.
- Growth and inflation projections:
  - Real GDP growth: -4.1 (2020), 3.2 (2021), 7.6 (2022), 3.7 (2023) — overall GDP projected to grow by 7.6 percent in 2022.
  - Non-oil GDP growth: -2.5 (2020), 4.9 (2021), 4.2 (2022), 3.8 (2023) — non-oil growth projected to increase to 4.2 percent in 2022 before returning to medium-term potential of 4 percent.
  - CPI Inflation (avg, %): 3.4 (2020), 3.1 (2021), 2.8 (2022), 2.2 (2023) — headline inflation expected to pick up to 4 percent (yoy) in the second half of the year and remain contained at 2.8 percent on average in 2022; core inflation remains at 2.4 percent.
- External sector:
  - Current account (% GDP): -3.2 (2020), 5.3 (2021), 17.2 (2022), 13.8 (2023) — current account surplus expected to triple to around 17.2 percent of GDP in 2022.
  - Reserves (months imports): 25.3 (2020), 22.1 (2021), 25.3 (2022), 26.8 (2023)
  - Net foreign assets expected to increase by 22 percent in 2022 reaching a cover of 25.3 months of imports and the equivalent of 52 percent of GDP, with reserve buffers eventually stabilizing at about 27 months of imports in the medium term.
- Risks: Risks to the outlook are balanced. The war in Ukraine has increased commodity prices but should not slow down or reverse diversification efforts.

### Financial sector and monetary policy
- Welcomed continued resilience of the financial sector and central bank’s strong supervision.
- Welcomed progress toward implementing the Basel III standards in line with the internationally agreed timeline.
- Encouraged further enhancing supervisory scrutiny of credit risks, as warranted, including from rising mortgage lending, and continued strengthening of the AML/CFT framework.
- Agreed that the exchange rate peg to the U.S. dollar continues to serve Saudi Arabia’s economy well given the current economic structure.
- Financial indicators and developments:
  - Broad money (% change): 8.3 (2020), 7.4 (2021), 8.5 (2022), 7.6 (2023)
  - Credit to the private sector (% change): 14.0 (2020), 15.4 (2021), 13.4 (2022), 12.8 (2023)
  - External debt (% GDP): 33.8 (2020), 34.4 (2021), 28.5 (2022), 29.0 (2023)
  - Banking system: non-performing loan ratio 1.8 percent as of end-March 2022, provisioning exceeding 160 percent; credit to private sector expanded by 13.9 percent (y/y) in May 2022, mainly driven by mortgages and SME lending.
  - Liquidity actions: In June, SAMA reportedly deposited SAR50 bn ($13 bn) with commercial banks and lengthened the maturity of its repo instruments.

### Structural reforms and social policies
- Commended authorities for significant progress in implementing ambitious structural reform agenda.
- Welcomed the impressive pace of labor market reforms, particularly the doubling of female labor force participation, and encouraged continued actions in this area.
- Advised continued efforts to improve the regulatory and business environment, promote private investment, boost productivity, and address corruption.
- Welcomed the authorities’ ambitious climate commitments outlined in the Green Initiative and looked forward to the specific steps to achieve its goals.
- Commended ongoing reforms to strengthen social safety nets through targeted schemes to help sustain energy price reforms.
- Structural priorities highlighted: increase women labor force participation further, ensure PIF interventions play a catalytic role, strengthen governance, and roll out the Saudi green initiative.

### Key economic and social statistics
- Population: 34.1 million (2021)
- Quota: SDR 9,992.6 million (2.10% of total)
- Main products and exports: Oil and oil products (73%)
- Key export markets: Asia, U.S., and Europe
- Unemployment rate:
  - Overall (% total labor force): 7.4 (2020), 6.9 (2021), 6.0 (2022), ...
  - Nationals (% total labor force): 12.6 (2020), 11.0 (2021), 10.1 (2022), ...
- Other selected indicators:
  - FDI (% GDP): 0.8 (2020), 2.3 (2021), 0.8 (2022), 0.8 (2023)
  - REER (% change): 1.0 (2020), 0.9 (2021), 4.8 (2022), ...
  - Current account drivers: higher oil prices and stepped-up oil production improved the current account; current account registered a 5.3 percent of GDP surplus in 2021.

*Source: SAUDI ARABIA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION*

### 11.      Risks to the outlook are balanced, with policies pursued by the authorities and advocated

### 11.      Risks to the outlook are balanced, with policies pursued by the authorities and advocated by staff—most notably on fiscal consolidation, public financial management, and structural reforms—helping mitigate the downside risks identified (Annex III)

### Major macroeconomic projections and key statistics (Selected Economic Indicators, 2022–27)
- Real GDP (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 7.6; 3.7; 2.9; 2.9; 2.9; 3.0
- Non-oil real GDP (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 4.2; 3.8; 4.0; 4.0; 4.0; 4.0
- Consumer price index (average) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 2.8; 2.2; 2.0; 2.0; 2.0; 2.0
- Current account balance (percent of GDP) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 17.2; 13.8; 10.8; 7.9; 5.4; 2.9
- SAMA's total net foreign assets (US$ billions) (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 535.5; 610.3; 685.5; 743.1; 780.6; 800.7
- SAMA's total net foreign assets, in months of imports of goods and services (Proj. 2022, 2023, 2024, 2025, 2026, 2027): 25.3; 26.8; 28.0; 28.1; 27.1; 26.8
- Sources: Saudi Arabian authorities; and IMF staff estimates and projections.

### Upside scenarios and potential gains
- Higher than expected oil production and accelerated implementation of structural reforms and investments under Vision 2030 could further improve the outlook.
- Baseline is relatively conservative and does not fully incorporate the National Investment Strategy (NIS) potential.
- If well-executed, the SAR12.4 trillion NIS investment ramp-up, combined with:
  - improvements in public investment efficiency,
  - a modest improvement of the fiscal balance, and
  - growth dividends from the deepening of ongoing labor market reforms,
  could deliver a sustainable rise in non-oil potential GDP growth to about 8.8 percent by 2025 (Selected Issues Paper III).

### Downside risks
- Epidemiological: another COVID surge, domestically or abroad.
- External demand: lower oil prices due to lower global activity if the war in Ukraine has lasting effects; risks of an abrupt slowdown in China.
- Financial conditions: even tighter-than-expected global financial conditions.
- Fiscal and policy risks: pressures to spend oil windfalls and deviate from fiscal prudence (including through the PIF or National Development Fund (NDF)).
- Reform risks: risks to the reform agenda including due to inflationary pressures.
- Supply chains: further global supply chain pressures could constrain investment imports and thus hamper the rolling out of the NIS.

### Climate change and energy-transition risks
- Aramco has signaled commitment to significant investment supporting stabilization of the oil market and energy security.
- Saudi Arabia faces energy transition risks (and other climate-related risks such as drought) as the world moves towards a net zero emissions target.
- Achieving emissions targets will likely require both supply and demand policies (e.g., restricting investment flows into oil without CO2 carbon capture and storage; shift to low-carbon consumption), which would imply a more favorable oil price path allowing for more fiscal space.

### Impact of the war in Ukraine (Box 1)
- Direct adverse spillovers on Saudi Arabia from the war in Ukraine are negligible; the main impact is through higher oil prices.
- A $10 per barrel increase in international oil prices could increase non-oil GDP by about ½ percentage points (preliminary estimates using past patterns of government spending), though this impact could be lower if fiscal expenditures respond less than in the past.
- Fiscal position improves significantly with higher oil prices, even if accompanied by higher “implicit” energy subsidies.
- Trade links with Russia and Ukraine are limited:
  - Wheat imports account for only 2.7 percent of all Saudi imports.
  - Russia and Ukraine each accounted for about 2 and 3 percent respectively of the total of Saudi agricultural and food imports in 2021.
  - Russia was the 19th provider of imports (1.5 percent of total imports); Ukraine the 32nd (0.7 percent of total imports).
  - Russia and Ukraine combined accounted for 41 percent of imports of wheat, 25 percent of barley and 20 percent of maize.
- Food price inflation was at 4½ percent in May (year not specified in excerpt); food accounts for 18.8 percent of the CPI.
- Food and agricultural subsidies were 0.4 percent of GDP; an end-2021 one-off advance purchase of wheat acted as a buffer.
- Financial links to Russia are small; PIF exposure to Russia was less than ½ percent of assets under management.

### Authorities’ views
- Authorities agreed with staff’s projections for 2022 growth, noting:
  - Strong reform momentum and removal of all Covid-19 related restrictions will result in a sustained rebound in non-oil activity.
  - Full implementation of the NIS and PIF strategy, and Vision 2030 reforms, would boost non-oil growth considerably above staff’s conservative baseline.
- Agreed that inflation (as measured by the current basket) will remain contained, and emphasized the significant strengthening of the external position expected.
- On the increasing premium between SAIBOR and LIBOR rates, authorities highlighted the phenomenon is temporary, with liquidity ample and not impacted by the end of the Covid-19 deferral loan program.

### Policy priorities
- Managing higher oil revenue in a sustainable way to allow for a more diversified and green economy.
- Priorities include:
  - maintaining fiscal discipline through broad-based fiscal consolidation;
  - ensuring financial stability post-COVID;
  - implementing structural reforms to support strong, sustainable, and inclusive growth.

### Fiscal policy: recent performance and outlook
- Fiscal surplus:
  - For the first time since 2013, a fiscal surplus of 5.5 percent of GDP is expected in 2022.
  - This reflects higher oil prices and production, rebounding non-oil activity (boosting VAT revenue), continued restraint on capital expenditure, reduced current spending from greater private sector participation, wage-bill efficiency improvements, and phasing out of COVID-19 related measures.
- Staff assesses some fiscal space with meaningful temporary fiscal measures possible (such as increases in social spending, preferably targeted).
- July decision measures (extend provisions for social safety nets across the board and allow for increased food subsidies and restocking of basic commodities) total ½ percent of GDP.

### Medium-term fiscal stance and PIH consistency
- Mission’s baseline relies on budget policies and spending ceilings under the medium-term fiscal framework.
- VAT rate has been tripled (to 15 percent); most non-oil fiscal adjustment expected through expenditure cuts, half frontloaded over the next two years.
- Medium-term staff view:
  - Non-oil primary deficit would reach about 20 percent of non-oil GDP by 2027.
  - CGNFA would turn positive by 2024 (and then stabilize in real terms).
- To reach and keep applying the PIH norm beyond 2027, a gradual adjustment of ½ percent of GDP a year would be needed.
- Stress scenarios, including oil price declines, call for maintaining prudent assumptions when formulating the budget.

### Proposed fiscal rule and institutional coverage
- Staff proposes a fiscal rule setting an expenditure ceiling delinked from oil price fluctuations:
  - An expenditure rule with 1 ½-2 percent real growth in spending, based on a fiscal anchor derived from the PIH, with a norm based on prudent assumptions.
  - Rationale: derived from a long-term fiscal anchor offering clearer guidance, would have prevented procyclical expenditure growth during high oil price years.
- Assessing and operationalizing a fiscal rule requires broader institutional coverage:
  - Increasing role of the PIF, NDF and other entities in capital expenditures means their activities should be incorporated and regularly monitored.
  - Elements of the PIF and NDF spending plans expected to invest SAR 150bn and 50bn annually (or about 3¾ and 1¼ percent of 2022 GDP respectively) in the Saudi economy should inform a finer assessment of the appropriate fiscal anchor and rule design.
  - Need to accelerate work towards a sovereign asset and liability management framework, including an asset liability management committee and a public sector balance sheet encompassing the NDF and PIF (currently recorded as private), government reserves at SAMA and other components.

### Structural and revenue reforms to support long-term consolidation
- Non-oil revenue and tax policy:
  - Non-oil revenue has doubled over the past four years to reach 12.8 percent of GDP in 2021, still well-below the G20 average.
  - Tax gap with Saudi Arabia’s estimated tax capacity was reduced to around 10 percent of non-oil GDP (from 15 percent in 2019).
  - Staff welcomes authorities’ efforts to develop a revenue strategy to improve revenue diversification and mobilize non-oil revenue.
  - Staff recommended maintaining the new 15 percent VAT rate while broadening reform plans to excises/customs duties, corporate income taxation, expat levies and property taxation.
  - Staff encouraged a full-fledged revenue administration strategy with targets and costing of detailed revenue initiatives (taxpayer registration, compliance improvement, arrears management).
- Energy price reforms:
  - Energy price reforms initiated in 2016 and 2018 helped halve subsidies between 2010 and 2020.
  - With higher international oil prices and a cap on gasoline prices established in July, compensation for energy products is rising; Aramco’s financial statements imply compensation in 2021 of almost 5 percent of GDP.
  - Staff welcomes end-2021 measures (diesel increased by a step of 21 percent; asphalt increases) and supports additional increases envisaged on four products in 2022.
  - Vision 2030 objective: domestic prices gradually reach market prices for all energy products by 2030.
  - Staff recommends: lift the cap on gasoline prices; adjust the current pricing formula to allow faster increases for other fuel prices, water and electricity; regularly disclose estimates of yields from energy price reforms in the budget.
- Social safety net strengthening:
  - Increase targeted social spending in conjunction with energy price and tax reforms.
  - Support stepped-up use of the Damaan program (introduced November 2021) and the Citizens’ Account Program.
  - Efforts to identify gaps and overlaps across subsidy programs and create a streamlined system have been submitted to the Council of Ministers.
  - Plans to provide food support through school meals and food banks in consultation with civil society organizations.

### Social safety nets (Box 2)
- Objective: identify gaps and overlaps with other subsidy programs to create a more streamlined system, using a unique social registry to ensure needs-based income support.
- Authorities submitted a revised strategy on social support benefits to the Council of Ministers, adopting a life-cycle risk framework and aiming to minimize inclusion errors.
- Targeted programs include:
  - Citizens’ Account Program: national unconditional cash-transfer program to mitigate the impact of structural reforms (higher energy prices, VAT, expatriate levy); cash transfers are deposited monthly into beneficiaries’ accounts.

*Source: IMF staff.*

### 2.8 million households covering about 13.1 million citizens. Currently, only 77 percent of those eligible

### 1sauea2022001 - 2.8 million households covering about 13.1 million citizens. Currently, only 77 percent of those eligible

### Social protection coverage and programs
- 2.8 million households covering about 13.1 million citizens. Currently, only 77 percent of those eligible are benefiting from the program and SAR23 billion was disbursed under the program.
- Damaan (reformed)
  - Conditional cash transfer program launched in November 2021 to provide guaranteed minimum income support and cover the cost of basic needs to lift people out of poverty.
  - Marks a shift from categorical beneficiary identification (widowed or divorced women, orphans, elderly and disabled) to new eligibility criteria.
  - Currently targets 394,301 households.
  - Expected to be fully functional based on the new eligibility criteria by mid-2023.
  - Includes monitoring and evaluation enhanced by an integrated information system and registry.
- Hafiz
  - Innovative incentive-based program aimed at providing support in finding jobs, including by equipping beneficiaries with skills and resources.
- Saned
  - Unemployment insurance scheme for Saudi beneficiaries under the age of fifty-nine who have lost employment.
  - Intended to bridge the transitional gap between jobs by providing a minimum income and necessary training.
- Non-Saudi citizens
  - Benefit from the occupational hazard program that includes medical care coverage, a daily allowance, and compensation for disability.
- Data and monitoring
  - Notwithstanding progress, publishing data on poverty would be useful to monitor progress in line with Sustainable Development Goals and the government’s own KPIs.

### Public debt management and fiscal framework
- Public debt remains low and is sustainable.
- Over the medium term, public debt is expected to remain constant in nominal terms as the Kingdom plans to refinance existing debt instead of using revenue windfalls for repaying debt.
- Staff supports debt strategy elements:
  - Lengthening debt maturities.
  - Reducing refinancing costs.
  - Pre-financing in favorable times.
  - Building a yield curve in domestic and international markets.
- Plans to develop a framework for assessing and monitoring guarantees and other potential contingent liabilities linked to increased private sector participation are welcome.
- PIF monitors its leverage, liquidity and interest coverage ratios independently; PIF’s diversification strategy should ensure its returns exceed the cost of debt for the Kingdom.

### Preconditions and steps for a sustained fiscal position and fiscal rule
- Anchoring fiscal policy in a medium-term fiscal framework (MTFF)
  - Preparation of a robust medium-term fiscal framework that incorporates multi-year revenue initiatives and spending priorities, including capex plans and cost-saving initiatives.
  - Moving to a medium-term budget framework will help improve expenditure prioritization and move the country towards introducing performance-based budgeting by 2027.
  - Ongoing work on the unified chart of accounts facilitates this move.
- Strengthening public financial management reforms
  - Moving towards a Treasury Single Account (TSA) has led to the rationalization of 10,000 bank accounts since 2019.
  - Enrolment within the TSA of 188 entities by Q2 2023 will help cash management and strengthen coordination with debt management.
  - Active users of the ETIMAD platform have increased by 80 percent over the past year; authorities should continue requiring all entities use the platform to enhance transparency and view of actual budget execution.
  - Regular communication on fiscal year management of oil revenues and their handling in government accounts at SAMA, and impacts on reserves and domestic liquidity, would be beneficial.
- Accounting for fiscal risks
  - Authorities prepared an internal report on fiscal risks to help monitor risks, including contingent liabilities from PPPs and credit guarantees.
- Enhancing budget disclosure requirements
  - Progress: expanded Budget Statement and regular publication of pre-budget statement, quarterly budget reports, mid-year review and year-end report.
  - Staff encourages continuing efforts to provide additional details on revenue and expenditure, extend institutional coverage, and report systemic explanations of deviations between budget outcomes and plans.
  - Further disclosure of fiscal risks in the Budget Statement, including more granular and quantified analyses and different revenue scenarios (presented for the first time in the 2022 Budget Statement), would strengthen reforms.

### Authorities' stated views on fiscal strategy
- Fiscal discipline remains a core focus; MTFF is not impacted by oil price booms and busts.
- Accelerating asset liability management framework; work is progressing.
- Working on establishing a fiscal rule that sets expenditure ceilings delinked from oil prices with clear criteria for surplus allocation.
- Non-oil revenue mobilization remains a key anchor of fiscal sustainability.
- For this fiscal year, authorities agree a surplus will materialize despite modest planned increases on some budget items (e.g., food subsidies) and expedited execution on some strategic Vision 2030 projects.
- PIF investment plans are independent of oil revenues; any increases in PIF/NDF spending should be seen as private investment.
- Reforms to enhance budget disclosure, establish a TSA, and move towards MTFF will help sustain fiscal sustainability.
- On energy subsidies: reform continues with planned step price increases to eliminate subsidies by 2030; authorities disagreed on lifting the cap on gasoline prices citing social cohesion and industrial cost concerns.
- Authorities consider scaling up targeted social safety net programs premature until decisions are made on which parts of the population need compensation.

### Monetary and exchange rate policy
- Impact of tighter global monetary policy conditions expected to be generally positive for the banking sector and limited for the economy in an environment of high liquidity and oil prices.
- SAMA raised its policy rates by 125 basis points since March 2022; further hikes expected in line with the US monetary policy tightening cycle.
- Banking structure characteristics:
  - Low wholesale funding.
  - 65 percent non-interest-bearing deposits.
  - Corporate sector borrowing at variable rates reset every 3 to 6 months.
- Analysis indicates further tightening likely to have limited impact on non-oil GDP growth, credit growth and asset quality in a high oil price environment.
- Currency peg to the U.S. dollar remains appropriate given the structure of the economy and supports monetary stability; should be reviewed regularly.
- External position broadly in line with medium-term fundamentals and desirable policies; adequate buffers to maintain the peg.
- Fiscal consolidation and competitiveness-enhancing structural reforms will help strengthen the external position.
- Authorities’ view: adjust domestic policy rates broadly in line with the Fed tightening cycle to maintain peg credibility; peg seen as appropriate exchange rate policy.

### Financial sector policies and stability
- Macro-financial systemic risks are low, but continued vigilance is needed.
- NPLs are currently at low levels; deterioration in asset quality for SMEs that benefited from deferred payments and loan restructurings did not materialize after expiration.
- Mortgage lending grew by 41 percent over the past year—a third year of strong growth—with risks limited by:
  - Tighter prudential requirements imposing debt service limits on borrowers.
  - Low loan-to-value ratio.
  - Most repayments made by salary assignments from public sector employees.
- Staff supports ongoing efforts to:
  - Enhance supervisory scrutiny of banks’ credit risks through regular thematic inspections and in-depth assessments of loan portfolios and provisioning practices.
  - Regular reporting on the stock of restructured or guaranteed financing program for SMEs (about 0.3 percent of GDP) introduced during COVID-19 and set to expire in 2023.
  - Regularly assess the need to continue the guaranteed financing program based on SMEs’ updated financial information.
  - Continue close monitoring of rising mortgage lending, including setting up a specific surveillance system to identify build-ups of vulnerabilities.
  - Build on a risk-based supervisory approach using regular ICAAP results; staff welcomed stress test scenarios that include full macroeconomic scenarios.

### Regulatory and supervisory reforms
- Progress in revising financial sector and legal regulatory framework to align with best international practices.
- Basel III post-crisis reforms
  - SAMA finalized issuance of policies ahead of the effective date.
  - Frameworks for leverage, operational risk and market risk issued in Q3 2021.
  - Credit risk, counterparty credit risk and disclosure requirements issued in Q1 2022.
  - Planned effective implementation date: early 2023.
- Islamic banking
  - Shari’ah Governance Framework finalized in 2020; risk management framework for Shari’ah compliant banking in December 2021.
  - Ongoing work to strengthen liquidity and capital adequacy standards in line with IFSB; authorities aim to address key prudential risk areas by Q4 2023.
- Banking Control law
  - Draft law under internal review before public consultations; adoption expected to reduce redundant provisions and remove exemption allowing a bank to be exempted from regulations.
  - Note: There has been no actual reported case in which Article (21) of the Banking Control Law has been used to exempt any bank from regulations.
- AML/CFT
  - Since becoming a full member of FATF in June 2019, Saudi Arabia is compliant or largely compliant with 38 out of 40 recommendations.
  - Progress in exchange of information, establishment of dedicated units for financial investigation and prosecution welcomed.
  - Further efforts needed to increase effectiveness and to implement action plan addressing deficiencies from the 2018 mutual evaluation.
  - Authorities should finalize update of ML/TF risk assessment and assess ML/TF risks related to virtual assets.
  - Further efforts needed to strengthen confiscation frameworks and capacity of AML/CFT stakeholders including the FIU.

### Financial digitalization and capital markets
- Digitalization progress
  - Number of active fintech companies grew by about 37 percent in 2021 to about 82 companies.
  - 3 digital banks licensed by SAMA.
  - Share of electronic payments in retail exceeded 57 percent of total transactions conducted in 2021.
  - Financial inclusion: 83 percent of the adult population now owning a bank account (up from 71 percent in 2019).
  - SAMA’s CBDC project at an early stage; requires careful monitoring of monetary policy implications (non-interest bearing CBDC), technical constraints (cyber risks) and socio-economic challenges (low adoption and financial illiteracy).
- Capital market development
  - Regulatory initiatives in 2021 including the Financial Sector Development Program and updated CMA framework increased number of qualified foreign investors.
  - Saudi Arabia became the world’s largest issuer of Sukuk; issuance increased by about 19 percent (yoy) in 2021.
  - Plans for creation of an investment funds indicator, new link to access Euroclear for the sovereign sukuk market, and implementation of legal framework for capital market infrastructure institutions aim to attract more investors.
- Authorities’ view: financial stability risks are low; SAMA continues to monitor credit risks and expanding mortgage lending. Basel III implementation proceeds per timeline. AML/CFT capacity strengthened; Fintech initiatives enhance inclusion and require regulatory pace.

### Structural reforms under Vision 2030
- Continued implementation essential to diversify the economy and boost growth.
- More than 300 initiatives and regulations enacted since inception to improve regulatory and business environment and attract foreign investment.
- National Competitiveness Center focuses on reducing costs of setting up businesses and enhancing competitiveness via financial policies to support investment.
- Outcomes and improvements
  - Increased female labor participation.
  - Improved ease of doing business (one-stop shop to register a business in 3 minutes).
  - Increased number of industrial facilities.
  - Enhanced digitalization of government operations.
  - Increased investment in line with the NIS.
- Despite a significant increase in FDI inflows in 2021 (reflecting the 2021 Aramco deal), FDI inflows remain low so far and diversification into more sophisticated products is limited.
- Note: Sharp increase in net FDI inflows in 2021 attributable to $12.4 billion infrastructure deal by Aramco with a global investor consortium.

*International Monetary Fund — SAUDI ARABIA (excerpts provided in source content).*

### 28.      Further enhancing private sector development and confidence will require decisive

### 28.      Further enhancing private sector development and confidence will require decisive

### PPPs / asset sales
- The private sector participation (PSP) program, launched in 2017, has entered its expansion phase, with a National Privatization Strategy pending approval and expected to provide more visibility on privatization and asset sales.
- About 211 projects for private sector participation (mostly through PPPs) have so far been identified and are at various stages of development.
- Staff welcomes maximum liability caps specified in each contract, which will help reduce potential contingent liabilities.
- Ongoing efforts to build a framework for monitoring and containing potential contingent liabilities should be accelerated to ensure such a framework is in place as investment and PPPs pick up.

### PIF interventions
- While recognizing the catalytic role that the PIF can play in kick-starting new sectors, and PIF’s initiatives to increase private sector participation, including through exit plans, there is a risk that PIF interventions can create an uneven playing field.
- PIF interventions—including in Giga projects—should continue to be subjected to rigorous cost-benefit analysis to ensure that PIF risk-adjusted returns remain high and generate greater private sector involvement.

### Enhancing SME and local content development
- Priorities include improved access to finance (e.g., through the guaranteed financing program, supply chain financing initiatives), rationalizing all subsidized SME funding initiatives under the SME bank, adoption of the Companies’ law to help simplify entry requirements, streamlining fees charged by various government entities, and important digitalization efforts for procurement and payment systems.
- It is important that undue costs to the consumers be avoided; staff believes that the recent increases in customs duties in certain nascent sectors last year and in June 2022 are not helpful (even if remaining aligned with WTO rules and regulations).
- Preferable alternatives include addressing directly the competitiveness of local production, including by developing local procurement strategies jointly with complementary policies such as those aimed at removing impediments to foreign competition and ensuring that enabling conditions, such as a high stock of human capital and the necessary infrastructure, are in place (Annex VIII).

### Strengthening governance
- Staff welcomed the authorities’ ongoing efforts to combat corruption through the Oversight and Anti-corruption authority (Nazaha), which have resulted in an increased number of investigations and prosecutions.
- The mission encouraged the swift adoption of the anti-corruption strategy currently under preparation.
- Steps taken to strengthen the transparency of public procurement—including measures planned to collect information on beneficial ownership—and e-government are an important contribution to Saudi Arabia’s fight against corruption.
- While waiting for the approval of its by-laws, Nazaha is preparing an asset declaration framework for officials at high risk of corruption, and a whistleblowers protection law that would codify and enhance existing regulations.
- Nazaha’s international initiatives include a leading role in developing the GlobE Network of Anti-Corruption Law Enforcement Agencies and an intention to participate in the IMF’s round of voluntary assessment of supply and concealment of corruption next year.

### Digitalization
- The growing role of digitalization, e-government and e-commerce have the potential to boost productivity given the young and tech-savvy population and the newly established national regulator of the digital government sector.
- Spurred by the implementation of the National Digital Transformation Strategy (NDTS), digitalization accelerated during the COVID pandemic, with progress on key targets and adoption of e-Health (Sehati), virtual court (Najiz), distance learning (Madrasati), and ease of doing business for enterprises (Etimad and Fasah).
- Key priorities over the next year include:
  - fostering the digital government sector as a prime catalyst for national digitalization (97 percent of government services are now delivered digitally);
  - monitoring compliance of government agencies;
  - improving digital literacy and skills;
  - further deployment of high-speed internet access (70 percent of households already have fiber access);
  - activating e-participation for all segments of the population.

### Deepening labor market reforms
- Increasing female labor force participation:
  - Initiatives include transportation subsidies of up to 80 percent for the cost of taxi services under the Wusool program, employer incentive schemes, a premium on Saudization score for each woman hired, paid maternity leaves and childcare support.
  - Female participation for nationals rose to 33.6 percent as of Q1 2022 — a doubling over the past three years that helped surpass the 30 percent Vision 2030 objective.
  - Staff supports the authorities’ intentions to further increase the 2030 target, with elevation of more women to senior public and private positions helping to build additional momentum.
- Continue containing public sector employment:
  - Limit opportunities in the sector with more stringent rules that consider experience as an essential prerequisite to help reset high public sector wage expectations in line with productivity.
  - Adapt education programs to reduce skills mismatches and provide more vocational training programs.
  - Ongoing assessments of labor market developments, electronic workforce management services, and streamlined visa procedures for women and specialized professions will support the shift towards more private sector employment.
- Reforming expatriate labor employment:
  - Reforms to the Kafala system will provide greater freedom of mobility allowing expatriates to freely enter and exit the country and to change employers.
  - Plans are underway to develop a skills-based migrant visa system.
  - The Premium Residency Center has issued permits to high-skill applicants, including doctors and investors.
  - These changes aim to benefit wages and productivity of expatriates, attract higher skilled migrants, and reduce incentives for firms to employ expatriates over nationals.

### Climate policies and green transition
- The Kingdom’s efforts on mitigation and adaptation are encouraging, with further room to grow.
- Achieving the Green Initiative’s objectives will require detailing how these will be reached, including the magnitude of the investment necessary and feasibility through technology.
- A coherent National Hydrogen Strategy to be published this year would help support the Kingdom’s ambition to become a global leader in that field.
- Plans to develop a circular carbon economy would contribute to improve energy efficiency and reduce emissions.
- Water scarcity is a key vulnerability: agriculture accounts for 80 percent of water consumption and is intimately tied to food security.
- Green finance developments:
  - After a first SAR-denominated “green” loan in 2021, green bond issuance is envisaged by PIF as well as the central government.
  - PIF has introduced a Green Finance Framework and jointly with Tadawul is establishing a voluntary exchange platform for carbon credit within MENA.
- Energy and water price reforms should be stepped up as part of the overall emissions reduction strategy.

### Saudi Green Initiative — targets and initiatives (selected)
- Ambitious renewable and hydrogen targets:
  - Install 27.3GW of renewable capacity by 2025, and then 57.8GW by 2030 (0.3GW are installed as of 2020).
  - Become a global leader in hydrogen generation with an ambition of producing 4 Mtpa by the year 2030.
  - Increase the capacity share of renewable energy up to 50 percent of its energy mix for electricity generation, while the remaining will come from natural gas.
  - Saudi Arabia submitted an updated NDC in November 2021 aiming to reduce, capture and remove emissions by 278mtpa of CO2eq relative to a “dynamic baseline”.
  - The Kingdom is aiming to reach net zero GHG emissions by 2060; Saudi Aramco aims to achieve net zero Scope 1 and Scope 2 emissions by 2050 through the Circular Carbon Economy approach.
  - Joined the Global Methane Pledge to cut methane emissions by 30 percent by 2030.
- EV and mobility initiatives:
  - Through PIF’s ownership of Lucid Motors and public procurement contracts, the government has placed an order for up to 100,000 EV within the next ten years from Lucid Motors.
  - The Saudi factory would be completed by 2025 or 2026, with an eventual annual capacity of 150,000 EV.
  - 85 percent of the production will be exported.
  - Eight MoUs were signed for pilot projects for hydrogen-based mobility applications and sustainable jet fuel production.
- Other targets and initiatives:
  - Plant 10 billion trees across Saudi Arabia; Study on 10 billion trees program (2023).
  - Green Mosques (2023); Mangrove Plantation pilot at Jeddah Port (2023).
  - Establish nature reserves (2023); Desert Preservation Initiative (2025).
  - Designate 10 biodiversity protection areas of 977 sq.km (2025); raise protected areas to more than 30 percent of terrestrial and marine areas.
  - Change the energy mix towards a more sustainable one (generate 50 percent of electricity through renewables by 2030 vs. less than 1 percent now; with 60-100 bn USD in additional annual capital expenditures).

### Statistical issues
- Data provision to the Fund has some shortcomings but is broadly adequate for surveillance.
- The updated classification of national accounts to reflect a more accurate presentation of oil and non-oil activities, including the disaggregation of non-oil private sector activities and government activities, is welcome.
- The completion of the census in 2022 will help update socioeconomic indicators and rebase the CPI basket.
- Staff supports efforts to conduct surveys (and use of financial statements) to collect FDI data by GASTAT and planned moves to accrual budgeting and reporting.
- Needed improvements on external statistics include widening the coverage of private sector and sectoral breakdown on IIP statistics by institutional investors.

### Staff appraisal — macro and fiscal policy messages
- The economy is recovering swiftly from the pandemic-induced recession with a substantial pick-up in growth this year, inflation is contained, and the external position has strengthened—supported by higher oil production and international commodity prices.
- Fiscal prudence remains necessary to ensure a sustainable recovery. Staff welcomes the authorities’ plans to maintain fiscal discipline by adhering to the 2022 budget ceilings despite higher oil prices.
- With the strengthening of the budget position, staff support some increases in targeted social safety nets or food subsidies to support low-income households this year.
- Fiscal consolidation should be supported by stepping up efforts on non-oil revenue mobilization and energy price reforms while moving ahead with strengthening social safety nets:
  - Maintain the current VAT rate and broaden potential revenue gains through new tax policy measures and strengthened revenue administration.
  - Accelerate energy price reforms, including removing the cap on gasoline prices and other products, to help remove price signals critical to energy conservation and the green transition.
  - Ongoing reforms to strengthen social safety nets—including new targeted schemes providing a guaranteed minimum income—are welcome; increased support through such programs and the Citizens account should be stepped up and not await the transition until the full reform is in place.
- Medium-term fiscal framework:
  - Staff supports establishment of an expenditure rule based on a long-term fiscal anchor and the ongoing work towards developing a sovereign-asset liability management framework.
- Public financial management and contingent liabilities:
  - Continue steps towards a robust medium-term fiscal framework, performance-based budgeting, a treasury single account, and enhanced budget disclosure.
  - Careful monitoring and disclosure of guarantees and contingent liabilities is needed, particularly as PPP projects are expected to increase.
- Financial sector:
  - Financial system risks are low; banks are profitable, well-capitalized and liquid.
  - SAMA should continue to enhance supervisory scrutiny of credit risks and carefully monitor rising mortgage lending.
  - Efforts to move towards Basel III standards, strengthen the legal framework for Islamic banks and increase focus on managing risks associated with cyber security and data protection are welcome.
- Structural reforms:
  - Continue implementing structural reforms to generate more inclusive, broad based and sustained growth.
  - The structural reform agenda centers on private sector led growth bolstered by the PIF and should focus on efficiency and catalyzing private investment.
  - PIF interventions—including in Giga projects—should continue to be subjected to rigorous cost-benefit analysis to ensure high returns and avoid crowding out private investment.
  - Public sector interventions should have an announced timeframe, a clear exit strategy, and focus on transparency and accountability to minimize governance risks.

*Source: Authorities’ data, MCIT, DGA; World Development Indicators, World Bank; Financial Access Survey, IMF.*

### 42.      Adoption of the anti-corruption strategy, an asset declaration framework and a

### 1sauea2022001 - 42.      Adoption of the anti-corruption strategy, an asset declaration framework and a

### Anti-corruption, AML/CFT, and governance
- Adoption of an anti-corruption strategy, an asset declaration framework, and a whistleblowers protection law are under preparation and will further support Saudi Arabia’s anti-corruption drive.
- The Oversight and Anti-corruption authority (Nazaha)’s proactive stance has resulted in an increased number of investigations and prosecutions.
- Progress on AML/CFT should continue, including by:
  - incorporating money laundering risks related to virtual assets; and
  - strengthening the framework for the confiscation of major proceeds of crime.
- Structural-reform recommendation from Annex I: prepare an anti-corruption strategy, including a framework for asset declaration.

### Labor market reforms and inclusion
- Continue progress on labor market reforms to boost productivity.
- Recent measures and outcomes:
  - Removal of formal restrictions on female employment.
  - Introduction of initiatives including paid maternity leaves, childcare support, and transportation subsidy.
  - Female labor participation rose to 34.9 percent in 2021 compared to 32.1 percent in 2020.
  - A record number of 1.9 million Saudi workers are now employed in the private sector as of end-2021.
  - Reforms to the Kafala system will provide greater mobility to expatriate workers.
- Policy priorities:
  - Continue to contain public employment.
  - Reduce skill mismatches.
  - Further raise female employment to support the shift toward more private sector employment.
- Data/statistics recommendation: further improvements needed in labor market and FDI statistics.

### Climate policy, mitigation, and adaptation
- The Kingdom’s efforts on climate policies for both mitigation and adaptation are welcome.
- Saudi Green Initiative highlights:
  - Ambitious commitments to reduce emissions by increasing the share of renewables in the energy mix and enhance vegetation.
  - Plans to develop a circular carbon economy.
  - Launch in 2021 of the Saudi Green Initiative along with over 60 initiatives to combat climate change.
- Policy need:
  - Articulate a detailed roadmap, including the magnitude of investment necessary and feasibility through technology.

### Fiscal and social policy context (selected findings from Annex I)
- Fiscal developments and support:
  - The fiscal balance improved by almost 9 percent of GDP in 2021, helped by rising oil prices and the full-year effect of the tripling of the VAT rate to 15 percent in mid-2020.
  - Social safety net reform is advancing toward a needs-based system with a guaranteed minimum income; however, it is not clear to what extent lower-income households were compensated for the VAT increase and COLA removal.
  - July 2022 measures include an allocation (for ¼ percent of GDP) to the Citizen’s Account Program to address repercussions of increased global prices.
- Wage bill and public employment:
  - The wage bill increased only marginally in 2021 but exceeded the budget; a royal decree formed a ministerial committee to rationalize the civil service wage bill.
  - New employment growth is coming mainly from the private sector, not the government.
- Fiscal transparency and procurement:
  - Progress: Treasury Single Account, expanded Budget Statement, regular publication of pre-budget statement, mid-year review, and year-end report.
  - Further work needed: more details on revenue and expenditure items, public investment entities, explanation of deviations between budget outcomes and plans, and greater procurement transparency including beneficial ownership.
- Sovereign asset-liability management:
  - The growing role of the PIF calls for a sovereign asset-liability management framework and improved fiscal transparency; work is ongoing and needs to accelerate.
- Private sector support measures:
  - Most pandemic support measures have been gradually withdrawn; the Guaranteed Financing Program extended until March 2023 to support micro and SME businesses.
- Financial inclusion:
  - Bank lending to SMEs increased to 8 percent of total loans in 2021 (6 percent in 2019).
  - 83 percent of the adult population now own a bank account as of 2021 (up from 71 percent in 2019).

### Data and statistics
- Improvements in economic data are welcome, but gaps remain.
- Continued priorities: improvements in national accounts, CPI compilation, and external statistics.
- Ongoing work: complete the 2022 census and update the household survey.
- Annex I reiterates that further improvements are needed in labor market and FDI statistics.

### Scheduling recommendation
- It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

*Source: Saudi Arabian authorities; and IMF staff estimates and projections (from the chapter).*

### Annex II. Inflation Developments and Passthrough Analysis of

### Annex II. Inflation Developments and Passthrough Analysis of External Factor

### Overview and recent inflation dynamics
- Inflation in Saudi Arabia has remained relatively stable over the past decade and has hovered around 2 percent.
- Since 2000, average inflation in Saudi Arabia hovered around 2 percent a year and inflation volatility has also been relatively moderate.
- Following the VAT rate increase from 5 to 15 percent in July 2020, CPI inflation jumped significantly, especially on items in the goods basket, but then settled slightly above zero (m/m).
- In the recent episode, inflation remains relatively contained despite supply-side disruptions, sharp increase in international commodity prices, and double-digit wholesale inflation.
- Consensus forecasts project inflation in Saudi Arabia settling at around 2 percent over the medium term, broadly in line with the U.S. price stability objective.

### CPI composition and sectoral drivers
- The housing rental component is about 21 percent of the overall CPI basket.
- Within housing rental:
  - Rent for a villa is 11.5 percent of the total CPI basket.
  - Rent for a floor in the villa is 4.4 percent of the total CPI basket.
- Transport represents about 13 percent of the total CPI basket.
  - Within transport, the purchase of motor cars represents about 63 percent of the transport basket.
  - Transport services (mainly international transport by air and travel by sea) increased in the past two months.
- Recent increases in inflation appear mainly driven by food and transport; gasoline prices were capped in July 2021, exerting downward pressure on inflation.
- About 70 percent of items in the CPI basket are in positive growth territory.

### Empirical approach to passthrough analysis
- Methodology: impulse response functions estimated via local projections (estimation period: January 2014 to December 2021).
- Four global factors considered: oil prices, international food prices, NEER, and global supply chain constraints.
- Global factor measures:
  - Oil price: (log difference of the) Brent spot market price in USD (month average).
  - International food prices: (log difference of the) IMF Primary Commodities Food Price Index (2016 = 100).
  - Global supply chains disruptions: changes in the Global Supply Chain Pressure Index (GSCPI).
- Model specifics:
  - Inflation defined as the month-over-month (log) change in the price index.
  - Number of lags (l) included in the model is 1; results robust to different lag length.
  - Specification includes forward leads of global factors between time 0 and horizon k to correct bias in local projections.

### Pass-through findings
- Low pass-through of international food and oil prices to domestic prices:
  - A rise in food or oil prices is not translated, on average, into an increase in domestic inflation.
  - Possible explanations: relatively small food weight in CPI baskets, low food import share, price controls on some food products (e.g., wheat, bread, water), and regulated fuel prices not increasing in line with international oil prices.
  - During the Covid period, some private sector operators reduced markups to accommodate reduced purchasing power, mitigating pass-through.
- Nominal effective exchange rate (NEER) appreciation shields against inflationary pressures:
  - A 1 percent increase in NEER is estimated to lead to a 0.6 percent decline in inflation after about nine months.
  - The passthrough on food CPI is only statistically significant at the 10 percent level.
- Supply-chain disruptions have a small but significant medium-term effect:
  - A 1 standard deviation increase in the GSCPI is estimated to raise domestic inflation by about 0.02 percentage points 12 months after the shock.
  - Because of persistent supply chain constraints, supply-related price pressures will likely extend until the end of 2022 and beyond.

### Interpretation and context
- Saudi Arabia’s monetary policy framework targeting a stable exchange rate has contributed to stabilizing inflation; fiscal dominance and the peg mean changes in exchange rates do not affect export volumes.
- Stable inflation expectations (as proxied by private sector consensus forecasts) provide an important nominal anchor and suggest SAMA’s monetary policy credibility was not negatively affected by recent turmoil or rising wholesale inflation.
- Cross-country context:
  - Oil-exporting countries that responded strongly to Covid-19 with expansionary fiscal/monetary policies had, on average, higher core inflation.
  - Specific policy changes in the region (e.g., VAT increases) have led to temporary increases in inflation in other GCC countries.

### Policy implications and recommendations
- Fiscal policy:
  - Anchor fiscal policy in a medium-term framework to reduce risks of procyclical fiscal policies.
  - Use existing buffers together with external borrowing to smooth fiscal adjustment in the short term if needed.
- Monetary and exchange-rate considerations:
  - The recent appreciation of the US dollar is expected to help contain inflation through NEER effects.
- Supply-chain and price-monitoring:
  - Given the small but non-negligible passthrough from global supply-chain pressures, monitor supply chain indicators (e.g., GSCPI) and prepare for extended supply-related price pressures.
  - Developing a producer price index (PPI) may help better reflect supply chain disruptions, given a limited relationship observed between wholesale price index and CPI recently.
- Structural reforms:
  - Accelerate structural reforms to reduce the impact of oil price fluctuations on the economy over the longer term.
- Targeted measures:
  - Maintain or consider targeted price controls/subsidies for key food items and regulated fuel pricing where appropriate to limit pass-through to CPI.

*Prepared by Nordine Abidi and Fozan Fareed. Source: GASTAT, Haver Analytics; IMF staff calculations.*

### 2030. It has also developed local

### 1sauea2022001 - 2030. It has also developed local

### Energy Price Reform (EPR) and Vision 2030
- A two-stage Energy Price Reform: EPR 1 (2016) and EPR 2 (2018).
- Objectives:
  - Gradually increase domestic energy prices and reach market/export prices by 2030.
  - Authorities estimate EPR 1 and EPR 2 yields at 23 and 25 billion SAR respectively, or a total of 1 ½ percent of GDP in 2021.
  - The Saudi authorities estimate that they have reduced energy subsidies by close to 60 percent since 2012.
- Specific measures:
  - Substantial step increases in gasoline prices (larger for premium than regular); electricity prices for residential users below 6000 kWh/month increased by 260 percent in 2018.
  - Continued alignment of premium and regular gasoline prices since 2018.
- Expected gains:
  - Expected cumulative gains from EPR in 2025 would represent 3 ½ percent of GDP.
- Planned list of liquid fuel and related products for gradual price increases to reach global reference prices by 2030:
  - Arabian Light Crude Oil
  - Arabian Heavy Crude Oil
  - Natural Gas
  - Ethane
  - Diesel
  - Fuel Oil (360)
  - Asphalt
  - Liquefied Petroleum Gas
  - Kerosene

### Subsidy recording, measurement, and mechanics
- Subsidies for domestic energy consumption are not recorded in the central government budget; they are mostly provided through associated energy SOEs and constitute foregone revenues for the central government.
- Recorded subsidies in the central government budget (30 bn in 2021 or less than 1 percent of GDP) include items mostly for food and agriculture and compensation of losses through “balancing accounts” for some SOEs (0.4 percent of GDP).
- Saudi Aramco compensation mechanism (disclosed following the 2020 IPO):
  - Concession and regulatory requirements force Aramco to sell certain hydrocarbons and petroleum products domestically at Government’s regulated prices.
  - Under an equalization mechanism, the Government compensates Saudi Aramco for the difference between regulated prices and equalization prices.
  - Effective 1 January 2020, the Government expanded the equalization mechanism to include LPGs and certain other products.
- Stages and recording of compensation:
  - The equalization price is set jointly by the Ministry of Energy (in consultation with Aramco and the Ministry of finance) using internationally recognized indices or Aramco’s official selling price; formulas are not public.
  - The difference between the equalization price and export prices appears as “other income related to sales” in Aramco’s statements and amounted to about 5 percent of GDP in 2021 (Text table 2).
  - Aramco can use those proceeds to pay taxes owed to the Saudi government; amounts left are recorded as a receivable “due from government.”
- Other supporting mechanisms:
  - Government guarantee mechanism guaranteeing amounts due to Aramco from government and semi-government entities (in 2019 represented about 0.9 percent of GDP).
  - Sales to the Saudi Electric Company under supply agreements (represented about 0.3 percent of GDP in 2019).
  - 2020 modification: conversion of Saudi Electricity Company debt into quasi-equity (Conversion into Mudaraba 167.9 bn SAR, 6.4 percent of GDP) and related balance sheet changes (Table 3).
  - Potential intra-group compensation following Aramco’s purchase and integration of Sabic.

### Recent developments and price caps
- Gasoline prices were capped since July 2021 at $0.62 a liter.
  - This level is described as about 50-75 percent of international gasoline prices, half the retail price in the US.
  - UAE example: gasoline currently at an average of 0.99$/liter in the UAE vs. 0.62$/liter in Saudi Arabia.
- Aramco’s “other income related to sales” reached 49.9 bn SAR (13.3 bn USD) in Q1 2022, an increase of 78 percent compared to Q1 2021.
- Diesel retail prices in Saudi Arabia have been consistently lower than the average of countries in the region despite a 21 percent step increase in January 2022.
- Electricity and natural gas prices:
  - Residential electricity prices remain below supply costs by an estimated 37 percent in 2020.
  - Industrial electricity prices remain below supply costs by an estimated 25 percent in 2020.
  - Natural gas (for industrial and power), gasoline, diesel, kerosene and LPG also remain below supply costs.

### Quantified subsidies and cross-country comparisons
- IMF estimates (cross-country, latest available for 2020) indicate:
  - Estimated level of subsidization for Saudi Arabia around 7 percent of GDP for all fuels, natural gas and electricity in 2020.
  - In percent of GDP, highest recorded subsidies are for diesel, followed by electricity and gasoline.
  - Recorded subsidies in Saudi Arabia are higher than in the GCC and MENA region and mostly for oil related products, while relatively lower for electricity and coal.
- Aramco and government flows (Table 2, values by year):
  - Other income related to sales (compensation): 2018: 5.2; 2019: 4.3; 2020: 3.6; 2021: 5.0 (in bn SAR).
  - Payments to the government:
    - Income taxes: 2018: 6.1; 2019: 5.0; 2020: 2.8; 2021: 4.5 (in bn SAR).
    - Royalties: 2018: 7.2; 2019: 5.7; 2020: 3.1; 2021: 4.4 (in bn SAR).
    - Dividends: 2018: 7.4; 2019: 9.1; 2020: 9.8; 2021: 8.2 (in bn SAR).
  - Due from the government (end of year receivable) — from other income related to sales: 2018: 1.2; 2019: 1.0; 2020: 0.9; 2021: 1.4 (in bn SAR).
  - Due from the government (end of year receivable) — from government guarantee: 2018: 0.4; 2019: 0.2; 2020: 0.1; 2021: -0.1 (in bn SAR).

### Fiscal and policy implications; IMF staff assessment
- Measurement and transparency:
  - Most energy subsidies are implicit and not reported as central government expenditures, complicating fiscal stance assessment.
  - Full disclosure early on regarding the cost of subsidization in the budget process would help evaluate policy trade-offs and would be a first important step.
- Policy recommendations and rationale:
  - Staff supports continuation and resumption of energy price reforms toward returning energy prices to international levels.
  - Benefits of reform:
    - Reduce leakages to the well-off.
    - Support authorities’ climate change objectives as laid out in the Saudi green initiative.
    - Free fiscal space for other priorities.
  - Accompanying measures:
    - Provide additional spending for the social safety net to help offset impact on the vulnerable.
    - Use more targeted social benefits enabled by modernization, revamping and digitalization of social safety nets.
    - Fully implement reforms for other fuel products as well as water and electricity.
- Feasibility note:
  - The authorities have developed social safety nets, more granular information, and digital ways to reach relevant households, facilitating targeted compensation.

*Prepared by Jerome Vacher (Annex IV: Energy Subsidies in Saudi Arabia) — source content as provided.*

### 5.2 percent over the medium-term. The reliance of the consumption and investment models on projected oil prices beyond t

### 1sauea2022001 - 5.2 percent over the medium-term. The reliance of the consumption and investment models on projected oil prices beyond t

### External balances and reserves
- CA gap in 2021 of -1.0 percent of GDP represents staff’s overall assessment anchored on the CA-regression based approach.
- The range for the gap is calculated using the estimates from Norway, a comparable oil-rich economy in the EBA sample.
- Total reserves include gold at national valuation.
- "5.2 percent over the medium-term." (phrase preserved from source context.)

### Progress in implementing the Key 2017 FSSA recommendations — Banking oversight
- Legal and institutional updates:
  - The new central bank law has been issued in November 2020; it creates a direct reporting channel to the King and establishes authority over all covered financial institutions.
  - A draft of the Banking Control Law has been prepared and is being reviewed internally prior to public consultation and submission to the legislative body.
- Transparency and guidance:
  - SAMA officially launched its Circulars Portal in December 2020.
  - Revised licensing requirements and guidelines were published on SAMA’s website in January 2019.
  - SAMA finalized its issuance of the Shari’ah Governance Framework in 2020 and issued the risk management framework for Shari’ah compliant banking in December 2021.
- Supervisory framework and prudential standards:
  - A new risk-based banking supervisory framework has been rolled out: a banks' risk rating is now based on a combination of its inherent risk rating and its control rating; supervisory planning for on- and off-site supervision is based on a bank’s risk profile; documentation for loan examinations has been enhanced.
  - SAMA has adopted IFRS-9 requirements; banks have been compliant with these requirements since 2018.
  - SAMA implemented BCBS Guidelines on "Prudential treatment of problem assets – definitions of non-performing exposures and forbearance”.
  - The central bank is in the process of issuing its own prudential requirements regarding loans classification and provisioning to further strengthen the existing framework.
  - SAMA issued rules and guidelines on management of problem loans in January 2020 requiring banks to establish policies and procedures for rescheduling and restructuring of existing exposures.
- Cross-border cooperation:
  - SAMA has signed MoUs with the Korean Financial Services Commission and Financial Supervisory Service, with the UAE in areas of financial services and market cooperation, and with the Dubai Financial Services Authority to work in the area of financial services.

### Liquidity management and financial safety nets
- Liquidity forecasting and operations:
  - A liquidity forecasting model has been developed and is regularly reviewed, tested and updated by SAMA.
- Resolution and emergency liquidity:
  - The resolution of systemically important financial institutions law was issued in December 2020.
  - SAMA has developed a general Emergency Liquidity Assistance (ELA) framework; further coordination with external stakeholders is needed to fulfill data requirements on exogenous factors (e.g., government plans) to improve the framework.
- Deposit protection and back-up funding:
  - In progress: the new proposed deposit protection framework will consider paying out insured deposits within a period of less than 30 days and will consider a back-up funding line within any proposed safety net mechanism.

### Macroprudential policy and data
- Debt service measures:
  - The principles that set the debt service to income ratio were issued in May 2018 and fully implemented in August 2018.
- Data improvements:
  - Monthly data on new residential mortgages and SMEs finance are now published; work is ongoing to further strengthen data collection.

### Diversification under Vision 2030 — objectives and targets
- Vision 2030 pillars and programs:
  - Vision organized around: 1. An Ambitious Nation; 2. Building a thriving economy; 3. A Vibrant Society.
  - Supported by 11 Vision Realization Programs (VRPs), including: Public Investment Fund Program; Housing Program; Pilgrim Experience Program; Fiscal Sustainability Program; Human Capability Development Program; Quality of Life Program; National Transformation Program; Privatization Program; Health Sector Transformation Program; Financial Sector Development Program; National Industrial Development and Logistics Program.
- Quantitative Vision targets:
  - SMEs to account for 35 percent of GDP from the current 20 percent.
  - Private sector to contribute 65 percent of GDP from its present 40 percent.
  - Increase foreign direct investment from 3.8 percent to 5.7 percent of GDP.
  - Raise the share of non-oil exports in non-oil GDP from 16 percent to 50 percent.
  - The Kingdom’s goal of achieving net zero emissions by 2060.

### Achievements and diagnostics on diversification and export complexity
- Progress and comparative performance:
  - Saudi Arabia has started diversifying away from hydrocarbons with acceleration since 2016 and has witnessed a reduction of the oil sector’s contribution across revenue, export and output dimensions.
  - The Kingdom has diversified into sophisticated manufacturing goods such as plastics, chemicals, manufacturing material and food-related manufactured products and has developed a revealed comparative advantage (RCA) in complex goods relative to GCC comparators.
- Product space and strategic implications:
  - Saudi Arabia’s positioning in the periphery of the product space indicates limited connectivity to the core of more sophisticated products; moving into more central product communities requires capabilities and enabling conditions (local content and domestic value chains, high stock of human capital, necessary infrastructure).
  - Diagnostic tools (complexity and distance measures) suggest balancing diversification into higher complexity products while not overstretching existing capabilities; identified high-potential sectors include value-added agricultural manufacturing, machinery, and pharmaceuticals.
- Policy instruments and institutional roles:
  - Industrial policies direct investment toward strategic sectors using the Public Investment Fund (PIF) and Saudi Industrial Development Fund (SIDF), build local supply chains guided by local procurement policy, and apply import duties on certain products while ensuring alignment with WTO rules.
  - A petrochemical value chain integration committee has been established to guide domestic value chains and capture more downstream activities.
  - PIF aims to unlock new sectors, localize cutting-edge technology and knowledge through international strategic investments.

### Labor market, automation, and implications for job creation
- Automation risks and opportunities:
  - Automation, mechanization and robotization may hinder manufacturing job creation; many frontier sectors may be vulnerable to automation and the job creation traditionally linked to manufacturing diversification may not materialize.
  - While automation could negatively affect employment of expatriates in low-skill sectors, it may present an opportunity to create high-skill employment for locals, aligning with the Saudization program.

*Prepared by IMF staff; content drawn from the referenced chapter text.*

### 10.      Successful diversification will hinge on continued implementation of the ambitious

### 10.      Successful diversification will hinge on continued implementation of the ambitious reform agenda, while minimizing inefficiencies that accompany industrial policies and ensuring the availability of skilled labor

### Role and design of industrial policies
- Properly formulated industrial policies can play an important role in the Kingdom’s diversification strategy.
- To maximize benefits and minimize risks, incentives should be carefully designed with a focus on transparency and accountability to minimize governance risks.
- Basic principles the literature generally agrees on:
  - Special emphasis on export orientation rather than import substitution with a focus on technology and innovation, and hold firms accountable for the support received, such as on the basis of strict performance criteria.
  - In the “Asian miracle economies”, the government intervened early on to support domestic firms in sophisticated sectors while ensuring fierce competition.
  - While import tariffs can protect nascent sectors (“infant industry argument”), they can also lead to misallocation of resources, rent seeking and lack of competition.
  - The global trading regime restricts the use of such instruments, and other measures can be considered to promote exports such as differential tax rates for profits from export sales and import-tariff rebates on imported intermediates.
  - Footnote references in source: 7

### Fostering linkages and mitigating fiscal risks
- Well-coordinated policies to foster backward linkages (high domestic value added) and forward linkages with a focus on downstream activities.
- High linkages and associated spillovers induce agglomeration effects and clusters which, through feeding back into productivity gains, can support sustained employment.
- Special Economic Zones (SEZs):
  - SEZs can help attract investment, create jobs and boost exports – both directly and indirectly when they succeed in building linkages with the broader economy and when accompanied by an integrated strategy, including a conducive business environment, technology upgrading and skills training.
  - Care should be taken to minimize fiscal risks from tax exemptions by instituting strict exit criteria, sunset clauses and ensuring incentives are time-bound.
  - Other industrial policy instruments such as local procurement strategies need to be developed jointly with other policies while ensuring there is no hindrance to foreign competition.
  - Footnote references in source: 8

### Human capital, labor market, and wage considerations
- Upskilling and reskilling the current workforce to remove skills gaps and mismatches and better aligning educational programs with employer needs.
- Improving the quantity and quality of education at all levels, including vocational training for middle-aged workers, will create a more productive workforce.
- Reducing the public-private wage gap will boost employment in the private sector.
- Addressing the productivity-wage gap will ensure competitive wages.

### Statistical and institutional context relevant to policy design (selected exact figures and facts from the informational annex)
- National accounts:
  - GASTAT compiles annual and quarterly production and expenditure-based GDP estimates with 2010 as base year.
  - The classification of national accounts was updated in 2021.
  - GASTAT compiles annual supply and use tables and recently published tables for 2018-2020 on the new classification.
  - An industrial production index periodicity improved from quarterly in 2016 to monthly since January 2019.
- Price statistics:
  - CPI data is published monthly using a fixed basket of goods and services consisting of 490 items based on the 2018 expenditure and income survey.
  - The completion of the ongoing census in 2022 will allow for the production of a new household survey and rebase the CPI basket.
  - The weight reference period for the wholesale price index was updated to 2014 though sample coverage remains limited to three cities.
  - A new PPI was planned with IMF TA in 2019 and is still under construction.
- Labor market statistics:
  - Data providing a breakdown of employment between the private and public sector is available from 2018Q3.
  - Absolute employment numbers are published based on administrative data from private sector social insurance records (GOSI) and data from the Ministry of Human Resources and Social Development, which is available from 2016Q3.
  - The switch from in-person to phone interviews for the Labor Force Survey (LFS) during COVID-19 may have impacted respondent coverage, resulting in a higher number of female respondents.
- Government finance and monetary statistics:
  - The authorities have reclassified the budget in line with GFSM 2014.
  - SAMA’s published balance sheet has a large and growing “other liabilities” item that hinders analysis.
  - SAMA has submitted to STA the preliminary monetary and financial statistics based on the IMF’s Standardized Report Forms (SRFs).
- External sector statistics and data participation:
  - Quarterly balance of payments (BOP) and international investment position (IIP) data are published according to the sixth edition of the Balance of Payments and International Investment Position Manual.
  - SAMA participates in the IMF’s Coordinated Portfolio Investment Survey (CPIS), although not in the IMF’s Coordinated Direct investment Survey (CDIS).
  - Ongoing efforts to collect FDI data by GASTAT would allow participation in the CDIS.
- Data standards:
  - Saudi Arabia subscribed to the Special Data Dissemination Standard (SDDS) on September 18, 2019.

*Source: 1sauea2022001 - 10.      Successful diversification will hinge on continued implementation of the ambitious*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1sauea2022001.pdf_