## 1. Saudi Corporate Performance and Resilience to Shocks

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### Background: Economic transformation and reform priorities
- Since Vision 2030 (2016) Saudi Arabia has:
  - Reduced the oil sector’s contribution across revenue, export, and output.
  - Rebuilt external and fiscal buffers.
  - Doubled non-oil revenue mobilization.
  - Reached record low unemployment and surpassed the female labor force participation 2030 target (over 30 percent).
  - Improved government efficiency (including through digitalization).
- Implementation of the National Investment Strategy (NIS) and continued structural reforms are expected to:
  - Foster competitiveness and enhance total factor productivity.
  - Boost non-oil growth significantly and help further reduce unemployment and diversify the economy.
- Fiscal calibration is needed to avoid procyclicality and overheating and to reduce risks from ambitious giga projects and industrial policies.

### Recent economic developments (key findings and statistics)
- 2022 growth and composition:
  - Real GDP growth: 8.7 percent y-o-y (fastest growing G20 economy in 2022).
  - Crude oil production increased by 16 percent in 2022.
  - Non-oil growth: 4.8 percent y-o-y in 2022.
  - Private consumption: increased by 4.8 percent y-o-y.
  - Non-oil private investment: rose by 45 percent in 2022.
- Labor market:
  - Total unemployment: 4.8 percent in 2022Q4 (down from 9 percent during Covid).
  - Saudi unemployment rate: 8 percent in 2022.
  - Youth unemployment: 16.8 percent in 2022.
  - Female unemployment: 12.9 percent; female labor force participation for nationals: 37 percent (from 18 percent in 2017).
- Inflation and wages:
  - Headline CPI average 2022: 2.5 percent.
  - Headline inflation early 2023: upticked to 3.4 percent, then fell to 2.8 percent in May 2023.
  - Wages for low-skilled workers: rose by 12 percent y-o-y in 2022Q4.
- External position and reserves:
  - Current account surplus 2022: 13.6 percent of GDP, equivalent to $150.8 billion.
  - SAMA's total net foreign assets (end-2022): 440.5 (US$ billions).
  - Net foreign assets provided about 19.4 months import cover in 2022.
  - Reserves declined by about $17.7 billion in May 2023 relative to 2022, primarily due to large amortizations.
  - Aramco held US$135 billion in cash and short-term investments at end-2022 (equivalent to 12 percent of GDP).
- Capital markets and financing:
  - Tadawul All Share Index fell by 7.1 percent in 2022.
  - Sovereign spreads averaged 72 bps daily in 2022.
  - Recent debt-raising: $10 billion sovereign issuance, $6 billion sukuk issuance, PIF green bonds ($3 billion in October 2022, and $5.5 billion in February 2023).
  - Rating agencies upgraded Saudi sovereign credit ratings.

### Outlook (baseline projections and key numeric projections)
- Oil price assumption and growth:
  - Staff baseline assumes international oil prices average $78 per barrel in 2023 (a 21 percent decrease over the average 2022 WEO oil price).
  - Non-oil real GDP growth expected to average 4.9 percent in 2023.
  - Oil GDP growth expected to decline by 2.5 percent in 2023.
  - Overall real GDP projected to grow by 1.9 percent in 2023.
  - Non-oil growth expected to continue into 2024 before returning to medium-term potential of 4 percent.
  - Non-Oil GDP expected to represent 71 percent of the economy by 2028 (from about 56 percent in 2022).
- Inflation:
  - Staff projects inflation over the longer term to return to 2 percent.
- External and reserve trajectories:
  - Current account surplus expected to decline over the medium term.
  - Net foreign assets (excluding PIF and Aramco holdings) expected to stabilize at around 13.8 months of imports or the equivalent of 36 percent of GDP by 2028.
- Selected numerical projections (2022–28 series as reported):
  - Real GDP: 2022 = 8.7; 2023 = 1.9; 2024 = 2.8; 2025 = 4.2; 2026 = 3.3; 2027 = 3.3; 2028 = 3.1
  - Non-oil real GDP: 2022 = 4.8; 2023 = 4.9; 2024 = 4.4; 2025 = 4.4; 2026 = 4.2; 2027 = 4.2; 2028 = 4.0
  - Consumer price index (average): 2022 = 2.5; 2023 = 2.8; 2024 = 2.3; 2025 = 2.0; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0
  - Current account balance (percent of GDP): 2022 = 13.6; 2023 = 6.5; 2024 = 3.5; 2025 = 2.7; 2026 = 1.7; 2027 = 0.6; 2028 = -0.3
  - SAMA's total net foreign assets (US$ billions): 2022 = 440.5; 2023 = 427.8; 2024 = 413.1; 2025 = 412.1; 2026 = 422.7; 2027 = 438.8; 2028 = 459.2
  - Months of imports (next 12 months): 2022 = 19.4; 2023 = 17.5; 2024 = 15.7; 2025 = 14.6; 2026 = 14.0; 2027 = 13.9; 2028 = 13.8

### Risks and scenarios
- Overall risk assessment: Risks to the outlook are balanced.
- Upside risks:
  - Higher than expected oil production if OPEC+ production cuts are reversed.
  - Higher oil prices if expectations of a supply shortfall persist.
  - Accelerated structural reforms and full implementation of the NIS.
  - Further sales by the government of Aramco shares could ease financing.
- Downside risks:
  - Lower oil prices from subdued global activity or quicker shift in fossil fuel demand.
  - Pressures to increase spending and deviate from fiscal prudence.
  - Slowdown in reform implementation and overheating risks from rapid investment scaling.
- Overheating investment-scale scenario (near-term):
  - Assumes 24 percent y-o-y growth of real gross fixed capital formation in 2022 persisting over the next two years (vs. average 6 percent for 2023-24 in the baseline).
  - Projected impacts (relative to baseline, percentage points change):
    - CPI Inflation: 2023 = 2.7; 2024 = 6.5
    - Non-oil Output Gap (% of Potential): 2023 = 1.0; 2024 = 2.6
    - Saving-Investment Gap (% of GDP): 2023 = -2.4; 2024 = -4.4
  - Recommended policy responses: tighter monetary and fiscal policy, reprioritization of capital projects; a flexible labor market (including expatriate labor) could mitigate risks.
- Climate transition risk:
  - Staff modeling (IMF-ENV) finds limited GDP impact under scenarios where countries implement NDCs and Saudi Arabia implements its NDC commitment to reduce emissions by 278Mt of CO2 eq per annum by 2030.
  - Nominal oil price projections analyzed under supply-only, demand-only, and mixed scenarios with timelines extending to 2040.

### Policy implications and recommendations
- Sustain structural reforms and implement the National Investment Strategy to boost non-oil growth, competitiveness, and total factor productivity.
- Calibrate investment spending and fiscal policy to avoid procyclicality and overheating; reprioritize capital projects if demand pressures materialize.
- Build and maintain buffers to mitigate long-term energy transition risks and oil price uncertainty.
- Ensure flexible labor market arrangements (including appropriate use of expatriate labor) to help absorb shocks and reduce inflationary pressures.
- Continue deepening domestic capital markets to diversify long-term funding sources and reduce reliance on international markets.

### Fiscal position, revenue measures, and fiscal frameworks
- Fiscal developments and outlook:
  - The fiscal surplus for 2022 (first since 2013) was halved relative to staff’s initial projection of 5½ percent of GDP, reflecting increased goods and services and capital spending, including additional military expenditures of 2 percent of GDP.
  - Authorities estimate close to 3 percent of GDP in one-off non-recurrent spending in 2022 (half in goods and services).
  - Staff estimates a deficit of 1.2 percent of GDP in 2023 after accounting for higher expenditures and estimated non-recurrent spending in 2022.
  - Potential additional dividends from Aramco could provide revenue upside.
- Revenue, tax capacity, and tax gap:
  - Non-oil tax revenue doubled over the past four years to reach 10.6 percent of GDP and 14 percent of non-oil GDP in 2022.
  - Tax gap with estimated tax capacity reduced to around 10 percent of non-oil GDP in 2022 (from 15 percent in 2019).
  - Measures to narrow the tax gap: maintain VAT at 15 percent, widen VAT base, consider reforms to excises/customs duties, corporate income taxation, expat levies and property taxation, and accelerate tax administration improvements per TADAT assessment.
- Energy prices and subsidies:
  - Subsidies on liquid fuels reached 6.2 percent of GDP in 2022 through foregone revenue for the government from Aramco sales.
  - Diesel prices increased by 25 percent at end-2022.
  - Staff supports gradual elimination of fuel subsidies by 2030 and recommends lifting the cap on gasoline prices, adjusting formulas to allow faster increases for other fuels and electricity, and scaling up well-targeted means-tested social programs (e.g., Damaan).
- Expenditure rationalization and social protection:
  - Partial cuts in the 2023 budget expected to yield savings of 1¼ percent of GDP.
  - Sustaining cuts requires rationalization of subsidies and high wage bill, workforce planning, efficiency in public investment, regular spending reviews, and full utilization of the Etimad digitalized expenditure chain.
  - Staff welcomes a new social protection strategy and single registry; acceleration recommended.
- Fiscal rules and SALM:
  - Staff welcomes structural fiscal rule work expected in 2024 based on a 50-year smoothing of oil prices, and recommends quick application of a rule that delinks spending from higher oil prices.
  - Estimated that an expenditure rule setting 1½-2 percent real growth in spending would have performed well historically.
  - Support for accelerating development of a Sovereign Asset-Liability Management (SALM) framework across PIF, NDF, and other public entities.

### Debt management and public debt outlook
- Public debt: close to 24 percent of GDP, low and assessed to be sustainable.
- Stress tests indicate low overall risk of sovereign stress with existing buffers.
- Government guarantees limited (e.g., Saudi Refinancing Company 0.3 percent of GDP).
- Borrowing strategy priorities: lengthen maturities, improve interest risk management, reduce refinancing costs, build yield curves, develop green issuance, deepen local debt market (e.g., international primary dealers).
- Medium-term projection highlights (selected):
  - Public debt (percent of GDP): 2022 = 23.8; 2023 = 25.1; 2024 = 25.8; 2025 = 25.1; 2026 = 24.2; 2027 = 23.3; 2028 = 22.7
  - Gross financing needs (percent of GDP): 2022 = -2.0; 2023 = 2.7; 2024 = 2.1; 2025 = 2.0; 2026 = 2.6; 2027 = 1.7; 2028 = 2.3

### Monetary and exchange rate policies
- Recent monetary developments:
  - SAMA raised its policy rate by 475 basis points since early 2022.
  - Broad money (M3) growth: 8 percent in 2022; time and savings deposits increased by 32 percent.
  - Q1 2023: total bank deposits grew by 10.8 percent y-o-y; time and savings deposits grew 38 percent y-o-y.
- Systemic liquidity episodes and SAMA response:
  - Two systemic liquidity pressures in 2022 (June and October) with three-month SAIBOR-LIBOR spreads widening to over 150 basis points.
  - SAMA injected liquidity via open market operations and placing SAMA’s deposits with banks; spreads normalized.
  - June 2022 injection: SAR 40 billion (US$10.7 billion) in deposits; October 2022 involved recycling MoF funds (~SAR 50 billion).
- Policy guidance:
  - Monetary policy should support the exchange rate peg; with an open capital account, policy rates should move in line with the Fed.
  - Strengthen liquidity management via market-based instruments (SAMA bills, repos/reverse repos), improved liquidity forecasting (daily data), and enhanced communication on operational frameworks.
  - Accelerate creation of a formal Emergency Liquidity Assistance (ELA) framework with clear criteria, collateral requirements at a penalty rate, and separation from standard monetary operations.
- Exchange rate regime:
  - Pegged exchange rate has supported monetary stability; peg should be reviewed periodically.
  - External position substantially stronger than implied by medium-term fundamentals; buffers above ARA metric.

### Financial sector policies and banking system resilience
- Banking system soundness:
  - Aggregate capital adequacy ratio: strong and well above regulatory minimum.
  - Profitability: high and above pre-pandemic levels.
  - NPL ratio: low and declining (Gross NPLs to gross loans: 1.8 percent in 2022).
  - Repricing held-to-maturity bonds to reflect interest rate increases would lower capital adequacy by less than a percentage point (SAMA calculations, end-December 2022).
- Corporate sector resilience:
  - Return on assets: declined from 8 percent in 2007 to about 6 percent in 2021 but remains above peers.
  - Scenario analysis: a two standard deviation decline in real GDP (~7 percent) or oil prices (~50 percent) would keep return on assets above 4 percent even two years after the shock.
- Housing and mortgage risks:
  - Mortgage boom since 2018, but risks assessed as low; house prices moderate compared to other GCC countries.
  - Most mortgages subsidized, fixed-rate, full recourse, with repayments by salary assignment for public sector employees.
  - Share of mortgage loans now surpasses 30 percent of all bank loans.
- Regulatory and supervisory reforms:
  - Most 2017 FSAP recommendations implemented; adoption of IFRS9 and Basel III final reforms as of January 1, 2023.
  - Draft Banking Law and Resolution Law regulations are in progress.
- Macroprudential guidance:
  - Monitor credit underwriting, prioritize early detection of distress, timely loan delinquency recognition, adequate provisioning, and thematic inspections.
  - If elevated credit growth persists, consider tightening measures: reduce loan-to-value for first-time home buyers; tighten loan-to-deposit guidance; lower debt service-to-income ratio; phase out mortgage fiscal incentives; monitor liability composition to avoid wholesale/foreign funding vulnerabilities.
- Fintech and cyber resilience:
  - Fintech Strategy approved May 2022; fintech in operation increased to 147 by December 2022, with 89 companies licensed or authorized by SAMA.
  - SAMA implementing Cyber Resilience Fundamental Requirements.

### Central Bank Digital Currency (CBDC), AML/CFT, and data
- CBDC:
  - SAMA conducted the Aber CBDC project and continues exploring domestic wholesale CBDC designs via a three-phased approach (evaluation, testing, implementation).
- AML/CFT:
  - National Risk Assessment being finalized; coordination and capacity-building for AML/CFT ongoing, including monitoring risks associated with fintech.
- Data and statistics improvements:
  - New census published June 2023.
  - Household survey expected Q3 2023.
  - Chain-linked volume GDP rebasing planned for Q1 2024.
  - Continued work on national accounts, price statistics, external sector statistics, and government finance statistics.

### Climate transition (Box 2) — modeling and findings
- Climate commitments:
  - NDC: reduce, capture, and remove emissions by 278Mt of CO2 eq per annum by 2030 (revised upward in 2021 from 130Mt CO2 eq).
  - Net zero targets: national net zero by 2060; Aramco net zero Scope 1 and 2 by 2050.
- IMF-ENV scenarios:
  - Four domestic-policy scenarios: NDC (w/o Saudi Arabia); FFSR (fossil fuel subsidy removal); NDC Partial (FFSR + Renewable); NDC Full (FFSR + Renewable + CCUS).
  - CCUS abatement costed at US$50/ton CO2 in baseline; sensitivity with $100/ton examined.
- Key quantitative findings:
  - Eliminating fossil fuel subsidies reduces about 100 million MTCO2 eq (~one-third of the 2030 target).
  - Renewable deployment adds 56 million MTCO2 eq reduction.
  - CCUS required to reach 278Mt CO2 eq target.
  - GDP impacts in 2030 relative to baseline:
    - NDC Full with CCUS at US$50/ton: GDP loss limited to 0.2 percent.
    - Doubling CCUS cost to $100/ton: GDP loss 0.4 percent.
- Policy implications:
  - Removing fuel subsidies, deploying renewables, and scaling CCUS can meet 2030 target with minimal GDP losses.
  - Lift cap on gasoline prices and scale up targeted social programs to protect vulnerable households.
  - Further fiscal adjustment and detailed costing of initiatives (afforestation, CCUS, hydrogen) needed.

### Structural reform agenda, industrial policy, and governance
- Vision 2030 progress: regulatory and business environment, digitalization, and labor market reform; many targets surpassed.
- PIF activity: new investment deals increased by 95 percent in 2022 and new investment licenses grew by 267.4 percent (mostly in construction and manufacturing).
- Industrial policy (Annex X):
  - NIS objectives: build industrial resilience, become regional manufacturing hub, expand global leadership.
  - SEZ incentives include corporate income tax 5 percent for 20 years (50 years for SILZ), withholding tax 0 percent for repatriation, 0 percent customs duties, and expat levy exemptions.
  - Staff recommends guardrails: cost-benefit analysis, strict exit criteria, claw-back mechanisms, sunset clauses, time-bound measures, transparency, and avoidance of discriminatory local content requirements.
- Governance and anti-corruption:
  - Progress on anti-corruption strategy and public procurement transparency; Nazaha by-laws approval and whistleblower protection law pending.
  - Voluntary assessment recommends enhancing beneficial ownership accuracy, finalizing NRA, and improving confiscation frameworks.

### Conclusion and monitoring priorities
- Transformation progress: output gap closed, inflation contained, unemployment at record low, external and fiscal buffers rebuilt, and shrinking oil contribution.
- Near-term outlook strong with balanced risks; contingency measures (tighter fiscal policy, calibrating investment spending) recommended if demand pressures materialize.
- Emphasized priorities:
  - Sound debt management and SALM development.
  - Continued exchange rate peg support and tight monetary stance aligned with the Fed.
  - Monitor rapid credit growth and mortgage exposures; apply macroprudential measures as needed.
  - Carefully calibrate investment programs (including PIF) to avoid crowding out private investment and overheating.
  - Accelerate governance and transparency reforms and detail Green Initiative implementation plans.
- Recommendation: next Article IV on the standard 12-month cycle.

*Source: IMF staff report chapter "1. Saudi Corporate Performance and Resilience to Shocks" and related excerpts (1sauea2023001).*

### 1. Saudi Corporate Performance and Resilience to Shocks _______________________________________ 25

### 1. Saudi Corporate Performance and Resilience to Shocks

### Background: Economic transformation and reform priorities
- Since Vision 2030 (2016) Saudi Arabia has reduced the oil sector’s contribution across revenue, export, and output; rebuilt external and fiscal buffers; doubled non-oil revenue mobilization; reached record low unemployment; surpassed the female labor force participation 2030 target (over 30 percent); and improved government efficiency (including through digitalization).
- Sustaining reform momentum irrespective of oil prices is crucial to generate inclusive growth and enhance resilience.
- Implementation of the National Investment Strategy (NIS) and continued structural reforms are expected to:
  - Foster competitiveness and enhance total factor productivity.
  - Boost non-oil growth significantly and help further reduce unemployment and diversify the economy.
- Fiscal calibration is needed to avoid procyclicality and overheating and to reduce risks from ambitious giga projects and industrial policies.

### Recent economic developments (key findings and statistics)
- 2022 growth and composition:
  - Saudi Arabia was the fastest growing G20 economy in 2022 with growth of 8.7 percent y-o-y.
  - Crude oil production increased by 16 percent in 2022.
  - Non-oil growth rose by 4.8 percent y-o-y in 2022, driven by wholesale, retail, restaurants, higher ICT growth, and construction; higher mortgage rates dampened real estate in H2.
  - Private consumption increased by 4.8 percent y-o-y.
  - Non-oil private investment rose by 45 percent in 2022, spurred by giga projects.
- Labor market:
  - Total unemployment reached 4.8 percent in 2022Q4 (down from 9 percent during Covid).
  - Saudi unemployment rate dropped to 8 percent in 2022 (its lowest level on record).
  - Youth unemployment was 16.8 percent in 2022.
  - Female unemployment reached 12.9 percent while female labor force participation for nationals reached 37 percent (from 18 percent in 2017).
- Inflation and wages:
  - Headline CPI averaged 2.5 percent in 2022.
  - Headline inflation upticked to 3.4 percent in early 2023, then fell to 2.8 percent in May 2023.
  - Wages for low-skilled workers rose by 12 percent y-o-y in 2022Q4.
- External position and reserves:
  - Current account surplus in 2022 was 13.6 percent of GDP, equivalent to $150.8 billion.
  - Reserves increased by $4.5 billion over 2021 despite the current account surplus; net foreign assets provided about 19.4 months import cover in 2022.
  - More recently, reserves declined by about $17.7 billion in May 2023 relative to 2022, primarily due to large amortizations.
  - Aramco held US$135 billion in cash and short-term investments at end-2022 (equivalent to 12 percent of GDP), mostly abroad.
- Capital markets and financing:
  - Tadawul All Share Index fell by 7.1 percent in 2022.
  - Sovereign spreads averaged 72 bps daily in 2022.
  - Market capitalization expanded (9th largest in the world for equity); increased weights in MSCI emerging market index attracted more foreign investors.
  - Recent debt-raising: $10 billion sovereign issuance, $6 billion sukuk issuance, PIF green bonds ($3 billion in October 2022, and $5.5 billion in February 2023).
  - Rating agencies upgraded Saudi sovereign credit ratings.

### Outlook (baseline projections and key numeric projections)
- Oil price assumption and growth:
  - Staff baseline assumes international oil prices average $78 per barrel in 2023 (a 21 percent decrease over the average 2022 WEO oil price).
  - Non-oil real GDP growth expected to average 4.9 percent in 2023.
  - Oil GDP growth expected to decline by 2.5 percent in 2023 (despite increasing refining production).
  - Overall real GDP projected to grow by 1.9 percent in 2023.
  - Non-oil growth is expected to continue into 2024 before returning to medium-term potential of 4 percent.
  - Non-Oil GDP is expected to represent 71 percent of the economy by 2028 (from about 56 percent in 2022).
- Inflation:
  - Headline inflation expected to remain contained; staff projects inflation over the longer term to return to 2 percent (the long-term U.S. average).
- External and reserve trajectories:
  - Current account surplus expected to decline over the medium term as oil prices stabilize and imports pick up.
  - Net foreign assets (excluding PIF and Aramco holdings) expected to stabilize at around 13.8 months of imports or the equivalent of 36 percent of GDP by 2028.
- Selected numerical projections (2022–28 series as reported):
  - Real GDP: 2022 = 8.7; 2023 = 1.9; 2024 = 2.8; 2025 = 4.2; 2026 = 3.3; 2027 = 3.3; 2028 = 3.1
  - Non-oil real GDP: 2022 = 4.8; 2023 = 4.9; 2024 = 4.4; 2025 = 4.4; 2026 = 4.2; 2027 = 4.2; 2028 = 4.0
  - Consumer price index (average): 2022 = 2.5; 2023 = 2.8; 2024 = 2.3; 2025 = 2.0; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0
  - Current account balance (percent of GDP): 2022 = 13.6; 2023 = 6.5; 2024 = 3.5; 2025 = 2.7; 2026 = 1.7; 2027 = 0.6; 2028 = -0.3
  - SAMA's total net foreign assets (US$ billions): 2022 = 440.5; 2023 = 427.8; 2024 = 413.1; 2025 = 412.1; 2026 = 422.7; 2027 = 438.8; 2028 = 459.2
  - In months of imports of goods and services (next 12 months): 2022 = 19.4; 2023 = 17.5; 2024 = 15.7; 2025 = 14.6; 2026 = 14.0; 2027 = 13.9; 2028 = 13.8

### Risks and scenarios
- Overall risk assessment: Risks to the outlook are balanced.
- Upside risks:
  - Higher than expected oil production if OPEC+ production cuts are reversed.
  - Higher oil prices if expectations of a supply shortfall persist.
  - Accelerated structural reforms and full implementation of the NIS (staff’s implementation assumes half of the planned year-on-year increase).
  - Further sales by the government of Aramco shares could ease financing and allow increased spending.
- Downside risks:
  - Lower oil prices from subdued global activity (short term) or quicker shift in fossil fuel demand (medium- to long-term).
  - Pressures to increase spending and deviate from fiscal prudence.
  - Slowdown in reform implementation and overheating risks from rapid investment scaling.
- Overheating investment-scale scenario (near-term):
  - Assumes 24 percent y-o-y growth of real gross fixed capital formation in 2022 persisting over the next two years (vs. average 6 percent for 2023-24 in the baseline).
  - Projected impacts (relative to baseline, percentage points change):
    - CPI Inflation: 2023 = 2.7; 2024 = 6.5
    - Non-oil Output Gap (% of Potential): 2023 = 1.0; 2024 = 2.6
    - Saving-Investment Gap (% of GDP): 2023 = -2.4; 2024 = -4.4
  - Policy responses to overheating should include tighter monetary and fiscal policy and reprioritization of capital projects; a flexible labor market (including expatriate labor) could mitigate risks.
- Climate transition risk:
  - Transition to net-zero raises uncertainty about long-term oil demand and prices.
  - Staff modeling suggests that even if all countries implement their NDCs and Saudi Arabia implements its NDC commitment to reduce emissions by 278Mt of CO2 eq per annum by 2030, the impact on the economy is expected to be limited as oil price reduction is contained.
  - Nominal oil price projections under net-zero scenarios were analyzed (supply-only, demand-only, 50% supply/50% demand shock scenarios) with timelines extending to 2040, indicating varied but contained effects.

### Policy implications and recommendations (implied/explicit)
- Sustain structural reforms and implement the National Investment Strategy to boost non-oil growth, competitiveness, and total factor productivity.
- Calibrate investment spending and fiscal policy to avoid procyclicality and overheating, including reprioritization of capital projects if demand pressures materialize.
- Build and maintain buffers to mitigate long-term energy transition risks and high uncertainty about oil prices.
- Ensure flexible labor market arrangements (including use of expatriate labor where appropriate) to help absorb shocks and reduce inflationary pressures.
- Continue deepening domestic capital markets to diversify long-term funding sources and reduce reliance on international markets.

*Source: IMF staff report chapter "1. Saudi Corporate Performance and Resilience to Shocks" (excerpts as provided).*

### 10.      Potential inward and outward spillovers from recent developments appear limited. The

### 10.      Potential inward and outward spillovers from recent developments appear limited.

### Spillovers and remittances
- Impact of financial tensions in the U.S. and Europe on Saudi Arabia is limited so far, despite large public and private investments abroad.
- U.S. Treasury bills and bonds holdings by Saudi Arabia declined in the recent period but still represent the equivalent of 10 percent of GDP.
- Positive spillovers expected from increased outward remittances due to stronger growth in the Kingdom and the post-Covid return of expatriate workers.
- Support to vulnerable countries has risen, with Saudi Arabia providing US$28 billion since October 2021, including to help mitigate the impact of the food security crisis.

### Authorities’ views on growth and risks
- Authorities agree with staff’s 2023 growth projection; near-term growth to remain above potential driven by strong consumption spending and accelerated project implementation.
- Over the medium term, authorities are confident that Vision Realization Programs, sectoral strategies, regional strategies and giga projects will continue raising non-oil growth and potential growth above staff’s baseline.
- Authorities recognize risks from large structural transformation reforms and are constantly assessing these risks while reviewing funding requirements and capacity for Vision 2030.
- Mitigating factors cited: a flexible labor market and existing cap on gasoline prices limiting inflationary pressures.
- Authorities expect Vision 2030 reforms to have positive regional and global spillovers.

### Fiscal position and near-term outlook
- The fiscal surplus for 2022—the first since 2013—has been halved relative to staff’s initial projection of 5½ percent of GDP, largely reflecting increases in goods and services and capital spending, including additional military expenditures of 2 percent of GDP.
- Close to 3 percent of GDP were, in the authorities’ latest estimates, one-off non-recurrent spending (of which, half is in goods and services).
- Staff estimates a deficit of 1.2 percent of GDP in 2023 after taking into account higher expenditures and estimated non-recurrent one-off spending made in 2022.
- Potential additional dividends from Aramco could allow for an upside in revenues.
- The non-oil primary balance is expected to improve by a cumulative 10 percent of non-oil GDP by 2028 under staff projections, but overall surpluses remain small and contingent on any shift in the oil price.

### Medium-term fiscal stance and required adjustment
- Under current policies, the non-oil primary deficit would reach about 20.5 percent of non-oil GDP by 2028 and the Central Government Net Financial Assets (CGNFA) would not improve by 2028, remaining at a negative level.
- Reaching the Permanent Income Hypothesis (PIH) norm would require new measures over the baseline transition period of close to 2 percent of non-oil GDP by 2028.
- Staff recommends achieving this through a combination of revenue increases and expenditure measures (details below).

### Revenue, tax capacity, and tax gap
- Non-oil tax revenue has doubled over the past four years to reach 10.6 percent of GDP and 14 percent of non-oil GDP in 2022.
- The tax gap with Saudi Arabia’s estimated tax capacity reduced to around 10 percent of non-oil GDP in 2022 (from 15 percent in 2019).
- Measures to narrow the tax gap include:
  - Maintaining the VAT rate at 15 percent, widening the base through reduced tax expenditures, and considering reforms to excises/customs duties, corporate income taxation, expat levies and property taxation.
  - Accelerating efforts to remedy tax administration gaps identified through an internal TADAT assessment as part of a comprehensive medium-term revenue strategy.

### Energy prices, subsidies, and mitigation
- Energy price reforms in 2016 and 2018 contributed to halving subsidies between 2010 and 2020.
- Subsidies on liquid fuels reached 6.2 percent of GDP in 2022 through foregone revenue for the government from Aramco sales.
- A 25 percent increase in diesel prices at the end of 2022 took place; staff supports authorities’ plans to gradually eliminate fuel subsidies by 2030.
- Recommended steps:
  - Lifting the cap on gasoline prices to help reduce subsidies and encourage energy conservation.
  - Adjusting the current formula to allow faster increases for other fuel prices and electricity to contain the rise in energy subsidies.
  - Scaling up well-targeted and means-tested social programs (e.g., Damaan) to support energy subsidy reforms.

### Expenditure rationalization and social protection
- Partial cuts planned in the 2023 budget in goods and services and in social benefits/subsidies are expected to yield savings of 1¼ percent of GDP.
- Sustaining cuts will require continued rationalization of subsidies and the high wage bill, strategic workforce planning, greater medium-term planning, efficiency in public investment, regular spending reviews, and full utilization of the Etimad digitalized expenditure chain platform.
- Staff welcomes a new social protection strategy (submitted for legislative approval) and the setup of a single registry; acceleration is recommended to ensure benefits remain well-targeted and reduce leakages.
- A new household living standards survey—being conducted with the World Bank—will help underpin social spending levels using a means-tested approach.

### Fiscal rules, frameworks, and public sector balance sheet
- An expenditure rule based on a fiscal anchor derived from the PIH (with a norm based on prudent assumptions) may best serve growth and stabilization objectives.
- Staff welcomes ongoing work on a structural fiscal rule expected to be implemented in 2024 based on a 50-year smoothing of oil prices in real terms, but calls for quick application of a fiscal rule that delinks spending decisions from higher oil prices.
- Staff estimates an expenditure rule setting 1½-2 percent real growth in spending would have performed well historically and would help prevent pro-cyclical expenditure growth during high oil price years.
- Staff supports accelerating development of a Sovereign Asset-Liability Management (SALM) framework to monitor sovereign balance sheet exposures across the PIF, NDF, and other public entities and to assess future investment commitments and funding needs.
- A preliminary assessment suggests public sector balance sheets are healthy with significant assets and limited leverage, though any significant ramp up in investment would require further capital (e.g., for NDF).

### Strengthening fiscal frameworks and transparency
- Priority reforms to strengthen fiscal frameworks include:
  - Anchoring fiscal policy in a medium-term fiscal framework (MTFF) and moving from a 3-year MTFF to a 5-year MTFF.
  - Advancing the medium-term expenditure framework beyond the pilot in six ministries and moving to accrual accounting to improve expenditure prioritization and enable performance-based budgeting by 2027.
  - Enhancing cash management via implementation of the Treasury Single Account (TSA); more than ten thousand government accounts have been rationalized, with 3000 accounts expected to remain once transfer of 188 entities is completed.
  - Strengthening budget execution through wider use of the Etimad platform and speeding payments to suppliers; transition to accrual budgeting will account for payment delays and improve fiscal assessment.
  - Accounting for fiscal risks by publishing internal reports on macro-fiscal risks, assessing contingent liabilities from PPPs and credit guarantees, and improving risk registers and assessment tools.
  - Enhancing fiscal transparency via expanded Budget Statement, higher frequency reports, further details on revenue and expenditure items, and quantifying and reporting all tax expenditures.
- Publication of PIF financial statements is welcomed as it will help determine an accurate state of public finances.

*Source: IMF staff calculations and country authorities.*

### 18.      Sound debt management should continue to support fiscal policy and mitigate risks.

### 18. Sound debt management should continue to support fiscal policy and mitigate risks.

### Public debt and sovereign risk
- At close to 24 percent of GDP, public debt remains low and is assessed to be sustainable (Annex III).
- Results from stress scenarios suggest low overall risk of sovereign stress, with existing buffers that can support periods of fiscal deficits.
- Government guarantees appear limited to debt issuances by the Saudi Refinancing Company (0.3 percent of GDP).
- Fiscal risks would be further mitigated by assessing and disclosing all potential contingent liabilities linked to increased private sector participation, including from PPP, and debt issuances by the PIF.

### Borrowing and market development strategy
- The borrowing strategy is set to remain agile and innovative to:
  - lengthen debt maturities,
  - further improve interest risk management,
  - reduce refinancing costs,
  - build a yield curve in domestic and international markets,
  - develop green issuance,
  - further deepen the local debt market (e.g., with the introduction of international primary dealers).

### Authorities’ views on fiscal policy and debt management
- Priority: fiscal sustainability and discipline based on a medium-term fiscal anchor.
- Authorities argue that increased capital expenditures and accelerated investments may justify slight deviations from previously set expenditure ceilings, which could generate a small deficit for this fiscal year.
- They noted significant improvements in enhancing fiscal transparency since the Vision 2030 launch.
- Considering transition to a fiscal rule that establishes expenditure ceilings delinked from oil prices and with clear criteria for surplus allocation.
- Expect fiscal consolidation to be expenditure-driven, mostly through spending efficiency, and continuation of energy price reforms.
- Cap on gasoline prices retained for now; cost of subsidies expected to fall this year in line with lower global commodity prices.
- Non-oil revenue mobilization remains a key anchor; immediate priority on broadening the base and growth in the economy, not on new tax policy measures.
- Agreed on accelerating work on an asset liability management framework and progressing towards an MTFF in line with international best practices.
- Progress on cash management and increased communication with the monetary authorities as the authorities move towards a Treasury Single Account.

---

### B. Monetary and Exchange Rate Policies

### Recent monetary developments and key statistics
- SAMA raised its policy rate by 475 basis points since early 2022, in line with the U.S. monetary tightening cycle.
- Broad money (M3) growth remained robust at 8 percent in 2022, supported by expansion of time and savings deposits, which increased by 32 percent.
- Demand deposits declined by 2 percent y-o-y in 2022.
- Q1 2023: total bank deposits have grown by 10.8 percent y-o-y, mainly supported by time and savings deposits (38 percent y-o-y increase).

### Systemic liquidity episodes and SAMA response
- Systemic liquidity pressures emerged twice in 2022 (June and October 2022), manifested in a significant widening of the three-month SAIBOR-LIBOR spreads to over 150 basis points (more than double the 60 basis points historical average).
- SAMA eased pressures by injecting liquidity through standard facilities (open market operations) and placing SAMA’s deposits with banks; interest rate spreads have normalized to historical averages.

### Policy guidance and operational recommendations
- Monetary policy should continue to support the exchange rate peg; with an open capital account, policy rates should move in line with the Fed policy rate.
- Liquidity management operations could be further strengthened through:
  - Market-based monetary policy instruments: rely primarily on open market operations (SAMA bills, repos/reverse repos); other injections—including deposits—should be market-based and avoid unnecessary risks to SAMA’s balance sheet.
  - Strengthening liquidity forecasting: require daily data, appropriate government forecasts on revenue and expenditure (including ex-post reviews), and regular exchange of information with the PIF/NDF.
  - Enhancing communication on the operational framework: clarify modalities for pursuing the operational target to improve public understanding and banks’ engagement in market segments.

### Emergency liquidity assistance (ELA)
- Recommendation to accelerate efforts to create a formal ELA framework.
- Suggested design features:
  - Clear criterion for when and why to provide ELA.
  - ELA provided only as long as the liquidity shortage persists and against a broader set of collateral at a penalty rate to viable banks.
  - ELA should be separated from standard monetary policy operations.

### Exchange rate regime and external position
- The pegged exchange rate regime has supported monetary stability; the peg should be reviewed periodically.
- Saudi Arabia’s external position is substantially stronger than implied by medium-term fundamentals, with buffers well above the minimum level defined under the ARA metric (Annex V).
- Competitiveness-enhancing reforms and a sizeable investment program, including by PIF, will help align the external position in the medium term while a medium-term fiscal framework will support fiscal consolidation.

### Authorities’ views on monetary policy
- Agreed that monetary policy should continue to support the peg and ensure adequate liquidity in the banking system.
- Highlighted that temporary liquidity pressures were eased by timely actions; will continue to primarily use market-based methods (e.g., open market operations).
- Welcomed forthcoming Fund technical assistance on liquidity forecasting and agreed on finalizing a formal ELA framework.

---

### C. Financial Sector Policies

### Banking system soundness and key indicators
- The banking system remains on a solid footing: aggregate capital adequacy ratio is strong (well above the regulatory minimum), profitability is high and above pre-pandemic levels, and the NPL ratio is low and declining.
- While mortgages growth has moderated, demand for project-related and consumer loans is expected to remain strong.
- Spillovers from the collapse of Credit Suisse and several mid-sized U.S. banks have been limited.
- SAMA calculations (end-December 2022 data): repricing of all bonds classified as held-to-maturity to reflect interest rate increases would lower the capital adequacy ratio by less than a percentage point.

### Corporate sector resilience (Box 1)
- Return on assets declined from 8 percent in 2007 to about 6 percent in 2021 but remains above peers.
- Firms’ profitability is persistent and positively associated with real GDP growth and oil price.
- Scenario analysis: a two standard deviation decline in real GDP (about 7 percent decline), or a two-standard deviation decline in oil prices (about a 50 percent decline), would keep return on assets above 4 percent even two years after the shock.

### Housing and mortgage risks
- Despite a mortgage boom since 2018, risks from the housing sector are assessed to be low.
- House prices have grown fast in a few areas but overall remain moderate compared to other GCC countries.
- Most mortgages are subsidized, issued at a fixed interest rate, with full recourse, and repayments made by salary assignments from public sector employees.

### Regulatory and supervisory reforms
- Most 2017 FSAP recommendations implemented, including roll-out of risk-based bank supervision and adoption of IFRS9 for banks (Annex VII).
- As of January 1, 2023, SAMA implemented Basel III final reforms regarding capital requirements, refinements to risk-weighted assets, and a revised leverage framework.
- Temporary regulatory COVID-19 measures phased out in 2022 and early 2023 with limited impact on asset quality.
- Ongoing work on draft Banking Law to strengthen framework for licensing, regulation, and supervision; work to strengthen regulatory framework for Islamic banks and implement Resolution Law regulations is welcome.

### Vigilance and macroprudential guidance
- Authorities should remain vigilant given rapid credit growth, especially mortgages:
  - Monitor credit underwriting and credit management practices closely.
  - Prioritize early detection of debtors and exposures in distress, timely recognition of loan delinquencies, and adequate provisioning.
  - Thematic onsite inspections of corporate loan and mortgage portfolios by SAMA are welcome.
  - Regular implementation of ICAAP and ILAAP and annual assessment of the countercyclical capital buffer are important.

- If elevated credit growth persists, staff recommends gradually tightening macroprudential measures, including:
  - Reducing the loan-to-value ratio for first-time home buyers.
  - Tightening the guideline on the loan-to-deposit ratio.
  - Lowering the debt service-to-income ratio.
  - Phasing out fiscal incentives provided for house mortgages should be considered.
  - Monitor composition of banks’ liabilities to avoid vulnerabilities from wholesale or foreign funding.

### Fintech and cyber resilience
- Fintech Strategy approved in May 2022; fintech ecosystem expanding:
  - Number of fintech in operation increased to 147 by December 2022, with 89 companies licensed or authorized by SAMA.
  - Payments and payment services constitute 30 percent of fintech companies’ registered activities.
- SAMA implementing Cyber Resilience Fundamental Requirements to help financial institutions manage and mitigate a wide range of cyber risks.

*Source: 1sauea2023001 - 18. Sound debt management should continue to support fiscal policy and mitigate risks.*

### 31.      SAMA is building on existing expertise to explore further Central Bank Digital

### 1sauea2023001 - 31.      SAMA is building on existing expertise to explore further Central Bank Digital

### Central Bank Digital Currency (CBDC)
- SAMA conducted the Aber CBDC project and was one of the first central banks in the world to experiment with domestic and cross-border wholesale CBDC.
- SAMA is continuing to explore CBDC use cases with a focus on evaluating the domestic wholesale design.
- SAMA is undertaking a three-phased approach (evaluation, testing, implementation), allowing for ongoing assessment at each stage and an evolving future roadmap.

### Anti-Money Laundering / Combatting the Financing of Terrorism (AML/CFT)
- The National Risk Assessment is being finalized and its findings should serve as the basis to further improve prioritization of mitigation measures.
- Saudi Arabia is enhancing coordination on AML/CFT between competent authorities and strengthening the framework for confiscation of major proceeds of crime.
- Efforts include raising the capacity of various AML/CFT stakeholders and enhancing AML/CFT supervision, including monitoring risks associated with fintech.

### Banking sector resilience and authorities’ views
- Authorities highlighted strong banking sector performance and judged risks from higher credit growth (including mortgages) or global spillovers to be relatively contained.
- Move to Basel III reforms and full IFRS 9 implementation is viewed as ensuring adequate capital buffers; ongoing thematic inspections and monitoring are in place.
- Authorities project that credit growth will remain in single digits, lessening near-term need to tighten macroprudential tools.
- Planned regulatory enhancements include adopting the recently revised Banking Law, implementing regulations to the resolution law, and strengthening AML/CFT (including monitoring cyber risks).

### Structural reform agenda (Vision 2030) and private sector development
- Vision 2030 mid-way stocktaking shows progress in regulatory and business environment, digitalization, and labor market reform; some 2030 targets already surpassed.
- PIF expected to catalyze private investment and restructure sectors; in 2022 new investment deals increased by 95 percent and new investment licenses grew by 267.4 percent (mostly in construction and manufacturing).
- Persistent constraints to investment identified by the World Bank Enterprise Survey: access to land, access to finance, and education of the workforce.

Key reform priorities and recommendations:
- Improvements in the regulatory environment:
  - Implement recent laws (commercial courts, insolvency) to protect investors and expedite cases.
  - New Investment Law (public consultation) aimed at level playing field for Saudi and non-Saudi investors.
  - Create effective communication strategy to announce policy changes and reduce wait-and-see investor behavior.
- Streamlining fees:
  - Ongoing work by the Non-Oil Revenue Center to streamline and standardize numerous fees faced by businesses.
  - Exercise should be holistic and take into account tax policy reforms envisaged by the Kingdom.
- Labor market reform:
  - Human Capital Development Program and Labor Demand Foresight Unit to support scaling up skilled labor and reducing wage premium.
  - Doubling of the Saudi female labor force participation since 2017; potential growth gains from increasing female participation to the OECD or G20 average are estimated at 1.6 percent per annum.
  - Launch of the Women Empowerment initiative and gender budgeting program to support momentum.
- PIF interventions:
  - PIF policy to conduct rigorous cost-benefit analysis, systematic exit/divestment analysis, regular risk monitoring, and reprioritization of projects is welcome.
  - Important to clearly communicate exit strategies (e.g., IPOs) to avoid perceptions of crowding out private investment.
- Increasing investment efficiency:
  - Need for effective project selection, appraisal, feasibility, and governance frameworks, especially for PPPs and projects outside the traditional budget process.
  - A unified public investment management system and a Public Investment Management Assessment (PIMA) could help benchmark and identify priorities.
- Digital transformation:
  - Since 2019 ICT strategy, the digital economy surpassed key 2023 targets; Saudi Arabia ranks high in digital infrastructure and digital government maturity.
  - Further priorities: improve digital literacy and skills, deploy high-speed internet access, strengthen cyber security measures, and activate e-participation for all population segments.

### Governance, anti-corruption, and transnational aspects
- Ongoing implementation of governance and anti-corruption advice; progress made on finalizing anti-corruption strategy and strengthening transparency of public procurement (including beneficial ownership collection).
- Approval of the anti-corruption agency (Nazaha)’s by-laws should be accelerated to enable full independent mandate, asset declaration framework, and enhanced prosecutorial framework for illegal enrichment.
- Whistleblower protection law remains pending approval.
- Voluntary assessment of transnational aspects of corruption: progress on controls of foreign ownership, AML/CFT preventive measures by larger financial institutions, and criminalization of bribery of foreign public officials; further improvements needed to prevent laundering of foreign proceeds of corruption and payments of bribes to foreign public officials.

### Industrial policy and safeguards
- Industrial Policy (IP) aims to reduce reliance on oil via targeted interventions, incentives, and Special Economic Zones (SEZ).
- Staff recommends minimizing risks by ensuring interventions correct market failures, conducting cost-benefit analysis on each new IP measure, and monitoring incentives with strict exit criteria, claw-back mechanisms, sunset clauses, and time-bound measures.
- Authorities’ commitment to WTO compliance is welcomed; discriminatory provisions (e.g., local content requirements in government contracts) should be avoided.

### Green Initiative and climate-related targets
- Saudi Arabia among the world’s largest emissions per capita, driven mainly by the energy sector; second lowest emissions globally per unit produced due to reduced flaring intensity.
- Authorities plan to increase renewable energy by an additional 2.1 GW capacity by 2024 and deploy Circular Carbon Economy (CCE) technologies including Carbon Capture Utilization and Storage (CCUS).
- Targets and initiatives included by 2030:
  - Reducing carbon emissions by 278 mtpa.
  - Use captured carbon to produce chemicals and synthetic fuels (2030).
  - Become the world's leading hydrogen producer and exporter (2030).
  - Plant 10 billion trees across Saudi Arabia and conduct a study on the 10 billion trees program.
  - Mangrove Plantation pilot at Jeddah Port and Green Mosques initiatives.
  - Designate 10 biodiversity protection areas of 977 sq.km and raise protected areas to more than 30 percent of terrestrial and marine areas.
  - Increase domestic capacity from renewable energy to around 50 percent, with the remaining majority from gas.
  - Expansion of the master gas system to increase supply capacity by more than 40 percent (2027).
- Staff analysis indicates revised 2021 targets can be reached with minimal GDP losses, including after eliminating fuel subsidies, but:
  - Additional costing and detailing of initiatives linked to each target is needed.
  - Accounting for cost uncertainty is necessary; example: if CCUS costs double from $50/ton of CO2 eq to US$100/ton of CO2 eq, mitigation loss is expected to remain in line with mitigation losses identified in the literature.
  - Green finance initiatives, including through PIF, and climate adaptation efforts (water demand, coastal flooding, soil degradation) are important priorities.

### Data and statistics improvements
- Data provision to the Fund is adequate for surveillance but further improvements are needed.
- Recent and planned statistical developments:
  - New census published in June 2023.
  - Improvements to the labor force survey being completed.
  - A household survey expected to be ready in Q3 2023.
  - Chain-linked volume estimation of GDP rebased to a more recent year planned for Q1 2024.
  - Plans to refine FDI data compilation in line with recent manuals and guides, with Fund TA assistance.
  - Planned outreach and comprehensive public communication to explain methodological changes when publishing revised data.
  - Continued work needed on national accounts, price statistics, external sector statistics, and government finance statistics, including classification of one-off revenues and expenditures and moving towards a general government concept.

*Source: 1sauea2023001 - 31.      SAMA is building on existing expertise to explore further Central Bank Digital*

### Box 2. From Oil Wells to Solar Cells: Saudi Arabia’s Climate Transition

### Box 2. From Oil Wells to Solar Cells: Saudi Arabia’s Climate Transition

### Climate targets and commitments
- Saudi Arabia committed under the Nationally Determined Contributions (NDC) to reducing, capturing, and removing emissions by 278Mt of CO2 eq per annum by 2030 (upward revision in 2021 from the previous 2016 pledge of 130Mt CO2 eq reductions).
- Saudi Arabia's Green Initiative includes plans to achieve net zero emissions by 2060, and net zero emissions through Saudi Aramco by 2050.
- The authorities describe their approach as Circular Carbon Economy (CCE) supported under four principles: Reduce, Reuse, Recycle, and Remove.

### Modeling approach and scenarios
- Model: IMF-ENV, a dynamic CGE model calibrated to staff’s current macro-economic framework; global mitigation in all scenarios.
- Four incremental domestic-policy scenarios considered (with other countries undertaking policies aligned with their NDCs):
  - 1. NDC (w/o Saudi Arabia): No further action by Saudi Arabia.
  - 2. FFSR: Fossil Fuel Subsidy Removal — gradual phaseout of subsidies by end-2030; savings assumed used as follows: One-fifth is redistributed to households (SSN) and the rest is used to increase overall investment.
  - 3. NDC Partial: FFSR + Renewable — FFSR and measures (subsidies and production taxes) to increase solar electricity capacity and natural gas capacity to 50 percent each.
  - 4. NDC Full: FFSR + Renewable + CCUS — NDC Partial combined with CCUS deployment to close the mitigation gap; CCUS abatement costed at US$50/ton CO2 in energy and industry sectors.
- Sensitivity: Doubling CCUS cost to $100/ton examined.

### Key quantitative findings
- Eliminating fossil fuel subsidies yields a reduction of about 100 million MTCO2 eq (about a third of the reduction target planned for 2030).
- Adding renewable energy will generate an additional 56 million MTCO2 eq emission reduction.
- CCUS is required to reach the 2030 target of 278Mt CO2 eq reductions; CCUS abatement costed at US$50/ton CO2 in the baseline NDC Full scenario.
- GDP impacts in 2030 (change w.r.t. baseline):
  - Under the full mitigation strategy with CCUS costed at US$50/ton, the GDP loss will be limited to 0.2 percent.
  - Doubling the costs of carbon capture to $100/ton will almost double losses to 0.4 percent.
  - These GDP losses are compared with literature estimates for global mitigation scenarios which range between 0.4 – 0.7 percent of GDP.
- Graphic-reported aggregate emission target noted as: 278 mpta.

### Policy implications and recommendations (from staff)
- Removing fuel subsidies and pursuing renewable deployment, together with CCUS deployment, can achieve the 2030 net emissions target with minimal GDP losses.
- Faster increases in energy prices—including by lifting the cap on gasoline prices—are important to create additional fiscal space and support the climate change agenda; this should be accompanied by scaling up well-targeted social programs to limit the impact on the most vulnerable.
- Additional fiscal adjustment over the medium term is advised to maintain stronger buffers and meet intergenerational needs, building on non-oil revenue mobilization (maintain current VAT rate, reform corporate income and property taxation, strengthen revenue administration).
- Continued improvements recommended: public investment efficiency, full utilization of the expenditure chain, rationalizing public sector wage bill, and strengthening fiscal rules (preferably a simple expenditure rule), MTFF development, budget forecasting, disclosure, and monitoring fiscal risks.
- For CCUS and broader climate strategy: refining results and needed CCUS contributions requires further details on policy plans for afforestation, CCUS, hydrogen—including financing and investment needs.

### Authorities’ views
- Authorities welcomed staff findings and noted sustained reform momentum under Vision 2030, with enhanced private sector role, removal of legal impediments, digitalization, and labor market reforms.
- Authorities reported completion of a mid-way stock-taking of Vision 2030, leading to more ambitious targets.
- Public investment management program is being implemented to improve investment efficiency.
- Authorities noted SEZs and industrial policies are being implemented with care to avoid undermining structural reforms and emphasized commitment to a rules-based global trade system and WTO compliance.
- On climate change, authorities welcomed staff’s results and emphasized CCE as a balanced, comprehensive approach; they expect R&D spending to help scale it up significantly.

### Staff appraisal highlights
- Saudi Arabia’s economic transformation is progressing well: output gap closed, inflation contained, unemployment at a record low, external and fiscal buffers rebuilt, and oil contribution to various sectors diminishing.
- Near-term outlook is strong with broadly balanced risks; contingency measures (tighter fiscal policy, calibration of investment spending) should be considered if demand pressures from rapid investment ramp-up manifest.
- Sound debt management, progress towards sovereign asset-liability management (SALM), and continued exchange rate peg support are emphasized.
- Monetary policy: a tight stance should continue, with policy rates moving in line with the Fed’s interest rates; establish emergency liquidity assistance framework.
- Banking system: strong capital adequacy, high profitability, low NPL ratio; monitor rapid credit growth and mortgage exposures; adopt macroprudential measures as needed.
- Structural reforms under Vision 2030 are encouraging; careful calibration of investment programs (including PIF) is needed to avoid private sector crowding out and overheating.
- Governance improvements underway should be accelerated (anti-corruption strategy, Nazaha by-laws, whistleblowers’ protection law).
- Industrial policy interventions should include cost-benefit analysis, impact evaluation, strict exit criteria, claw-back mechanisms, sunset clauses, and time-bound incentives; preferential policies like local procurement for government contracts are discouraged.
- The Green Initiative implementation is essential to meet net emissions reduction plans; elaborating specific programs and investments for each goal will facilitate evaluation and necessary adjustments.
- Continued improvements in national accounts, monetary and external statistics, and GFS compilation remain priorities.

*Source: IMF staff estimates; Box 2. From Oil Wells to Solar Cells: Saudi Arabia’s Climate Transition (1sauea2023001).*

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

### 1sauea2023001 - 55.      It is recommended that the next Article IV takes place on the standard 12-month cycle.

### Real Sector Developments
- Oil production has trended upwards, but declined recently following OPEC+ production cuts.
- Non-oil GDP represents a larger contribution to Real GDP growth.
- Non-oil growth is driven by retail and construction.
- On the demand side, private investment drives real growth.
- Outlook indicators:
  - Purchasing Managers Index (PMI): PMI New Orders and PMI Total Economy series (Jan-2022 to May-2023) show PMI remaining strong (50+ = expansion).
  - Consumption spending indicators: POS Transactions and ATM Withdrawals (SAR Billion) show consumption spending strong.

### Inflation Developments
- Headline and core inflation have declined.
- Largest declines observed in transports and food.
- Real estate sector shows signs of slowdown after two-year strong growth; residential, commercial, and agricultural contributions tracked (2020Q1–2023Q1).
- Wholesale Price Index pressures subsiding.
- Food price indices have declined in line with world prices (Saudi Arabia and World Index series).
- Projections suggest contained inflation (Consensus Forecasts April 2023; Saudi Desk Projection for 2023–2028: 1.5, 1.7, 1.9, 2.1, 2.3, 2.5, 2.7, 2.9, 3.1, 3.3, 3.5 shown as projection grid).

### Monetary and Financial Sector Developments
- Monetary policy remains aligned with the U.S. tightening cycle (SAUUS Fed Funds Rate series).
- SAIBOR/LIBOR spreads stabilized after two episodes of stress in the last year; SAIBOR and LIBOR series presented (Jan-20 to May-23).
- Excess liquidity in banking sector has reverted to more normal levels (Banks' Excess Reserves and SAMA Bills; percent of bank assets).
- Money supply (M3) remains growing; Money Supply (USD billion RHS and year on year growth) series shown.
- Deposits:
  - Shift to time deposits observed; bank deposits (USD Billion) series show Other Quasi-Monetary, Time & Savings, Demand deposits and Total Bank Deposits.
- Credit growth remains high but moderating; Private Sector Credit and Deposit Growth (Y-o-Y percent change) series show credit growth versus deposit growth and loan-to-deposit ratio.

### Banking and Financial Sector Developments
- Bank credit growth is slightly declining, driven by personal loans and real estate activities (Contribution to Bank Credits by Economic Activity; Aug-22 to Mar-23).
- Growth in long-term credit tapering off more recently; Bank Claims by Maturity (Y-o-Y percent change) series.
- Share of mortgage loans now surpasses 30 percent of all bank loans (Real Estate Loan Growth and Share in Total Lending; Mortgage Loans percent).
- Commercial bank deposit growth remains robust; Commercial Bank Deposits ratio and Loan to Deposit Ratio series.
- Banking system balance sheet composition:
  - Increase in private assets; decrease in foreign liabilities (Change in Banking System Balance Sheet Composition, Assets and Liabilities, 2021-2022; percentage point changes).

### External Sector Developments
- Higher oil prices improved the current account; trade balance and composition charts (2014–2022).
- Diversification signs: lower services deficit.
- Reserve accumulation has been tepid; Foreign Currency Reserves (EOP, USD Billion) series and Foreign Reserves and Trade Balance.
- Sizeable foreign assets acquisition abroad, including by PIF and Aramco; International Investment Position (USD Billion) shows Assets: FDI Abroad, Portfolio Investment, Other Investment, Reserve Assets, Liabilities lines.
- External balance sheet remains robust; reserves exceed ARA metrics.
- NEER appreciation driven by the dollar; REER appreciated less due to lower inflation relative to trading partners. Real and Nominal Effective Exchange Rate (Index, 2010=100) series shown.

### Fiscal Developments
- Fiscal performance improved with return to a surplus in 2022.
- Debt levels improved and remain low; Central Government Gross Debt (percent of GDP) series.
- Current expenditures have been contained; employee compensation slightly decreased as a share of expenditures.
- Revenue increased due to sizable oil windfalls and strong pick-up in non-oil revenue from goods and services taxation.
- Key table highlights (Table 1, selected rows):
  - Crude oil production (million of barrels per day): 2019–2028 row shows: 9.8 9.2 9.1 10.6 10.1 10.0 10.5 10.7 10.9 11.0
  - Average oil export price (U.S. dollars per barrel): 65.9 42.7 73.2 102.0 80.4 73.6 70.9 68.9 67.2 65.9
  - Nominal GDP (SAR billions): 3,145 2,754 3,257 4,156 3,997 4,055 4,223 4,383 4,558 4,746
  - Real GDP growth (percent): 0.8 -4.3 3.9 8.7 1.9 2.8 4.2 3.3 3.3 3.1
  - Consumer price index (avg): -2.1 3.4 3.1 2.5 2.8 2.3 2.0 2.0 2.0 2.0
  - Current account balance (percent of GDP): 4.6 -3.1 5.1 13.6 6.5 3.5 2.7 1.7 0.6 -0.3
  - Central government gross debt (percent of GDP): 21.6 31.0 28.8 23.8 25.1 25.8 25.1 24.2 23.3 22.7
  - SAMA's total net foreign assets (US$ billions): 494.0 449.2 438.2 440.5 427.8 413.1 412.1 422.7 438.8 459.2
- Table 2 (Budgetary Central Government Operations) highlights:
  - Revenue (SAR billions): 927 782 965 1,277 1,130 1,137 1,152 1,223 1,280 1,333 1,350 (years 2019–2028 in sequence)
  - Expenditure (SAR billions): 1,059 1,076 1,039 1,173 1,114 1,185 1,218 1,255 1,286 1,324 1,349
  - Net lending (+)/borrowing (-) (SAR billions): -132.6 -294 -73 104 -48 -67 -32 -7 1 (table formatting shows negative and positive entries across 2019–2028)
  - Revenue (percent of GDP): 29.5 28.4 29.6 30.7 29.2 28.4 28.4 29.0 29.3 28.9 28.5
  - Expenditure (percent of GDP): 33.7 39.1 31.9 28.2 28.8 29.7 30.0 29.7 29.4 29.0 28.4

### Labor Market Developments
- Total unemployment rate trending downward, driven by Saudi nationals and expatriates.
- Saudi national employment improved and youth unemployment has been halved.
- Labor force participation improved, particularly for females; female labor force participation 34.5 percent in 2022Q4.
- Private sector employment continues to rise; Private Sector Employment (Millions) series shows Saudi and Non-Saudi lines (Q3-2018 to Q4-2022).
- Average monthly wages remain contained, with slight increase over past year (Average Monthly Wages Riyals series).
- Wage premia exist between Saudi and non-Saudi, and in education; Wage Premium percent series (2021Q1, 2022Q2, 2022Q4).

### Climate Change and Emissions
- Saudi Arabia’s absolute levels of GHG emissions are low, but per capita they are sizeable; Saudi GHG emission series (1990–2018) and per capita/per GDP metrics presented.
- Saudi Arabia is one of the largest emitters in the region, trailing Iran.
- GHG composition: mainly CO2 and Methane.
- CO2 emissions largely driven by the energy sector; Methane driven by energy and waste contributions.
- Climate actions:
  - Saudi Green Initiative (SGI): announced investment total of $186 billion.
  - 2022 SGI progress: 18 million trees planted; launch of a $1.5 billion Sustainability Fund.
  - National Hydrogen Strategy to be published in 2023.

### Oil Price Scenarios (Upside/Downside)
- Scenario assumptions: low/high oil price scenario assumes the oil price is two standard deviations for period 2023-2028 below/above the WEO adjusted oil price throughout the projection years. Both scenarios assume no change in government spending, non-oil revenue collections, or external borrowing relative to baseline.
- Scenario impacts (2020–2028 charts):
  - Fiscal Balance (Percent of GDP): Low Oil Price Scenario, High Oil Price Scenario, Baseline series shown (visual).
  - Government Net Financial Assets (Percent of GDP): scenario series shown.
  - Current Account Balance (Percent of GDP): scenario series shown.
  - Reserves (Months of imports): scenario series shown.

### Monetary and External Tables (selected)
- Table 4 (Balance of Payments, USD Billion) highlights:
  - Current account (USD Billion): 38.2 -22.8 44.3 150.8 68.8 37.8 30.9 19.3 7.8 -3.5 (2019–2028)
  - Trade balance (USD Billion): 121.3 47.9 136.5 234.7 140.7 104.1 95.0 81.3 68.5 55.7
  - Exports (USD Billion): 261.6 173.9 276.2 410.7 329.2 311.0 323.4 330.2 339.4 347.4
  - Imports (f.o.b.) (USD Billion): -140.3 -125.9 -139.7 -176.0 -188.5 -206.8 -228.4 -248.9 -270.9 -291.7
  - SAMA's total net foreign assets (USD Billion): 494.0 449.2 438.2 440.5 427.8 413.1 412.1 422.7 438.8 459.2
  - Oil price (US$/barrel) and Average Saudi oil export price: 64.2 43.3 70.8 99.0 78.4 73.6 70.9 68.9 67.2 65.9

### Financial Soundness Indicators
- Table 6 (2016–2022) select indicators:
  - Number of licensed banks: 24 25 29 25 25 26 27 (2016–2022).
  - Total assets (percent of GDP): 93.3 89.3 80.1 81.6 104.9 97.2 84.3.
  - Credit to private sector (percent of GDP): 55.9 51.9 46.7 47.4 61.9 60.3 53.5.
  - Regulatory capital to risk-weighted assets: 19.5 20.4 20.3 19.3 20.3 19.9 19.9.
  - Gross NPLs to gross loans: 1.4 1.6 2.0 1.9 2.2 1.9 1.8.
  - Average pretax return on assets: 1.8 2.0 2.1 2.0 1.4 1.8 2.1.

### Recommendation Status and Policy Messages
- Support fiscal consolidation by stepping up efforts on non-oil revenue mobilization, energy price reforms and strengthening social safety net.
  - Implementation notes: No new tax measures in place, but non-oil tax revenue remained strong and increased with good compliance. Prices of four energy products increased in 2022, including diesel, but not enough to reduce subsidies on liquid fuels, which reached 6.2 percent of GDP in 2022 due to foregone government revenue from ARAMCO.
- Maintain fiscal discipline by adhering to the 2022 budget ceilings.
  - Fiscal balance improved by close to 5 percent of GDP in 2022, but less than expected in the 2022 Article IV. Medium-term consolidation more challenging due to higher spending and lower oil revenues.
- Increase necessary social safety net targets or food subsidies to support low-income households in 2022.
  - Implementation notes: Social benefits spending increased in 2022, including a special package to address high food prices. A new household living standards survey (World Bank) will help underpin social spending levels.
- Develop a sovereign asset-liability management framework to support fiscal sustainability.
  - Status: Ongoing work, starting with first phase on financial assets and liabilities aiming at comprehensive coverage.
- Strengthen public financial management reforms.
  - Status: Continued improvements—more accounts streamlined within the TSA; preparations for medium term budgeting; budget disclosure improving; statement of fiscal risks being developed; PPP risk assessment framework being finalized.
- Continue sound public debt management to support fiscal policy and capital market development.
  - Status: Public debt remains low, decreased by 5 percent of GDP in 2022, sustainable; borrowing strategy aims to lengthen maturities and deepen local debt market.
- Enhance supervisory scrutiny of credit risks and implement Basel III.
  - Status: Gross NPLs remain low. Enhanced monitoring ongoing; thematic bank inspections completed, including IFRS 9 model review, mortgage portfolio review, targeted inspections of corporate loan portfolios. Banking Control Law being finalized. Basel III frameworks for leverage, operational risks, and market risks are being applied.
- Rationalize and unify initiatives to support SMEs.
  - Status: Initiatives unified and rationalized in the SME Bank. Remaining tasks include streamlining numerous fees faced by SMEs.
- Facilitate investment efficiency and catalyze private investment.
  - Status: Non-oil private investment increased by 45 percent in real terms, driven by giga projects. Efficiency of private sector investment still needs improvement. PIF divestments (Tadawul and Acwa power) noted as examples of repositioning.
- Continue labor market reforms to boost productivity.
  - Status: Authorities promoted gender equality, including anti-discrimination regulation and other legal code changes. Overall unemployment 5.6 percent in 2022; female labor force participation 34.5 percent in 2022Q4, exceeding Vision 2030 targets.
- Continue authorities’ efforts on climate policies.
  - Status: $186 billion announced for SGI; 18 million trees planted in 2022; $1.5 billion Sustainability Fund launched; National Hydrogen Strategy to be published in 2023.
- Improve economic data.
  - Status: New GDP series based on a new supply and use table (SUT) estimation published; transition to chain-linked volume estimate expected to be completed by early (text truncated at source).

*Source: IMF staff — Saudi Arabia country report content unit 1sauea2023001 (figures, tables, and recommendation status as provided in the source).*

### 2024. Input and output tables were published for the first time. A population census has been

### Annex II. Risk Assessment Matrix

### Global Risks (Conjunctural)
- Intensification of regional conflict(s). Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, refugee flows, FDI and financial flows, and payment systems.
  - Likelihood: High
  - Expected impact: Medium
  - Key points: Direct spillover channels (trade, food prices, investments, financial sector) are limited for Saudi Arabia; Saudi Arabia is mostly commodity exporting. Food security has been a focus given constitution of advance stocks. Tensions in Asia would affect Saudi Arabia more strongly as it is the main destination for its exports and economic ties have intensified recently (in particular with China).
  - Policy response: Depend on the nature of the shock. Fiscal policy could respond, and the authorities would need to ensure adequate liquidity in the banking system.
- Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and markets fragmentation.
  - Likelihood: Medium
  - Expected impact: Medium
  - Key points: Main channel is lower commodity prices and demand for Saudi oil, particularly as China is now Saudi Arabia’s largest buyer of oil (with 26 percent of its oil exports). China is also a significant non-oil exporter to Saudi Arabia and a partner in direct foreign investments.
  - Policy response: Fiscal policy needs to be anchored in a medium-term framework to reduce procyclical risks. Use existing buffers and external borrowing to smooth short-term adjustment if needed. Monitor banking system liquidity and accelerate structural reforms to reduce oil-price dependence.
- Commodity price volatility. Succession of supply disruptions and demand fluctuations cause recurrent commodity price volatility, external and fiscal pressures, and social and economic instability.
  - Likelihood: Medium
  - Expected impact: Medium
  - Key points: Changes in global oil prices directly affect growth, inflation, fiscal and current account balances. Food supply shocks have tamed impact given Saudi policies on food stocks and some domestic price regulation.
  - Policy response: In response to a large increase/decrease in the global price of oil, use fiscal consolidation/stimulus to stabilize growth and inflation. Accelerate structural reforms to diversify the export base away from oil.
- Systemic financial instability. Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies and cross-border spillovers.
  - Likelihood: Medium
  - Expected impact: Low
  - Key points: Fixed exchange rate tied to the U.S. dollar and significant assets abroad make Saudi Arabia vulnerable to shifts in interest rates and market sentiment, but large buffers, favorable market access, and a strong banking balance sheet mitigate risks.
  - Policy response: Continue prudent financial sector policy, monitor bank and NBFI exposures via stress testing and inspections, and provide liquidity if needed with market-based mechanisms compatible with the peg.
- Monetary policy miscalibration. Major central banks slow tightening or pivot prematurely, de-anchoring inflation expectations and triggering wage-price spirals.
  - Likelihood: Medium
  - Expected impact: Low
  - Key points: Risk is low for Saudi Arabia amid low inflationary pressures. Monetary policy follows the U.S.; continued strong fundamentals reduce volatility risks.
  - Policy response: Continue monetary policies and liquidity management consistent with the exchange rate peg.

- Note on RAM probability language: “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent.

### Global Risks (Structural)
- Deepening geo-economic fragmentation. Weakened international cooperation and broader conflicts lead to reconfiguration of trade and FDI, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, and lower potential growth.
  - Likelihood: High
  - Expected impact: Medium
  - Key points: Saudi Arabia’s prominent role in the Middle East and global oil market and its geopolitical and economic ties to China and Russia could expose it to fragmentation effects, including demand shocks, supply disruptions, technological and payments fragmentation, and rising input costs.
  - Policy response: Remain engaged multilaterally (e.g., G20), keep open trade policies, accelerate fiscal and structural reforms to boost potential growth and diversify exports away from oil, and maintain strong capital adequacy to absorb any NPL increases during transition.

### Domestic Risks
- Reform slippage. Risk that reforms may slow, including because of domestic inflationary pressures, reducing prospects for stronger growth and employment over the medium term.
  - Likelihood: High
  - Expected impact: Low
  - Key points: Failure to deliver fiscal consolidation and structural reforms would adversely affect growth and employment. Failure to translate reforms into private-sector jobs for Saudis may pressure public employment and fiscal sustainability. Inflationary pressures might slow reforms (e.g., on energy prices, subsidies, VAT).
  - Policy response: Continue structural reforms to boost non-oil growth and labor market reforms to increase competitiveness of Saudi nationals. Implement fiscal adjustment that balances recovery support with rebuilding fiscal buffers.
- Cyberthreats. Cyberattacks on critical physical or digital infrastructure trigger financial and economic instability.
  - Likelihood: Medium
  - Expected impact: Medium
  - Key points: Given geopolitical tensions and rapid digitalization, Saudi Arabia faces a high density of cyberattacks; serious attacks occurred in 2012, 2015, 2017, 2019 and 2020 targeting critical infrastructure (including ARAMCO).
  - Policy response: Expanded capacity via the National Cybersecurity Agency (created in 2017) and a national cybersecurity strategy with 6 objectives to reach by 2030. Continue close monitoring and supervision of banking and payment systems.
- Energy transition. Faster global shift to lower fossil fuel consumption could lower demand and oil prices, affecting oil exporters.
  - Likelihood: Medium
  - Expected impact: Medium
  - Key points: Saudi Arabia remains vulnerable to lower oil prices despite diversification progress; has shown resilience historically and capacity to adjust using measures such as tax changes. Authorities view prolonged slump risk as low given energy security imperatives and a slow transition.
  - Policy response: Diversify away from fossil fuel use (e.g., renewable energy build-up in line with Vision 2030), accelerate phasing out of energy subsidies, enhance diversification efforts, implement fiscal rules in line with the Permanent Income Hypothesis, and sustain non-oil revenue mobilization.
- Extreme climate events. More frequent/intense events cause infrastructure damage, supply disruptions, inflationary pressures, and reduced growth.
  - Likelihood: Medium
  - Expected impact: Low
  - Key points: Saudi Arabia faces sandstorms and floods; limited water resources and rising temperatures imply increasing adaptation costs. Spillovers from extreme events in partner countries could also affect Saudi Arabia.
  - Policy response: Increase resilience to climate events and climate-change adaptation. The Saudi Green Initiative aims at planting 10 billion trees; align this with a water resources strategy and policy.

### Fiscal and Debt Sustainability Assessment (DSA) — Summary Findings
- Overall risk of sovereign stress: Low
- Near term: 1/ (note in source)
- Medium term: ModerateLow (as shown in DSA summaries)
- Long term: Low
- Key findings:
  - Saudi's public debt is assessed to remain sustainable under the baseline scenario.
  - Large buffers can support periods of fiscal deficits; past debt increases were partly to develop the local debt market and nurture access to international markets.
  - The assessment of low debt and financing risks over the medium and long term, together with stress scenario results, supports a final assessment of low risk.
  - Most indicators have begun to normalize as recovery from the COVID-19 shock proceeds.
  - Medium-term liquidity risks analyzed by the GFN Financeability Module are low.
  - Long-term risks are low given large asset buffers from the PIF if needed, and limited pass through of aging-related expenditures on health and social security to debt dynamics. Staff assess limited climate transition costs adding to debt dynamics.
  - On the fanchart: assets exceed 75 percent of GDP and 100 percent of public debt, so the mechanical signal from the debt fanchart module is adjusted to low regardless of the DFI’s level.
  - The overall assessment: Saudi Arabia is at a low overall risk of sovereign stress and debt is sustainable.

*Source: Fund staff.*

### 5. Debt consolidation across sectors:

### 1sauea2023001 - 5. Debt consolidation across sectors

### Debt coverage and disclosures
- Color code legend shown: █ chosen coverage     █ Missing f rom recommended coverage     █ Not applicable.
- Reported holders and issuers listed (values shown as 0): 
  - Budget. central govt 0
  - Extra-budget. f unds 0
  - Social security f unds 0
  - State govt. 0
  - Local govt. 0
  - Nonf in pub. corp. 0
  - Central bank 0
  - Oth. pub. f in. corp 0
  - Total 000000000
- Commentary: "State and local governments in Saudi Arabia do not have their own separate debt issuance authority, and typically operate under the umbrella of the central government, including their borrowing requirements."
- Reporting on intra-government debt holdings and recording/valuation notes:
  - CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
  - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - IPSGSs = Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.
  - Includes accrual recording, commitment basis, due for payment, etc. (Non-cash basis 4/; Cash basis).
  - Valuation definitions: Nominal value 5/; Face value 6/; Market value 7/.

### Public debt structure and key indicators (Figure 3 and commentary)
- Perimeters:
  - Debt by Currency: "The perimeter shown is central government."
  - Public Debt by Holder and Governing Law, Debt by Instruments, Public Debt by Maturity: "The perimeter shown is general government."
- Commentary: 
  - "Saudi Arabia continues to have space for external market access."
  - "The share of foreign currency debt slightly increases in the forecast horizon."
  - "Partial repurchasing of outstanding local and international debt bonds and securities maturing in the short term helped reduce future refinancing risk and slightly increased the average time to maturity."
- Residual maturity: 6. years.
- Maturity buckets shown (percent of GDP): ≤ 1 year; 1-5 years; > 5 years (series displayed across 2018–2031 projection horizon).

### Baseline scenario projections and contributions to change in public debt (Figure 4)
- Actual and projection series (Public debt, percent of GDP):
  - Public debt: 23.8 25.1 25.8 25.1 24.2 23.3 22.7 22.1 21.3 20.4 19.4 (years labeled: 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032)
  - Change in public debt: -5.0 1.3 0.7 -0.7 -0.9 -0.9 -0.6 -0.7 -0.8 -0.9 -1.0
- Contribution of identified flows: -8.7 0.2 0.4 -0.9 -1.0 -1.0 -0.6 -0.8 -0.9 -1.0 -1.1
- Primary deficit (percent of GDP): -2.5 0.7 1.1 0.2 -0.3 -0.6 -0.4 -0.7 -1.0 -1.2 -1.5
- Noninterest revenues (percent of GDP): 30.0 27.9 27.9 28.5 28.7 28.8 28.0 27.7 27.4 27.1 26.8
- Noninterest expenditures (percent of GDP): 27.5 28.7 29.1 28.7 28.4 28.2 27.6 27.0 26.5 25.9 25.4
- Automatic debt dynamics: -5.9 0.2 -0.2 -0.7 -0.3 0.1 0.2 0.4 0.5 0.6 0.8
  - Real interest rate and relative inflation: -2.6 0.7 0.4 0.4 0.5 0.8 0.9 1.1 1.2 1.3 1.4
  - Real interest rate: -3.9 1.4 0.8 0.6 0.7 0.9 1.0 1.1 1.2 1.4 1.5
  - Relative inflation: 1.3 -0.7 -0.3 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
  - Real growth rate: 2.3 -0.4 -0.7 -1.0 -0.8 -0.8 -0.7 -0.7 -0.6 -0.6 -0.6 (formatting in source shows line breaks; preserved values as presented)
- Other identified flows: -0.3 -0.7 -0.5 -0.5 -0.5 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4
- Contingent liabilities: 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Other transactions: -0.5 -0.8 -0.5 -0.5 -0.5 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4
- Contribution of residual: 3.7 1.0 0.3 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1
- Gross financing needs (percent of GDP): -2.0 2.7 2.1 2.0 2.6 1.7 2.3 2.1 2.0 1.8 1.6
  - of which: debt service: 1.0 2.3 1.4 2.3 3.4 2.8 3.2 3.2 3.4 3.4 3.4
  - Local currency: 0.6 0.6 1.1 1.4 2.6 1.8 1.9 1.9 2.1 2.0 2.1
  - Foreign currency: 0.4 1.8 0.3 0.9 0.8 1.0 1.3 1.3 1.3 1.3 1.3
- Memo statistics:
  - Real GDP growth (percent): 8.7 1.9 2.8 4.2 3.3 3.3 3.1 3.1 3.1 3.1 3.1
  - Inflation (GDP deflator; percent): 17.3 -5.6 -1.3 -0.1 0.5 0.7 1.0 1.0 1.0 1.0 1.0
  - Nominal GDP growth (percent): 27.6 -3.8 1.5 4.2 3.8 4.0 4.1 4.1 4.1 4.1 4.1
  - Effective interest rate (percent): 0.0 0.0 1.7 2.2 3.3 4.7 5.5 6.2 6.9 7.6 8.4
- Commentary: "Public debt reflects expectations of a narrowing of primary deficit and stable economic conditions in the short term, also due to improved fiscal position."

### Realism and stress analysis of baseline assumptions (Figure 5)
- Commentary: 
  - "The realism analysis does not point to major concerns and the projected fiscal adjustment and debt reduction are well within norms."
  - "The forecast of oil growth in the past few years appeared more optimistic with the introduction of the OPEC+ oil production quota in 2020 and the subsequent changes to the quota."
  - "The impact of fiscal adjustment on growth is only imperfectly apprehended in the context of an oil exporting economy as the assessment should be more finely focused on non oil growth."
- Comparator and percentile diagnostics referenced (no new numeric values beyond charts reproduced).

### Medium-term risk assessment (Figure 6 and commentary)
- Key indices and values:
  - Fanchart width: 154.6 2.2 (percent of GDP) — presented as "Fanchart width154.62.2 (percent of GDP)" in source.
  - Probability of debt non-stabilization (percent): 46.1 0.4
  - Terminal debt-to-GDP x10.3 0.2
  - Debt fanchart index (DFI): 2.9
  - Risk signal (DFI-based): High (per note 3/ thresholds).
  - Average baseline GFN (percent of GDP): 2.2 0.8
  - Banks' claims on the gen. govt (pct bank assets): 18.0 5.8
  - Change in banks' claims in stress (pct banks' assets): 3.0 1.0
  - GFN financeability index (GFI): 7.6
  - Risk signal (GFI-based): Moderate (per note 4/ thresholds).
  - Final medium-term assessment: "Final assessment: Prob. of missed crisis, 2023-2028, if stress not predicted: 36.4 pct. Prob. of false alarms, 2023-2028, if stress predicted: 10.2 pct."
- Commentary: 
  - "Medium-term risks are assessed as low against a mechanical high signal as large financial asset buffers mitigate debt solvency risks."
  - "On the fanchart specifically, in the case of Saudi Arabia, assets exceed 75 percent of GDP and 100 percent of public debt, thus the mechanical signal from the debt fanchart module is adjusted to low, regardless of the DFI’s level."
  - "Commodity price shock (lower prices) would slightly increase public debt (on average about 5 pp) and GFNs further (on average about 1.3 pp) in the medium term."

### Liquidity developments in the banking sector (Annex IV) — Background and recent developments
- Background:
  - "Saudi Arabia has a fixed exchange rate regime, with a peg to the U.S. dollar. Since 1986, the Saudi Riyal has been pegged to the U.S. dollar at a rate of 3.75 Saudi Riyal to the dollar."
  - "Saudi Arabia has a free capital account."
  - "As of end-April 2023, this corridor system had the upper bound and lower bound rates fixed at 5.75 percent and 5.25 percent respectively."
  - SAMA manages reverse repo and repo rates to support the exchange rate peg.
  - SAMA monitors liquidity indicators including bank’s net liquidity position at the central bank, SAIBOR-LIBOR spreads, and loan-to-deposit ratio.
- Recent developments:
  - "Since early 2022, SAMA raised its policy rate by 475 basis points, almost in line with the U.S. monetary policy tightening cycle."
  - Two liquidity squeezes in June and October 2022 caused interest rates to spike: three-month SAIBOR-LIBOR spreads widened to over 150 basis points (compared to the historical average of the past 3 years of around 60 basis points).
- Factors explaining liquidity squeezes:
  - Rapid credit growth: "Bank credit to the economy increased by 12 percent in 2022, outpacing growth in bank deposits of only 9 percent."
    - Loan-to-deposit ratio reached 100 percent in early 2023.
    - SAMA's loan-to-(weighted) deposit ratio reached 82 percent in December 2022, approaching prudential maximum of 90 percent.
    - Authorities' 70 percent home ownership target referenced as a driver of lending.
  - Delink of oil revenues and domestic liquidity:
    - "Foreign assets of Saudi residents (outward FDIs, portfolio investments, deposits with foreign banks, etc.) increased by around 14 percent of GDP in 2022, matching the amount of the current account surplus driven by oil proceeds."
  - Establishment of the Treasury Single Account (TSA) at SAMA:
    - Out of 188 government entities, 160 enrolled in the TSA by 2022; remaining 28 expected to be enrolled in 2023.
    - TSA rationalized more than 10,000 bank accounts by 2022 and had transitory implications for liquidity.
  - Increasing Non-Oil Revenue: "Non-oil revenue grew by 137 percent between 2016 (SAR 186 billion) and 2022 (SAR 440 billion)."
- Assessment of SAMA’s balance sheet:
  - "As of February 2023, about 34 percent of SAMA’s liabilities are government deposits — a declining trend as government reserves have declined."
  - SAMA assets: main assets are investment in foreign securities and foreign deposits; trends show government deposits at SAMA vs banks, foreign securities and foreign deposits series across 2010–2023 (charts reported).

*Source: 1sauea2023001 - 5. Debt consolidation across sectors*

### 8.      Temporary liquidity pressures have been eased thanks to the authorities’ timely and

### 8.      Temporary liquidity pressures have been eased thanks to the authorities’ timely and resolute action.

### Liquidity interventions and outcomes
- In June 2022, SAMA intervened with the injection of SAR 40 billion (US$10.7 billion) in the form of deposits.
- The June 2022 injection quickly reassured market participants and resulted in a narrowing of the SAIBOR-LIBOR spreads.
- Re-emergence of liquidity pressures in October 2022 was handled using a newly developed framework requiring interaction between SAMA and the Ministry of Finance (MoF).
  - This framework involved the recycling of MoF funds in the banking system, with SAMA acting as the fiscal agent of the government (for about SAR 50 billion).

### Monetary policy toolkit and usage
- SAMA’s market-based instruments include:
  - Overnight facilities and term repos/issuance of SAMA bills (open market operations)
  - FX swaps
  - Reserve requirements
- Recent liquidity squeeze episodes were in part addressed by non-market tools:
  - Authorities complemented conventional monetary tools with interventions in the form of direct placement of deposits in the banking system.
- Sources: Haver Analytics and IMF staff calculations.

### External Sector Assessment — overall findings
- Overall Assessment: The external position in 2022 was substantially stronger than the level implied by medium-term fundamentals and desirable policies.
- The external balance sheet remains strong.
- Reserves remain adequate according to standard IMF metrics.
- Under the current fiscal balance path, the central government’s non-oil primary balance is expected to be on an improving trend.
- Given the economy’s structure, the pegged exchange rate continues to provide Saudi Arabia with a credible policy anchor.

### External sector — potential policy responses
- With projected normalization of oil exports, the gap is expected to diminish.
- Vision 2030 structural reforms to diversify the economy, lift productivity, and boost the non-oil tradable sector, accompanied by a sizeable investment program (including by the Public Investment Fund (PIF)), will reduce the current gap and help align the external position in the medium term.
- Continued fiscal reforms to avoid procyclical fiscal policy amid high hydrocarbon windfalls will be important, including:
  - Delinking spending decisions from international oil price fluctuations
  - Implementing a medium-term fiscal framework
- Noted structural fiscal reforms already initiated: non-oil revenue mobilization, broad-based improvement of public financial management, and energy price reform.
- Caution: Minimize risks associated with industrial policies and avoid discriminatory policies that could distort resource allocation and elicit retaliatory actions by trade partners.

### Foreign asset and liability position (2022 and medium-term)
- Background:
  - Net external assets are estimated at 64.4 percent of GDP at the end of 2022, down from 71.4 percent of GDP in 2021.
  - Net external assets increased from US$620 billion to US$714 billion, while nominal GDP expanded by a larger magnitude due to high oil prices.
  - In the medium term, the NIIP is expected to stabilize at 69.1 percent of GDP.
  - Composition of external assets (broad categories): Portfolio and other investments 54 percent, reserves 34 percent, and FDI 12 percent of total external assets.
- Assessment: The external balance sheet remains very strong; accumulated assets provide protection against oil price volatility and savings of exhaustible resource revenues for future generations.
- 2022 (% GDP) — key figures:
  - NIIP: 64.4
  - Gross Assets: 122.1
  - Res. Assets: 41.5
  - Gross Liab.: 57.7
  - Debt Liab.: 23.9

### Current account (2022 and projections)
- Background:
  - The CA balance registered a surplus of 13.6 percent of GDP in 2022, compared with a surplus of 5.1 percent in 2021.
  - The trade balance improved by 9.1 percent of GDP as the price and volume of oil exports increased in 2022.
  - The terms of trade improved by 28.9 percent during the year.
  - For projections, oil production is assumed to follow the OPEC+ agreement, with a decline in 2023.
  - The CA is expected to register a surplus in 2023 (around 6 percent of GDP) as oil export revenues decline relative to 2022, in part because of lower oil price projections (the terms of trade are projected to deteriorate by around 22 percent) in 2023.
- Assessment:
  - IMF staff assesses a CA gap of 4.7 percent of GDP using the EBA-Lite CA model, with significant model uncertainty.
  - Cyclical adjustment component: 1.1 percent of GDP.
  - Additional cyclical considerations (COVID-19 transitory impacts) assessed to be near 0.
  - Consumption Allocation Rules suggest a CA gap of 0.3 percent of GDP for constant real annuity rules and –2.6 percent of GDP for constant real per capita annuity allocation rules.
  - Investment Needs Model suggests a CA gap of 14.4 percent of GDP.
  - The estimated CA gap of 4.7 percent of GDP has an estimated range from 2.2 to 7.2 percent of GDP.
- 2022 (% GDP) — key figures:
  - CA: 13.6
  - Cycl. Adj. CA: 12.5
  - EBA Norm: –
  - EBA Gap: –
  - COVID-19 Adj.: 0.0
  - Other Adj.: –
  - Staff Gap: 4.7

### Real exchange rate and assessment
- Background:
  - The riyal has been pegged to the US dollar at a rate of 3.75 since 1986.
  - On average, the REER appreciated by 4.1 percent in 2022 and was 5 percent above its 10-year average, while the NEER appreciated by 8.7 percent in 2022.
  - As of April 2023, the REER was 0.2 percent below the 2022 average.
- Assessment:
  - Exchange rate movements have a limited impact on Saudi Arabia’s competitiveness in the short term because most exports are oil or oil-related products denominated in dollars.
  - The EBA-Lite REER model suggests an overvaluation of 11.2 percent.
  - Consistent with the IMF staff CA gap and based on an elasticity of 0.2, the staff assesses the REER to be undervalued by 21.6 percent, with a range of –9.1 to –34.1 percent.

### Capital and financial accounts
- Background: Net financial outflows continued in 2022 as the PIF and other entities invested abroad.
- Assessment: Lack of detailed information on the nature of financial flows complicates analysis of the financial account; strong reserves position, including PIF assets, limits risks and vulnerabilities to capital flows.

### FX intervention and reserves level
- Background:
  - Net foreign assets increased to $440.5 billion (39.7 percent of GDP, 19.4 months of imports, and 231 percent of the ARA metric) at the end of 2022, down from $438.2 billion at the end of 2021 (and from $724 billion in 2014).
  - This trend was, in part, driven by financial outflows.
  - Reserves are expected to stabilize at about 14 months of imports in the medium term.
- Assessment:
  - Reserves play a dual role as savings for precautionary motives and future generations.
  - Reserves are adequate for precautionary purposes (measured by IMF metrics).
  - Buffers are also provided by external assets held by the PIF and national oil company.
  - Fiscal prudence is needed over the medium term to strengthen the CA and increase savings for future generations.

*Source: IMF staff report content (1sauea2023001).*

### Conclusion

### Conclusion

### Housing sector transformation: achievements
- Since its inception in 2018, the Saudi Housing program successfully boosted access to adequate real estate and stimulated supply.
- The program facilitated procedures for almost immediate entitlement of qualified Saudi citizens to real estate, replacing waiting times that could have lasted for over a decade in the past.
- The ownership ratio has increased and is well on the way to reach the Vision 2030 70 percent target by 2030.

### Current risk assessment and banking-sector resilience
- Although house prices have been growing fast in a few specific cities or areas, there are no signs of over-heating and house prices remain moderate compared to other GCC countries.
- Most mortgages are issued at a fixed interest rate and with a full recourse, which contribute to repayment discipline.
- Existing prudential ratios and the relatively high capitalization and solid profitability of banks create an extra cushion against unforeseen developments.

### Vigilance and emerging risks
- The situation is fluid; authorities should remain vigilant.
- Pressure on prices could intensify as:
  - demand for labor increases while housing supply remains limited (particularly in some big cities),
  - there has been a massive return of expatriate workers leading to a double digit increase in rents,
  - demand for housing will be further boosted by the anticipated relaxation of regulations on real estate ownership by foreigners linked to the intention of making Saudi Arabia a major international hub.
- The very rapid growth in mortgages calls for close monitoring of credit underwriting and credit management practices in banks.
- Priority supervisory actions include:
  - early detection of debtors and exposures in distress,
  - timely recognition of loan delinquencies,
  - adequate provisioning.

### Macroprudential and fiscal policy recommendations
- Gradually phasing out various macroprudential and fiscal incentives should be considered if mortgage growth remains strong.
- Mortgages and other real estate-related lending have been the main contributor to rapid credit growth.
- Suggested measures to consider:
  - tightening the previously relaxed macroprudential measures,
  - gradually exiting from various fiscal incentives (subsidies, tax exemptions, and guarantees),
  - reducing the maximum loan-to-value ratios on mortgage lending,
  - introducing a small countercyclical capital buffer.

### Annex VII — Status of Staff Recommendations from the 2017 FSAP (selected progress highlights)
- The amended central bank law was adopted in 2020; a revised Banking Control Law was published for general comments and is expected to be submitted to the legislative body in late 2023.
- SAMA officially launched its Circulars Portal in December 2020.
- A new risk-based banking supervisory framework has been rolled out; banks' risk ratings combine inherent risk and control ratings.
- Revised licensing requirements and guidelines were developed and published on SAMA’s website in January 2019, including guidance for digital-only banks.
- SAMA implemented IFSB banking standards and issued Shari’ah Governance Framework, Risk Management Framework, Credit Risk Management - Early Settlement Attributes, Related Party, Profit Sharing Investment Accounts (PSIAs); Capital Adequacy is noted as "work in progress."
- SAMA adopted IFRS9 requirements; BCBS Guidelines on "Prudential treatment of problem assets – definitions of non-performing exposures and forbearance" were implemented; SAMA is in the process of issuing its own prudential requirements on loans classification and provisioning expected to be adopted by the end of 2023.
- SAMA issued rules and guidelines on management of problem loans in January 2020 requiring banks to establish policies for rescheduling and restructuring.
- SAMA has signed MoUs with the Korean Financial Services Commission and Financial Supervisory Service, with the UAE, and with the Dubai Financial Services Authority for various supervisory and market cooperation areas.
- A liquidity forecasting model has been developed; a new TA mission will assess it.
- The law on resolution of systemically important financial institutions was issued in December 2020; SAMA is drafting implementing regulations aiming to complete drafting by end-2023.
- SAMA started developing a general Emergency Liquidity Assistance (ELA) framework.
- The principles that set the debt service to income ratio were issued in May 2018 and implemented in August 2018.
- Monthly data on new residential mortgages and SMEs finance are now published; work is ongoing to further strengthen data collection.

### Annex VIII — Vision 2030: Actuals vs Authorities Targets (selected indicators and exact figures)
- Housing Program: Homeownership rate — Baseline 47%; Present 64%; Target 70%.
- Financial Sector Development Program: SME loans as percentage of total bank loans — Baseline 2%; Present 7.7%; Target 11%.
- Share of cashless operations — Baseline 18%; Present 62%; Target 70%.
- Fiscal Sustainability Program: Increase non-oil government revenue — Baseline 166 Billion SAR; Present 410.9 Billion SAR; Target 1 Trillion SAR.
- Health Sector: Life expectancy (years) — Baseline 77; Present 78; Target 80. Number of ICU beds per 100k population — Baseline 12.5; Present 15; Target 14.
- Human Capability Development: Unemployment rate among Saudis — Baseline 12%; Present 8%; Target 7%. Females’ economic participation rate — Baseline 22.8%; Present 34.5%; Target 30%.
- National Transformation Program: Digital economy contribution to GDP — Baseline 0.2%; Present 15%; Target 19.2%.
- Public Investment Fund Program: Increase Public Investment Fund assets — Baseline 600 Billion SAR; Present 2.23 Trillion SAR; Target 7 Trillion SAR.
- Quality of Life Program: Tourism sector contribution in GDP — Baseline 3.6%; Present 4.5%; Target 10%.
- Privatization Program: Increase private sector contribution to GDP — Baseline 40%; Present 43%; Target 65%. Increase FDI (percent of GDP) — Baseline 1.2%; Present 2.2%; Target 5.7%.

### Annex IX — Voluntary Assessment of the Transnational Aspects of Corruption (key findings and recommendations)
- Facilitation issues:
  - Saudi Arabia has taken steps to strengthen the Anti-Money Laundering (AML) framework; the MER identified corruption as one of the most significant domestic proceeds-generating crimes but found Saudi Arabia is not considered an attractive location for laundering international proceeds.
  - Controls on foreign ownership of companies and access to beneficial ownership (BO) through the corporate registry have been implemented; the new company law in 2022 provides the Ministry of Commerce authority to set rules to ensure BO information is updated and accurate.
  - Beneficial ownership information maintained by banks on their clients was not always up to date; authorities launched an electronic platform to increase access and update to BO information and issued circulars to enhance awareness of methods to conceal beneficial ownership.
  - Larger financial institutions have a good understanding of ML risks and apply appropriate AML/CFT preventive measures, including customer due diligence and identification of beneficial ownership; however, timeliness of reporting suspicious transactions could be improved and guidance has been issued.
  - Supervisors of financial institutions conduct intensive supervision of higher-risk sectors and have high engagement with regulated entities.
  - Authorities improved ML investigations and prosecutions through capacity building and training, establishment of an asset recovery department at Nazaha, creation of departments for asset tracing and confiscation at the Directorate of General Security, amendments to anti-bribery legislation to provide basis for confiscation and adoption of non-conviction-based confiscation in 2019, and improved case management for mutual legal assistance.
- Remaining gaps and recommended improvements:
  - (i) Enhance understanding of the risks and complete the process of updating the NRA to include an analysis of inflows of proceeds of foreign crimes such as corruption being laundered in the country.
  - (ii) Ensure that accurate and up-to-date beneficial ownership information is maintained on all legal persons in Saudi Arabia.
  - (iii) Continue measures to further enhance effectiveness for confiscation of the instrumentalities and proceeds of crimes, while recognizing notable steps already taken towards investigations into foreign predicate offenses and related money laundering.
- Supply-side issues:
  - In December 2021, the anti-bribery law was amended to extend criminalization to foreign government officials and certain officials of international institutions and organizations.
  - Nazaha established the Department for Combating Foreign Bribery to receive, process, and investigate reports of foreign bribery and follow up on implementation of international commitments.
  - The department can initiate investigations from reports received via the department’s reporting channels, the “Investor Care” channel, and social media platforms; it conducts workshops to raise awareness and aims at including foreign bribery as a predicate offense to money laundering.
  - Saudi Arabia joined the OECD Working Group on Bribery in 2020 and its participant status has been extended.

*Source: 1sauea2023001 - Conclusion*

### Annex X. Industrial Policy in Saudi Arabia

### Annex X. Industrial Policy in Saudi Arabia

### Overview and purpose of industrial policy (IP)
- Industrial policy (IP) is a component of Saudi Arabia's Vision 2030 reform program aimed at structural transformation and diversification through targeted interventions, incentives, and the establishment of special economic zones (SEZs).
- IP is guided by the National Industrial Strategy (NIS) and supported by other initiatives and institutions; to realize potential, inefficiencies must be minimized and IP must complement broader structural reforms.
- Prepared by Sidra Rehman.

### Rationale, conditions, and justification for IP
- IP can play a role in structural transformation and diversification if:
  - there is a significant market failure or externality at the industry level; and
  - the government can identify affected industries and correct failures with appropriate policies.
- Externalities cited in the literature include:
  - information externalities (discovering cost structure of an economy);
  - coordination externalities in the presence of scale economies;
  - technological or environmental externalities (spillovers from firm-level training or R&D).
- Interventions are justified when broad-based reforms are insufficient, must pass a cost-benefit analysis (considering alternative uses of resources), and should minimize government-failure risks.

### NIS objectives, enabling conditions, and KPIs
- NIS three main objectives:
  - i) building industrial national resilience;
  - ii) becoming an integrated regional manufacturing hub;
  - iii) expanding global leadership in selected segments.
- Four enabling conditions:
  - i) building world-class supply chains;
  - ii) growing the industrial business base;
  - iii) unlocking international trade;
  - iv) cultivating innovation and know-how.
- Key targets and KPIs (Indicator Name — Baseline 2020 — 2030 — 2035 — Clarification):
  - Competitive Industrial Performance Index (CIP Rank): 37 — 20 — Top 15
    - "The Kingdom aspires to be among the top 15 countries in the world in the industrial sector competitiveness and the economic complexity index."
  - Economic Complexity Index (ECI Rank): 39 — 20 — Top 15
  - Manufacturing GDP (SAR Billion): 331 — 895 — 1,413
    - "Increasing the GDP which would contribute to the advancement of the Kingdom's position within the G20."
  - Manufacturing exports (SAR Billion): 169 — 557 — 892
    - "Increasing manufacturing exports as the Strategy is aiming to improve the competitiveness of local products, which will lead to improvement in the balance of trade."
  - Manufacturing sector employment (Thousands of jobs): 893 — 2,074 — 3,281
    - "Creating new manufacturing jobs to reach almost 3 times comparison with 2020."
  - NIS Localization Ratio (percent): 41% — 57% — 64%
    - "Growth in the percentage of local industries serving the local market by a multiple of 1.4."
- Explicit 2030 targets summarized in NIS messaging:
  - "Double the job opportunities created by the sector from 0.9 million jobs in 2020 up to 2.1 million jobs by 2030"
  - "Increase manufacturing GDP from 331 billion SAR in 2020 to reach 895 billion SAR by 2030"
  - "Increase the non-oil exports from 169 billion SAR by 2020 to 557 billion SAR by 2030"

### Key initiatives, instruments, and implementation features
- Strategic pillars and actors:
  - NIS as a strategic roadmap; governance includes the Higher Committee for the Industrial Development (HCID) and sectoral councils; private sector supported by Industrial Councils.
  - Key supporting entities/initiatives: Public Investment Fund (PIF), National Industrial Development and Logistics Program (NIDLP), Saudi Industrial Development Fund (SIDF), Economic Cities and Special Zones Authority (ECZA), National Incentives Committee, Local Content Procurement Government Authority.
- Special Economic Zones (SEZs):
  - SEZs are legal, logistical, and tax arrangements intended to attract foreign investment into export-oriented manufacturing and to overcome constraints in service provision, infrastructure, land titling, and red tape.
  - Saudi Arabia targets SEZs with "game-changing regulatory and competitiveness offerings" by 2030.
  - Examples of SEZs and projects: King Abdullah Economic City (KAEC SEZ); Special Integrated Logistics Zone (SILZ); Ras Al Khair SEZ (including King Salman Global Maritime Industries Complex); Jazan SEZ; NEOM (semi-independent free zone with anchor investors including Lucid, Ceer, and Google Cloud).
  - SEZ regulatory and incentive features may provide more favorable treatment than the base economy and include fiscal incentives such as:
    - Corporate Income: 5 percent for 20 years (with a note of "50 years for SILZ. The Cloud Computing SEZ does not have tax incentives." in the SEZ context).
    - Withholding tax: 0 percent permanently for repatriation of profits from SEZs into foreign countries.
    - Customs duties: 0 percent deferral for goods coming into the SEZs.
    - Expat levy: Fees exemptions.
    - Saudization and local content requirements: "0 percent from 1-5 years; 15 percent from 6-10 years; 11-15 will be supported by job replacement programs while maintaining flexibility with investors."
  - ECZA is the umbrella regulator responsible to regulate, plan, and monitor SEZs across the Kingdom; the National Incentives Committee coordinates incentives across the economy.
- Building a world-class supply chain and logistics:
  - NIDLP and SIDF aim to transform Saudi Arabia into a leading industrial powerhouse and a global logistics hub by maximizing value of mining and energy sectors and supporting backward and forward linkages.
- Growing the industrial base and local content instruments:
  - Transparent and agile regulatory framework; support for SMEs (e.g., SIDF’s Afaq program); partnerships between local and international companies.
  - Government procurement guided by the Local Content Procurement Government Authority: mandated thresholds and compliance requirements vary by sector and typically set project-by-project after contract analysis; measures include issuing mandatory lists of national products for various sectors.
    - The instrument/policy introduced in 2022 increased local content in government contracts to 40 percent (from 28.8 percent in 2018), against a 70 percent target set for 2030.
    - The procurement policy does not discriminate between local or foreign owners domiciled in Saudi Arabia; waivers exist if costs of locally sourced inputs are beyond appropriate prices or if quality is suboptimal.
  - Made in Saudi initiative (NIDLP, led by Saudi Export Development Authority): unified brand to encourage domestic purchasing and expand exports to priority markets; beneficiaries use the Made in Saudi Logo.
  - In-Kingdom Total Value Add (IKTVA) program (ARAMCO): target local content level in oil and gas sector by 2030; as of 2022, the program had achieved a 63 percent local content level.
- Regional Headquarters (RHQ) initiative:
  - Aims to incentivize multinationals to establish RHQs in Saudi Arabia; in 2021 the government announced that starting 2024 it would cease signing contracts with foreign companies that do not have their regional headquarters in the Kingdom.
  - RHQ incentives include Saudization exemptions, visa limit exemptions, end-to-end business services, and government fee waivers.
- Role of PIF and Saudi Green Initiative:
  - PIF: use asset base and partnerships to unlock new sectors, de-risk sectors to catalyze private investment, and plan to introduce local content requirements aligned with national direction.
  - Saudi Green Initiative: aims to reach net zero GHG emissions by 2060; Saudi Aramco aims to achieve net zero Scope 1 and Scope 2 emissions by 2050.
    - Policies include enhanced energy efficiency, increased reliance on renewable energy, and the Circular Carbon Economy.
    - Incentives will include subsidies and tax incentives, coupled with energy price reforms and climate-friendly investment to boost the renewable sector.
    - Examples include increased EV penetration via PIF’s ownership of Lucid Motors.

### Potential pitfalls, risks, and empirical evidence
- General cautions and potential adverse effects:
  - Targeted policies can create distortions or limit spillovers to the broader economy; careful calibration is required.
  - Local procurement and local content provisions:
    - Currently WTO compliant for Saudi Arabia due to non-signatory status to the WTO Government Procurement Agreement (GPA) and existing carve-outs.
    - If the Kingdom transitions from observer to full GPA member, local content provisions may pose a challenge.
    - Local procurement risks: could create constraints in a rapidly growing economy, hinder competition, and bid up wages and prices of scarce local inputs.
  - SEZs and spillovers:
    - Spillover outcomes from SEZs remain uncertain and depend on SEZ firm characteristics, local endowments, and institutional setting.
    - A World Bank study (2017) found no catalytic impact of SEZs on the countries they operate in, though positive effects were observed within a 20 km perimeter.
    - Empirical literature on FDI is skeptical about spillover benefits for developing countries, attributing limited spillovers to constrained absorptive capacity.
  - Fiscal incentives and tax expenditures:
    - Fiscal incentives are frequently used to attract firms to SEZs; SEZs by design may entail tax expenditures.
    - More attractive incentives within SEZs may cannibalize the base economy and limit broader spillovers.

*Source: Annex X. Industrial Policy in Saudi Arabia*

### 6.      Successful industrial policies and targeted interventions hinge on broad-based

### 6.      Successful industrial policies and targeted interventions hinge on broad-based structural reforms, while minimizing associated inefficiencies, including through guardrails already being considered by the Kingdom.

### Core principles for industrial policy
- Properly formulated industrial policies can play an important role in structural transformation and diversification.
- To maximize benefits and minimize risks, incentives should be carefully designed with a focus on transparency and accountability to minimize governance risks.
- Literature-agreed basic principles highlighted:
  - Institutional set-up: ambition, autonomy, accountability, and adaptability in planning agencies; close state–firm collaboration with state setting ambitious goals, granting firms autonomy, ensuring strict accountability (domestic and international competition), and rapid adaptation to changing circumstances.
  - Rigorous evaluation of policy impact to delineate responsibility for successes and failures and to inform decision-making.
  - Export orientation with emphasis on technology and innovation rather than import substitution; hold firms accountable via strict performance criteria.
  - Well-coordinated policies to foster backward linkages (high domestic value added) and forward linkages (downstream activities) to induce agglomeration effects and productivity spillovers.
  - Upskilling and reskilling the workforce and aligning education with employer needs.

### Institutional set-up: staff views and authorities’ actions
- Authorities have a clear governance framework and a national incentives committee which should govern all incentives (including through a working group with SEZs).
  - Example: the National Incentives Committee (NIC) is responsible for deal-level incentives (e.g., the Apple deal within SILZ).
  - Incentives schemes for SEZs operating under ECZA are coordinated with NIC through a working group and are subject to a Council of Ministers decree/approval.
  - Targets are set by KPIs.

### Rigorous evaluation, monitoring, and accountability
- Rigorous evaluation ensures accountability and provides vital input for decision-making.
- Monitoring and accountability mechanisms could include regular reporting on targets and achievements, with explanations for deviations to identify successful policies and phase out others.
- Staff views and authorities’ actions:
  - Authorities have a monitoring and evaluation mechanism in place leading to regular reporting on targets and achievements.
  - Authorities are conducting cost-benefit analysis on each new IP measure before approval and regular assessments of IP impact and effectiveness—including local content requirements—to mitigate risks and allow flexibility to abandon, phase-out or modify policies.
- Ongoing inventory and database of all incentives to better identify costs and inconsistencies.
- Fiscal risk mitigation via strict exit criteria, sunset clauses and time-bound nature of incentives.
- Caution: fiscal exemptions, in particular the 50-year tax holiday at SILZ, may become a burden.

### Tax incentives: staff observations and policy guidance
- Current initiatives: assess level of tax expenditures and economic activity in SEZs to determine if benefits to firms are justified by increased employment or positive spillovers.
- Ensure stringent application of selection criteria for benefiting industries to avoid past errors.
- Ensure a level playing field between firms in SEZs and the broader economy by:
  - Re-evaluating the tax burden on firms operating outside zones,
  - Addressing regressive taxes,
  - Fostering SME development.

### Export orientation and trade considerations
- Emphasize export orientation focused on technology and innovation rather than import substitution.
- Hold firms accountable for support received via strict performance criteria.
- Risks of protectionism:
  - Import tariffs can protect nascent sectors but can also cause resource misallocation, rent seeking, and lack of competition.
  - Local content provisions are discriminatory and can distort production, risk retaliation from trading partners, and disrupt balanced growth.
- Staff views and authorities’ actions:
  - Authorities recognize global trading regime constraints and commit to consistency with WTO legal obligations.
  - Authorities could consider additional targets monitoring export shares (not just manufacturing production) to ensure export goals are met.

### SEZs, linkages, and industrial clustering
- Well-coordinated measures to build backward and forward linkages increase domestic value added and create clusters with productivity spillovers.
- SEZs can attract investment, create jobs and boost exports when they build linkages with the broader economy and are part of an integrated strategy including a conducive business environment, technology upgrading and skills training.
- Staff views and authorities’ actions:
  - Authorities have instituted substance requirements (including minimum capital requirements) to stimulate new activity rather than reshuffling existing activity.
  - Regular economic impact assessments can introduce guardrails.
  - Industrial policy instruments should be developed jointly with other policies while ensuring no hindrance to foreign competition.

### Skills, labor market and human capital
- Upskilling and reskilling are essential to remove skills gaps and mismatches and better align education with employer needs.
- Staff views and authorities’ actions:
  - Initiatives such as the Human Capital Development program and the Labor Demand Foresight Unit will address skill needs.
  - Improving 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 private sector employment; addressing the productivity–wage gap will ensure competitive wages.

### Key risks and guardrails emphasized
- Governance risks: patronage and capture can undermine returns to industrial policy unless institutions ensure autonomy, accountability, and adaptability.
- Fiscal risks from long-duration exemptions (e.g., the 50-year tax holiday at SILZ).
- Trade and retaliation risks from discriminatory measures such as local content requirements or protectionist tariffs.
- Need for clear exit criteria, sunset clauses, time-bound incentives, and regular cost-benefit analysis to enable modification or phase-out of policies.

*Source: SAUDI ARABIA — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION — Informational annex (section 6).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sauea2023001.pdf_