Saudi Arabia - Staff Concluding Statement of the 2021 Article IV Mission

May 3, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC: The authorities responded quickly and decisively to the COVID-19 crisis and the economic recovery that is underway is expected to continue. The government’s policies should deliver needed fiscal consolidation over the medium-term, although a slower pace of adjustment could be considered this year to provide further support to the recovery. This could be achieved by increasing spending on the social safety net. The private sector support programs implemented by the Saudi Central Bank (SAMA) and banks have provided breathing space to small and medium-size enterprises (SMEs) and should be withdrawn carefully. Important labor market reforms have resulted in a significant increase in female labor force participation and should enhance job mobility for expatriates working in the private sector. Steps to strengthen the environment for private investment are welcome. In trying to grow and diversify the economy, the public sector will need to be careful not to crowd out the private sector. The commitment to reduce greenhouse gases (GHGs) is welcome and specific plans should follow as soon as possible.

1. The authorities responded quickly and decisively to the COVID-19 crisis. Strict early containment and health mitigation measures limited cases and fatalities and the vaccination program has advanced well in recent months. Fiscal, financial, and employment support programs introduced by the government and SAMA helped cushion the impact of the pandemic on businesses and Saudi workers. As the economy reopened, some of the support programs have been ended and others adjusted to target only those sectors where the effects of the crisis are longer-lasting.

2. Reforms under Vision 2030 have played a key role in helping the economy navigate the pandemic. Efforts to establish a robust structure of interagency coordination and governance, the growing digitalization of government and financial services, reforms to increase labor market mobility, and strong fiscal and financial policy buffers all equipped the economy to manage the crisis.

3. The economic recovery is ongoing, the unemployment rate has fallen, and CPI inflation is easing.

  • Real GDP growth is projected by IMF staff at 2.1 percent this year and 4.8 percent in 2022 (-4.1 percent in 2020). Real non-oil GDP growth rebounded in the second half of 2020 and high-frequency indicators suggest the recovery has continued in 2021. Non-oil growth is projected at 3.9 percent in 2021 and 3.6 percent in 2022 compared to a contraction of 2.3 percent in 2020. Real oil GDP growth is projected at -0.5 percent in 2021 (-6.7 percent in 2020) given production levels agreed by OPEC+ and 6.8 percent in 2022 as the OPEC+ agreement is assumed to end as announced.
  • The unemployment rate for Saudi nationals increased to 15.4 percent in 2020Q2 before declining to 12.6 percent in 2020Q4.
  • CPI inflation increased in July 2020 with the higher VAT rate but has eased in recent months and is projected at 2.8 percent in 2021 (3.4 percent in 2020).

4. To secure the recovery and spur stronger growth, policymakers need to carefully manage the exit from the remaining COVID-related support and continue the longer-term reform agenda under Vision 2030.

Fiscal policy—balancing short-term support and medium-term consolidation

5. The 2021 budget aims to substantially reduce the fiscal deficit. The deficit widened in 2020 to 11.3 percent of GDP (4.5 percent of GDP in 2019) as oil revenues fell and spending needs increased, and it was comfortably financed by new borrowing and the drawdown of government deposits. IMF staff projects the fiscal deficit to decline to 4.2 percent of GDP this year, slightly lower than the budget forecast, and over the medium-term (by 2026) to move to broad balance given the outlook for the global oil market and the fiscal policy plans of the government. The VAT rate increase, the removal of the Cost-of-Living Allowances (COLA), the increased focus on the efficiency of capital spending, and planned further domestic energy price reforms are all important contributors to the planned fiscal adjustment and should not be reversed or delayed.

6. Fiscal consolidation is needed but should be carefully calibrated in the short-term to ensure the recovery continues to be well supported. Spending on the social safety net should be increased to support low-income households and help offset the loss of purchasing power they experienced after the increase in the VAT rate and the removal of the COLA last year. The planned reform to the social safety net that will move from a “categorial” to a “needs-based” system with a minimum guaranteed income for the less well-off is welcome. Increased financial support to low-income households, however, should not await the transition to this new system. If the recovery stalls, the planned reduction in government capital spending could also be slowed while keeping the medium-term capital spending envelope unchanged. There is also fiscal space to increase healthcare spending if needed.

7. The fiscal policy framework is continuing to be developed by the Ministry of Finance. The establishment of a high-level Sovereign Asset Liability Management Committee is an important step to develop a consistent framework for assessing and managing the risk and return profile of the public sector balance sheet. Steps to continue to strengthen fiscal transparency are needed, including by publishing more detailed information in budget documents and broadening the coverage of fiscal data beyond the central government. Fiscal risks should continue to be monitored, including potential contingent liabilities from public-private partnerships (PPPs) and credit guarantees in housing and SME programs. The introduction of Etimad has strengthened government financial management. Government procurement processes could be further strengthened by removing remaining exemptions to the public procurement law.

Monetary, financial, and exchange rate policies

8. The financial sector continues to be well-regulated and supervised by SAMA. Banks are well-capitalized and liquid despite a decline in profitability and a slight increase in non-performing loans (NPLs) (which remain low) over the past year. The private sector support programs that SAMA and the banks have implemented during the crisis have provided important breathing space to SMEs. As SAMA is doing, the need to continue with the deferred payments program should be assessed regularly based on the economic and financial situation facing SMEs and it should be withdrawn carefully. The deferral program will likely have masked financial vulnerabilities that have emerged among some companies during the crisis. Banks have already increased provisions and SAMA will need to continue to ensure that banks carefully assess borrower creditworthiness in the post-pandemic environment, conduct stress-tests, and further increase provisioning if needed.

9. The impressive pace of equity and debt market reforms has continued under the guidance of the Capital Market Authority and the National Debt Management Center. These reforms are increasing capital raising options for companies and investment opportunities for savers. The Aramco IPO took place in late-2019, Saudi Arabia has been included in global equity and bond indices, equity derivative products have been introduced, reforms have continued to strengthen market infrastructure and regulation, and foreign investors can now directly trade in domestic debt instruments. Government sukuk issuance has built-out a sovereign yield curve and liquidity in the sukuk market is increasing.

10. The exchange rate peg continues to serve Saudi Arabia well given the current economic structure. SAMA’s foreign exchange reserves remain at very comfortable levels.

Achieving Strong, Sustained, Inclusive, and Greener Growth

11. Structural reforms should continue to be implemented to secure strong, sustained, inclusive, and greener growth. The program to codify legal practices is welcome and will strengthen the legal infrastructure for business. The PPP/asset sales program has considerable scope to increase the efficiency of capital allocation and service provision for the government. The growing role of digitalization and the move to e-government, e-commerce, and digital banking have the potential to boost productivity given the young and tech-savvy population. Ongoing initiatives to support SMEs and entrepreneurs are welcome. The fintech sector is showing promise in delivering innovative financial solutions that benefit SMEs and others who are less well-served by banks.

12. Public sector interventions can help overcome the reluctance of private companies to enter new or riskier sectors but need to be carefully implemented. Public companies have the financial firepower and political support to make large investments and take risks that the private sector is unable or unwilling to do. This can be important to kick-start new sectors and can lead to new opportunities for the private sector in emerging supply chains. At the same time, there is often no market test before large sums of money are committed and public interventions may crowd-out private investment. A careful balance needs to be struck. Where the public sector is involved, a timeframe for this involvement to end should be announced (the PIF Board has said 5 years) and a plan for eventual exit put in place to allow greater private involvement. The potential effects of efforts to scale-up domestic investment on the fiscal and external accounts will need to be carefully analyzed.

13. Investments and other policy measures are needed to support greener growth and reduce greenhouse gas (GHG) emissions. The Saudi Arabia Green Initiative is a welcome commitment from the leadership of the country to reduce GHG emissions, but more specific plans on how Saudi Arabia will meet its commitments are needed. In addition to continuing to reduce domestic energy price subsidies, stepped-up green investments that are being planned and implemented have the potential to boost growth and employment and reduce GHG emissions. The potential of renewable energy is large and should attract domestic and foreign investors given the right regulatory and financial environments.

14. The rapid increase in labor market participation of Saudi females and reforms to the Kafala sponsorship system for expatriate workers are very welcome. The Saudi female labor force participation rate is estimated to have increased by 13 percentage points to over 33 percent over the past two years which will help boost productivity, growth, and household incomes as these women become employed. Recent reforms to the Kafala sponsorship system for expatriate workers in the private sector are very important. With strong enforcement, the new regulations will give foreign workers greater freedom of movement which will benefit their wages and productivity.

15. Increasing the competitiveness of Saudi workers in the private sector is important to the success of the reform agenda. Developing a competitive and diversified private sector will be difficult unless the wage expectations of Saudi workers are in line with their productivity. To boost productivity, improving education and vocational training needs to be a continued focus of policy. Experience with e-learning during the pandemic may offer new options for broadening the scope and quality of education and training. A clear message from policymakers that future job opportunities in the public sector will be limited will reduce the reservation wage of Saudi workers.


“The mission team would like to thank the Saudi Arabian authorities and the people they met outside the government sector for their cooperation and open discussions.

IMF Communications Department


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