IMF Executive Board Concludes 2016 Article IV Consultation with Saudi Arabia
IMF News, July 28, 2016
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- Published: July 28, 2016
Executive Board Assessment
- Directors noted challenges from the decline in oil prices and welcomed the authorities’ timely response supported by sizeable fiscal buffers and a strong and resilient financial system.
- Fiscal and current account balances have moved into deficit and growth is starting to slow; continued fiscal adjustment and reforms to strengthen and transform the economy were highlighted as necessary.
- Directors commended Vision 2030 and the National Transformation Program but underscored the importance of clear prioritization and sequencing to reduce implementation risks.
- Supported policies to increase the role of the private sector: privatization, public-private partnerships, improving the business environment, developing local capital markets, encouraging FDI, and supporting small and medium enterprises.
- Emphasized continued labor market and education reforms to encourage private sector employment of Saudi nationals and increase labor force participation of women.
- Agreed on the need for a gradual but sizable and sustained fiscal consolidation and encouraged development of a credible medium-term plan to achieve budget balance over the medium term.
- Recommended revenue and expenditure reforms including:
- Continued gradual adjustment of energy prices with compensation for lower-income households.
- Introduction of a VAT and excise taxes.
- Containment of the government wage bill.
- Improved public investment management and spending efficiency.
- Growth-enhancing structural reforms to accompany fiscal measures.
- Urged development of a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget.
- Recommended an integrated asset-liability approach to financing the fiscal deficit; noted that government debt issuance would help establish a risk-free yield curve and support domestic debt market development.
- Encouraged continued monitoring of credit quality, strengthening of the macro-prudential framework, finalization of bank resolution and liquidity provision frameworks, and strengthening liquidity forecasting and management frameworks of the central bank.
- Agreed that the exchange rate peg to the U.S. dollar is the best option given the current structure of the economy, while recommending periodic review and continued fiscal adjustment to support the peg.
- Welcomed improvements in economic statistics and encouraged subscription to the Fund’s Special Data Dissemination Standard; noted need for more detailed budget data and updates to enhance transparency.
Growth and Inflation Outlook
- Real GDP growth:
- Expected to slow to 1.2 percent in 2016.
- Expected to recover to 2 percent in 2017 as the pace of fiscal consolidation eases.
- Expected to settle around 2.25 -2.5 percent over the medium-term.
- Inflation:
- Has risen in recent months to over 4 percent due to increases in energy and water prices.
- Expected to ease to 2 percent in 2017.
Banking and Financial Sector
- Bank deposits have declined, but growth of credit to the private sector remains strong.
- Capital buffers are high, NPLs low, and banks are well provisioned against loan losses.
- SIBOR has moved higher in recent months and the spread to U.S rates has widened as liquidity has tightened.
- SAMA measures:
- Relaxed the loan-to-deposit ratio in February.
- Increased its reverse repo rate by 25bp to 0.5 percent in December.
- Directors encouraged continued close monitoring of credit quality and strengthening of macroprudential and central bank liquidity frameworks.
Fiscal Outlook and Policy
- Based on current policies, the fiscal deficit is projected to narrow to 13 percent of GDP in 2016.
- Non-oil revenues are expected to increase, while spending restraint—particularly on the capital side—will result in a substantial reduction in expenditure.
- The fiscal deficit is expected to be financed through a mix of deposit drawdown and domestic and international borrowing.
- Recommendation: develop a credible medium-term plan to reach budget balance in 5 years (balancing the budget over the medium term deemed appropriate).
External Sector and Reserves
- Current account:
- Projected to narrow to -6.4 percent of GDP in 2016.
- Projected to move close to balance by 2021 as oil prices partially recover.
- SAMA’s net foreign assets (NFA) are expected to fall further in 2016, but the pace of decline will slow over the medium term.
- Directors saw merit in periodically reviewing the exchange rate peg to the U.S. dollar to ensure continued appropriateness.
Structural Reform Priorities
- Diversify the economy and create jobs for nationals in the private sector.
- Focus on privatization and public-private partnerships.
- Develop local capital markets and encourage FDI.
- Support small and medium enterprises.
- Continue labor market and education reforms, and increase labor force participation of women.
- Improve transparency through publication of more detailed budget data and updates.
Selected Economic Indicators, 2011–16 (as presented)
- Production and prices (Annual percent change; unless otherwise stated)
- Real GDP: 2011: 10.0; 2012: 5.4; 2013: 2.7; 2014: 3.6; 2015: 3.5; 2016 (Proj.): 1.2
- Real oil GDP: 2011: 12.2; 2012: 5.1; 2013: -1.6; 2014: 2.1; 2015: 4.0; 2016 (Proj.): 0.6
- Real non-oil GDP: 2011: 8.1; 2012: 5.5; 2013: 6.4; 2014: 4.8; 2015: 3.1; 2016 (Proj.): 1.6
- Nominal GDP (billions of U.S. dollars): 2011: 670; 2012: 734; 2013: 744; 2014: 754; 2015: 646; 2016 (Proj.): [value not listed for 2016 in table]
- Consumer price index (avg): 2011: 3.7; 2012: 2.9; 2013: 2.2; 2014: 4.2; 2015: [value not listed]
- Fiscal and Financial variables (Percent of GDP; unless otherwise stated)
- Central Government revenue: 2011: 44.5; 2012: 45.3; 2013: 41.4; 2014: 36.9; 2015: 25.4; 2016 (Proj.): 22.7
- Of which: oil revenue: 2011: 41.2; 2012: 41.6; 2013: 37.1; 2014: 32.3; 2015: 18.4; 2016 (Proj.): 14.2
- Central Government expenditure: 2011: 33.4; 2012: 33.3; 2013: 35.6; 2014: 40.3; 2015: 41.3; 2016 (Proj.): 35.7
- Fiscal balance (deficit -): 2011: 11.2; 2012: 12.0; 2013: 5.8; 2014: -3.4; 2015: -15.9; 2016 (Proj.): -13.0
- Non-oil primary balance (percent of non-oil GDP): 2011: -61.7; 2012: -60.4; 2013: -59.7; 2014: -64.0; 2015: -50.8; 2016 (Proj.): -39.3
- Broad money (annual percent change): 2011: 13.3; 2012: 13.9; 2013: 10.9; 2014: 11.9; 2015: 2.5; 2016 (Proj.): [value not listed]
- External sector (US$ billions; unless otherwise stated)
- Exports: 2011: 364.7; 2012: 388.4; 2013: 375.9; 2014: 342.5; 2015: 202.3; 2016 (Proj.): 183.9
- Of which: Oil and refined products: 2011: 317.6; 2012: 337.2; 2013: 321.7; 2014: 284.4; 2015: 151.3; 2016 (Proj.): 132.6
- Imports: 2011: -120.0; 2012: -141.8; 2013: -153.3; 2014: -158.5; 2015: -155.0; 2016 (Proj.): -149.4
- Current account: 2011: 158.6; 2012: 164.8; 2013: 135.4; 2014: 73.8; 2015: -53.5; 2016 (Proj.): -41.1
- Current account (percent of GDP): 2011: 23.7; 2012: 22.4; 2013: 18.2; 2014: 9.8; 2015: -8.3; 2016 (Proj.): -6.4
- SAMA’s net foreign assets: 2011: 535.2; 2012: 647.6; 2013: 716.7; 2014: 724.3; 2015: 608.9; 2016 (Proj.): 542.9
- SAMA's net foreign assets (in months of imports of goods and services): 2011: 29.8; 2012: 33.8; 2013: 33.2; 2014: 35.4; 2015: 27.9; 2016 (latest data for end-April)
- Real effective exchange rate (percent change)1: 2011: -3.6; 2012: 3.2; 2013: 3.0; 2014: 9.3; 2015: 8.3; 2016 (latest 2016 data is for end-April)
- Sources: Country authorities; and IMF staff estimates and projections.
Press Release No. 16/368 — July 28, 2016; IMF Communications Department