Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Saudi Arabia
IMF News, August 17, 2015
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- Published: August 17, 2015
Executive summary and outlook
- On July 29, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Saudi Arabia.
- Saudi Arabia has been one of the strongest growing economies in the G-20; rising oil prices and production previously resulted in large external and fiscal surpluses and strong government spending that led to robust private sector activity.
- Over the past year, the global oil market environment changed substantially with oil prices dropping by close to 50 percent.
- Real GDP growth projections:
- Real GDP growth is projected to slow to 2.8 percent this year.
- Real GDP growth is projected to slow further to 2.4 percent in 2016 as government spending begins to adjust to the lower oil price environment.
- Over the medium-term, growth is expected to be around 3 percent.
- Inflation is likely to remain subdued.
Fiscal and external developments
- The decline in oil prices is resulting in substantially lower export and fiscal revenues.
- Fiscal position:
- A central government fiscal deficit of 19.5 percent of GDP is projected in 2015.
- The deficit is expected to decline in 2016 and beyond as one-off spending ends and large investment projects are completed, but it will remain high over the medium-term.
- Government debt was 1.6 percent of GDP at end-2014.
- External position:
- The current account surplus declined to 10.9 percent of GDP in 2014. It is expected to move into a small deficit in 2015 but return to surplus during 2016-20.
- Deposit inflows to banks and private credit growth have slowed in recent months.
- Nonetheless, the banking system is well positioned to weather lower oil prices and the growth slowdown.
Executive Board assessment and policy recommendations
- Directors welcomed Saudi Arabia’s strong economic performance while noting that the large decline in oil prices is likely to dampen growth in the period ahead.
- Main risks to the outlook identified by Directors:
- Uncertainties about future oil prices.
- Possible escalations of regional tensions.
- Fiscal policy recommendations:
- Need for a gradual, but sizable multi-year fiscal adjustment based on a mix of expenditure and revenue measures.
- Suggested measures include:
- Comprehensive energy price reforms.
- Firm control of the public sector wage bill.
- Greater efficiency in public sector investment.
- Expansion of non-oil revenues, including by introducing a VAT and a land tax.
- Directors agreed that issuing debt to finance part of the deficit is appropriate and would help promote the development of private capital markets.
- Fiscal framework and transparency:
- A stronger fiscal framework would support fiscal consolidation.
- The annual budget should be set within a medium-term fiscal framework that clearly establishes the authorities’ policy intentions, fully integrates the expenditure priorities from the national development plan, and delinks expenditures from short-term volatility in oil revenues while ensuring that spending adjusts to longer-term price trends.
- Directors welcomed the authorities’ plan to establish a macro fiscal unit and publish fiscal data in GFSM2001 format.
- Monetary and exchange rate policy:
- Directors concurred that the exchange rate peg to the U.S. dollar remains appropriate.
- They emphasized the need for fiscal consolidation to support the peg over the long term and saw merit in periodically reviewing the peg in coordination with other GCC countries.
- Financial sector and macroprudential policy:
- Directors agreed the banking system is in a strong position to weather lower oil prices and weaker growth.
- They supported continuing efforts to strengthen financial sector regulation and supervision.
- They saw merit in formalizing the macroprudential policy framework to ensure coordination among key agencies and to build on the existing use of macroprudential tools in a countercyclical manner.
- Structural reforms and labor market:
- The decline in oil prices has increased the importance of structural reforms to shift growth toward the private sector.
- With unemployment of nationals still high and the working-age population growing strongly, the government is continuing to focus on reforms to increase employment of nationals in the private sector and diversify the economy away from oil.
- Directors supported ongoing policies to increase the employment of nationals in the private sector and diversify the economy, and welcomed efforts to strengthen the business environment, develop infrastructure, invest in education and training, and increase employment opportunities for women.
- Directors emphasized that achieving the authorities’ goals will require realigning incentives facing firms and workers to encourage tradable rather than nontradable production and employment in the private rather than public sector.
Data, banking, and statistics
- Directors noted continued progress in improving the quality and availability of key economic statistics and welcomed the authorities’ plan to subscribe to SDDS in 2016.
- Banking sector: Deposit inflows to banks and private credit growth have slowed in recent months, but the system is viewed as well positioned to withstand the slowdown.
Selected economic indicators, 2010–15 (as reported)
- Production and prices (Annual percent change; unless otherwise stated)
- Real GDP: 2010: 4.8; 2011: 10.0; 2012: 5.4; 2013: 2.7; 2014: 3.5; 2015 (Proj.): 2.8
- Real oil GDP: 2010: -0.1; 2011: 12.2; 2012: 5.1; 2013: -1.6; 2014: 1.5; 2015 (Proj.): 2.4
- Real non-oil GDP: 2010: 9.0; 2011: 8.1; 2012: 5.5; 2013: 6.4; 2014: 5.0; 2015 (Proj.): 3.1
- Nominal GDP (billions of U.S. dollars): 2010: 527; 2011: 670; 2012: 734; 2013: 744; 2014: 746; 2015 (Proj.): 644
- Consumer price index (avg): 2010: 3.8; 2011: 3.7; 2012: 2.9; 2013: 2.0; 2014: (blank in table)
- Fiscal and Financial variables (Percent of GDP; unless otherwise stated)
- Central Government revenue: 2010: 37.5; 2011: 44.5; 2012: 45.3; 2013: 41.4; 2014: 37.3; 2015 (Proj.): 29.9
- Of which: oil revenue: 2010: 33.9; 2011: 41.2; 2012: 41.6; 2013: 37.1; 2014: 32.6; 2015 (Proj.): 24.2
- Central Government expenditure: 2010: 34.0; 2011: 33.4; 2012: 33.3; 2013: 35.6; 2014: 40.8; 2015 (Proj.): 49.5
- Fiscal balance (deficit -): 2010: 3.6; 2011: 11.2; 2012: 12.0; 2013: 5.8; 2014: -3.4; 2015 (Proj.): -19.5
- Non-oil primary balance (percent of non-oil GDP): 2010: -54.8; 2011: -61.7; 2012: -60.4; 2013: -59.5; 2014: -64.0; 2015 (Proj.): -64.7
- Broad money (annual percent change): 2010: 13.3; 2011: 13.9; 2012: 10.9; 2013: 11.9; 2014: 8.5
- External sector (US$ billions; unless otherwise stated)
- Exports: 2010: 251.1; 2011: 364.7; 2012: 388.4; 2013: 376.0; 2014: 343.3; 2015 (Proj.): 236.2
- Of which: Oil and refined products: 2010: 215.2; 2011: 317.6; 2012: 337.5; 2013: 322.0; 2014: 285.2; 2015 (Proj.): 183.7
- Imports: 2010: -97.4; 2011: -120.0; 2012: -141.8; 2013: -153.4; 2014: -155.5; 2015 (Proj.): -152.7
- Current account: 2010: 66.8; 2011: 158.6; 2012: 164.8; 2013: 135.5; 2014: 81.2; 2015 (Proj.): -5.8
- Current account (percent of GDP): 2010: 12.7; 2011: 23.7; 2012: 22.4; 2013: 18.2; 2014: -0.9
- SAMA’s net foreign assets: 2010: 440.4; 2011: 535.2; 2012: 647.6; 2013: 716.7; 2014: 724.3; 2015 (Proj.): 659.8
- SAMA's net foreign assets (in months of imports of goods and services): 2010: 26.7; 2011: 29.8; 2012: 33.8; 2013: 34.1; 2014: 36.3; 2015 (Proj.): 32.4
- Real effective exchange rate (percent change)1: 2010: -0.2; 2011: 9.2; 2012: 4.3
- Notes:
- 1 Latest 2015 data is for end-May.
Press Release No. 15/383, August 17, 2015, IMF Communications Department.