Pipe project in Saudi Arabia which, despite higher state spending, has room to save extra oil revenues for future generations (photo: Richard Ashworth/Newscom)
ANNUAL POLICY CONSULTATION
The oil sector continues to dominate the economy, but strengthened budgetary institutions have reduced the linkage between the oil price and the level of fiscal spending, and progress has been made on diversifying the economy. Further strengthening of budgetary institutions, financial deepening, and a focus on increasing productivity are key going forward, the IMF added.
“Increased oil prices and oil production have resulted in sharply higher fiscal and current account surpluses, providing fiscal space to increase spending to address longstanding social issues, including employment creation, the availability of affordable housing, and financing for small and medium-sized enterprises,” said David Robinson, IMF mission chief for Saudi Arabia.
Non-oil sector growing
Supported by increased government spending and supportive monetary policy, overall real GDP is estimated to have grown by 7.1 percent in 2011, with 8 percent growth recorded in the non-oil sector— the highest since 1981. The private sector grew at 8.5 percent, with the construction and manufacturing sectors providing the largest lifts.
Despite its increased spending, the government has room to save, setting aside a portion of the extra oil revenues for future generations. “International reserves, which constitute the principal savings component of oil wealth, exceeded half a trillion dollars (94 percent of 2011 GDP). The banking sector also remains highly capitalized and liquid, with improved profitability,” the IMF said.
Structural reforms gained new momentum in 2011
Housing finance. The Saudi government allocated almost two-thirds of a combined $110 billion fiscal package to a multi-year project to construct half a million new affordable housing units. The government also allocated an additional $11 billion to the Real Estate Development Fund to increase the availability of housing loans.
Employment. A new jobseekers’ allowance (Hafiz) and a new Saudization program (Nitaqat) to increase the employment of nationals in the private sector came into effect in late 2011. These programs have been supported by expanded job placement and training schemes.
Small and medium-sized enterprise financing. The government allocated about $5 billion to the Saudi Credit and Savings Bank, with the intention of expanding financing for small businesses. The government intends to transfer a similar amount to the Saudi Industrial Development Fund to support bank credit to small and medium-sized enterprises (Kafala) and other lending.
Positive global and regional spillovers
In assessing the economy of the world’s largest oil producer, the IMF also noted that spillovers from policy decisions in Saudi Arabia have had important positive spillovers at both the global and regional level. At the global level, spillovers occur via the oil market—Saudi Arabia is the only producer that has traditionally maintained significant spare production capacity, which it has employed to help smooth oil market fluctuations.
At the regional level, higher growth and fiscal spending in Saudi Arabia are having a positive impact on several countries in the region through increased demand for imports and higher remittances from foreign labor employed in the Kingdom. This regional support—particularly important given the difficult economic situation in many countries—has been supplemented by substantial new pledges of financial assistance.
Buoyant outlook with some risks
On current trends, real GDP is projected to grow by 6 percent in 2012. The private sector is again expected to lead the way, reflecting the increased role of the private sector in the economy, a clear break from the past.
“The very strong macroeconomic outlook is a result of prudent economic management,” said Robinson, adding that “apart from the oil market, the Saudi economy is generally well insulated from the euro area crisis: non-oil exports to the euro area are relatively small, and financial cross-border spillover effects appear minor.”
Nonetheless, the substantial reliance of the Saudi economy on oil—as the dominant source of fiscal and foreign exchange revenues—implies that the global oil market remains the main source of risk, said the IMF. Policy buffers have been built up over the last several years and there has been progress in strengthening budgetary institutions and in diversifying the economy. However if, for example, pressures in the euro area lead to a protracted period of weaker global demand, resulting in a large and sustained dip in oil prices—as occurred in the 1980s and 1990s—this could still present significant challenges to the Saudi economy.
Seizing opportunity to advance reforms
Current policy space can be used to sustain growth and cushion against risks in the years ahead. Key steps include
• Productivity growth: While there has been progress in diversifying the economy and boosting private-sector growth, non-oil growth per capita has lagged that of other emerging market economies. Targeted government investment alongside product and labor market reforms can facilitate a more dynamic private sector and stimulate job creation for nationals outside of the public sector. Training and skill-acquisition programs are also important to ensure that Saudi nationals are well prepared to take up emerging new job opportunities.
• Fiscal institutions: The link between fiscal spending and oil revenues has declined in recent years, resulting in significantly lower volatility in fiscal spending. Next steps to enhance the stability, quality, and efficiency of spending would include improved budget preparation and control at line ministries and further strengthening of the medium-term fiscal framework to ensure consistency with intergenerational equity in spending decisions.
• Financial sector development: Credit to non-oil GDP and stock market capitalization grew substantially between 2000 and 2011. However, certain segments of the financial system, such as fixed-income securities, small and medium-sized enterprise financing, and mortgage lending, remain relatively underdeveloped. The share of bank loans going to small and medium-sized enterprises, for example, is below the levels in other countries. Consequently, it is important to support the emergence of a strong small-business sector in a manner that facilitates a transition to regular financing sources, the IMF said. While the banking system has withstood large shocks, financial sector supervision will need to continue to evolve to stay on top of emerging risks, including those beyond the banking system.
