Public Information Notice: IMF Concludes 2001 Article IV Consultation with Saudi Arabia

November 7, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 10, 2001, the Executive Board of the International Monetary Fund concluded the Article IV consultation with Saudi Arabia.1


In 2000, Saudi Arabia's macroeconomic position strengthened dramatically, reflecting higher oil prices and the maintenance of prudent macroeconomic policies. Real GDP growth is estimated to have picked up to 4.5 percent, mainly due to an 8.5 percent increase in the oil sector GDP as oil production rose. Non-oil GDP growth also recovered moderately to an estimated 2.6 percent on account of the robust expansion in manufacturing activities including petrochemicals, and a strong pickup in the construction and private services sectors. Reflecting the strengthened business confidence and economic pickup, the stock market price index increased by 11 percent.

The overall central government budget registered a sharp turnaround to a surplus of around 3.5 percent of GDP, although expenditure was allowed to increase by 28 percent mainly to settle past late payments, and to accelerate implementation of government investment projects. In the process, government domestic debt stock fell to 95 percent of GDP. In an attempt to contain subsidies, electricity rates were adjusted upward. The external current account shifted to a surplus of about 9 percent of GDP, as both oil and non-oil exports (especially petrochemicals) surged and the Saudi Arabian Monetary Agency's (SAMA) net foreign assets rose to cover about 10 months of prospective imports. The growth of domestic liquidity slowed down to 4.5 percent as net domestic credit fell slightly on account of a sharp fall in the banking sector's claims on the government. Credit to the private sector rose by over 6 percent, mainly on account of personal and consumer lending. In contrast, there was limited pickup in short-term business lending, in part, because of the increase in the private sector's own liquidity following the settlement of late government payments. However, in light of the fall in interest rates, longer-term business sector lending was more robust.

A number of structural reforms were implemented in 1999 and 2000. In 1999, steps were taken to corporatize and restructure the telecommunications company and the electricity sector; the stock market was opened to foreign investors through open-ended mutual funds; and reform of the tax and customs administration was continued. In 2000, the new Investment Law was implemented, allowing foreign investors full ownership of business in all but 22 activities, including the oil sector and energy distribution. In addition, the Saudi Arabian General Investment Authority was established to encourage foreign direct investment, steps were taken to train Saudi labor force for employment in the private sector, and a tourism authority was established.

For 2001, real non-oil GDP is forecast to increase by 4 percent, while oil GDP is expected to increase only modestly in a noninflationary environment. The fiscal and external current account balances are expected to be adversely affected by the fall in world oil prices. In light of the expected pick up in the non-oil sector, broad money is projected to increase by 7.5 percent in 2001; credit to the private sector is forecasted to increase by almost 11 percent. SAMA's net foreign assets are expected to increase to the equivalent of about one year's prospective imports of goods and services.

Executive Board Assessment

Executive Directors welcomed Saudi Arabia's continued pursuit of prudent macroeconomic policies and its efforts to strengthen the process of structural reform in order to accelerate the growth of non-oil activity, generate employment opportunities for a rapidly growing labor force, and reduce the economy's vulnerability to oil price shocks. Directors agreed with the authorities' focus on economic diversification based on private sector-led growth, which will be complemented by a reduction in the role of the government in the economy, a further shift to market-based pricing, encouragement of foreign direct investment, and creation of an institutional setting conducive to achieving these objectives. They noted that steps already taken in these areas, together with higher oil prices, had contributed to a substantial improvement in Saudi Arabia's economic performance in 2000.

Directors noted that in 2001, notwithstanding the moderation of oil prices, the fiscal balance is expected to remain strong because of continued expenditure restraint, and the SAMA's net foreign assets are expected to rise further under a liberal exchange and trade system. They were encouraged by the tangible signs of increase in foreign direct investment, which, along with the agreement to implement the ambitious Gas Initiative, will pave the way for a durable upward shift in economic activity. Nevertheless, Directors noted that the economy remains vulnerable to the downside oil price risks, and any weakening of global oil prices in the near term will put additional strains on fiscal and external balances with potentially negative effects on growth. Consequently, Directors encouraged the authorities to maintain prudent macroeconomic policies, particularly sustained expenditure restraint, and to accelerate the implementation of structural reforms. They also suggested that the authorities should be prepared to tighten fiscal policy further if oil price developments warrant.

Directors stressed that a tight fiscal policy and structural strengthening of the budget will be required to put public debt on a permanently declining path and reduce the budget's vulnerability to oil price fluctuations in the medium term. They underscored the importance of moving ahead with steps to mobilize non-oil revenues through improvements in tax administration, early introduction of indirect taxes, and consolidation of various fees and charges, and to strengthen expenditure control mechanisms and shift the composition of expenditure toward investment so as to maintain the budget in balance or small surpluses over the medium term, as envisaged by the authorities. Measures they considered particularly important include a reduction in the wage bill through civil service reform, more effective targeting of social spending, and a further reduction in subsidies. They also supported a broader definition of the public sector to improve fiscal policy design and implementation.

Directors welcomed the authorities' determination to pursue state enterprise restructuring in order to improve resource allocation and set the stage for privatization. They recommended that the authorities base their privatization plans on a sound regulatory framework, and that they apply explicit hard budget constraints and price adjustments to improve the financial performance of enterprises. Moreover, Directors stressed that private sector development will benefit from a speedy reduction in the areas presently excluded for foreign investors. In this context, Directors welcomed the opening up of the upstream gas sector and the authorities' intention to use the "negative list" flexibly under the new investment law.

Directors commended the authorities for closely supervising the banking system in accordance with international standards and regulations, and for their recent steps to combat money laundering. They welcomed the progress being made in further developing the stock market, deepening the secondary market in government bonds, and developing the corporate bond market, and encouraged the authorities to continue to develop the financial sector in order to facilitate private sector investment. They also endorsed the policy of fostering cross-border competition to increase the efficiency of the banking system, and looked forward to early enactment and implementation of the capital market law.

Directors welcomed the authorities' focus on training and education to generate required skills to address the unemployment problem through private sector-led growth. In addition, they considered that the pursuit of a market-based wage policy, combined with wage restraint in the public sector and civil service reform, will help re-orient national job seekers toward the private sector. They also supported the reform of the social insurance system to reduce the incentives for nationals to seek public sector jobs and to lower their reservation wage, as well as the authorities' plans for revising the labor law to improve labor mobility, simplify work permit regulations, and rationalize rules governing employment.

Directors commended the authorities for pursuing a prudent monetary policy which—backed by a strong financial system—has ensured a credible exchange rate peg, a liberal exchange and trade system, and domestic price stability. Directors looked forward to a resolution of the remaining bilateral trade issues that would clear the way for Saudi Arabia's accession to the World Trade Organization. Directors welcomed Saudi Arabia's efforts to foster stability and predictability in the oil market. They commended Saudi Arabia for its generous financial assistance to developing countries.

Directors noted the important progress that has been made during the past year in the development and dissemination of economic data and increasing transparency. They encouraged further efforts, in collaboration with the Fund, in improving data collection, analysis, and dissemination, particularly with respect to the national accounts, employment and wages, and the consolidated public sector accounts. They also encouraged the authorities to adopt the Fund's General Data Dissemination System.

Saudi Arabia: Selected Economic Indicators, 1997-2000

  1997 1998 1999 Prel.

  (Percent change)
Production and prices        
Real GDP 2.0 1.7 -0.8 4.5
Real oil GDP -1.3 2.9 -5.6 8.5
Real non-oil GDP 3.8 1.1 1.7 2.6
Nominal GDP (in billions of U.S. dollars) 146.4 128.5 142.9 173.3
Consumer price index -0.4 -0.2 -1.3 -0.6
  (In percent of GDP)
Financial variables 1/        
Total revenue 37.5 29.3 27.6 39.8
Of which: oil revenue 29.2 16.6 19.5 33.0
Total expenditure 40.3 39.5 34.4 36.3
Fiscal balance (deficit -) -2.8 -10.2 -6.8 3.5
Change in broad money (in percent) 5.2 3.7 6.8 4.5
Interest rates 2/ 5.8 6.2 6.1 6.7
  (In billions of U.S. dollars,
unless otherwise indicated)
External sector        
Exports 60.6 38.7 50.6 78.8
Of which: oil and refined products 53.2 32.5 44.8 72.1
Imports 26.4 27.5 25.7 27.8
Current account 0.3 -13.1 0.4 15.6
In percent of GDP 0.2 -10.2 0.3 9.0
SAMA's net foreign assets 3/ 56.9 45.4 37.9 47.5
In months of imports of goods and services 14.5 11.5 8.2 10.0
Real effective exchange rate (percent change) 4.9 3.6 -4.4 2.1

Sources: Data provided by the authorities; and IMF staff estimates.

1/ Public finance data are on a fiscal year basis, which coincides with the calendar year.
2/ Three-month Saudi Arabian riyal deposits.
3/ Includes liquid assets or gross official reserves and other foreign assets of SAMA.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 10, 2001 Executive Board discussion based on the staff report.


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