IMF Executive Board Concludes 2021 Article IV Consultation with Saudi Arabia

IMF News, July 8, 2021

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Published: July 8, 2021

Overview and recent developments

On June 30, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation with Saudi Arabia.
The Saudi economy entered the COVID-19 pandemic with strong policy buffers and reform momentum.
Authorities responded quickly and decisively with fiscal, financial, and employment support programs that helped cushion the impact of the pandemic on the private sector.
As the lockdown eased and the economy recovered in the second half of 2020, the government withdrew or increasingly targeted the temporary fiscal and employment support. SAMA’s borrower support has been retained.

Growth outlook and projections

The non-oil recovery that started in the second half of 2020 is expected to continue with non-oil growth projected at 4.3 percent in 2021.
Central government fiscal consolidation will be a drag on growth but is expected to be offset by higher Public Investment Fund investment and strong private demand.
Real oil GDP growth is projected at -0.4 percent in 2021 as production is assumed to remain in line with the OPEC+ agreement.
Overall real GDP is expected to grow by 2.4 percent in 2021.
Over the medium-term, growth is expected to accelerate as the economic reform agenda begins to pay dividends.
Inflation is expected at 3.2 percent in 2021 (annual average).

Fiscal developments and public finances

The fiscal deficit widened in 2020 to 11.3 percent of GDP mostly driven by a 30 percent decline in oil revenues.
Non-oil revenues increased, including because of the VAT rate increase from 5 to 15 percent in July 2020.
Expenditures increased modestly as the removal of cost of living allowances in June 2020 and lower capital spending largely offset COVID-19 related spending and other one-off spending.
Directors supported the authorities’ planned medium-term fiscal consolidation and emphasized the need to continue enhancing the social safety net in the near term to support low-income households.
Directors encouraged maintaining the fiscal reforms introduced last year, pressing ahead with planned energy and water price reforms, and considering ways to rationalize the government’s wage bill.
Directors encouraged continued development of the Fiscal Sustainability Program to reduce fiscal policy procyclicality, monitoring fiscal risks, and developing a robust sovereign asset-liability management framework given the growing role of the Public Investment Fund and public-private partnerships (PPP).
Directors recommended further strengthening expenditure management, public procurement, and fiscal transparency.

Financial sector and monetary conditions

Credit to the private sector has been very strong, boosted by programs to encourage mortgage and SME lending.
Banks remain liquid, well capitalized, and well-regulated and supervised.
Directors welcomed the continued resilience of the financial sector and the strong supervision by the Saudi Central Bank.
Directors recommended carefully monitoring mortgage lending, regularly assessing the appropriateness of the deferred payments program, and ensuring that banks assess borrowers’ creditworthiness under this program.
Directors welcomed efforts to strengthen the financial sector’s legal and regulatory framework, the impressive capital market reforms, and the enhancement of the AML/CFT framework.

Structural reforms and climate policy

Strong reform momentum is continuing, including:
- Rapid increase in labor market participation of Saudi females.
- Reforms to the Kafala sponsorship system for expatriate workers.
- Program to codify legal practices, the PPP/asset sales program, deepening of domestic capital markets, e-government reforms, digitalization, and support to SMEs and entrepreneurs.
Directors underscored that structural reforms should continue to diversify the economy and promote sustainable, inclusive growth.
Directors welcomed ongoing efforts to strengthen the legal framework, accelerate privatization and PPP programs, strengthen governance, and accelerate digitalization.
Directors recommended fully assessing the macroeconomic impact of the National Investment Strategy and the potential risks of crowding out private investment.
Directors commended the announcement of the Saudi Climate Strategy and the commitment to reducing greenhouse gas emissions and looked forward to more details on plans to meet climate commitments.

Exchange rate and external sector

Directors agreed that the exchange rate peg to the U.S. dollar continues to serve the economy well given the current economic structure.
Many Directors encouraged the authorities to review the peg over the medium term to ensure that it remains appropriate given plans for economic diversification.
Directors welcomed Saudi Arabia’s subscription to the SDDS and reiterated the importance of further improving data quality and availability.

Executive Board assessment (summary of Directors’ views)

Directors agreed with the thrust of the staff appraisal, highlighting strong policy buffers and positive reform momentum pre-pandemic, and commended the authorities for quick and decisive policy responses.
They stressed that remaining pandemic-related policy support should be carefully withdrawn to continue supporting the ongoing recovery, while continuing implementation of the Vision 2030 reform agenda to promote strong, sustained, diversified, inclusive, and greener growth.
Directors emphasized social safety net enhancements, continuation of fiscal reforms, energy and water price reforms, wage bill rationalization, fiscal risk monitoring, sovereign asset-liability management, and strengthened expenditure management and fiscal transparency.
Financial sector resilience, capital market reforms, AML/CFT enhancement, structural reforms to boost labor participation and job mobility, and assessment of National Investment Strategy impacts were highlighted.

Key statistics and selected economic indicators (2019–22)

Population: 35.0 million (2020)
Quota: SDR 9,992.6 million (2.10% of total)
Literacy: 95% (2017, adults)
Main products and exports: Oil and oil products (69%)
Key export markets: Asia, U.S., and Europe

Proj.

Real GDP growth:
- 2019: 0.3
- 2020: -4.1
- 2021: 2.4
- 2022: 4.8
Non-oil GDP growth:
- 2019: 3.3
- 2020: -2.3
- 2021: 4.3
- 2022: 3.6
CPI Inflation (%):
- 2019: -2.1
- 2020: 3.4
- 2021: 3.2
- 2022: 2.1
Central government finances:
- Revenue (% GDP):
- 2019: 31.2
- 2020: 29.7
- 2021: 28.6
- 2022: 28.8
- Expenditure (% GDP):
- 2019: 35.6
- 2020: 41.0
- 2021: 32.0
- 2022: 30.7
- Fiscal balance (% GDP):
- 2019: -4.5
- 2020: -11.3
- 2021: -3.5
- 2022: -1.9
- Public debt (% GDP):
- 2019: 22.8
- 2020: 32.5
- 2021: 30.0
- 2022: 30.4
Non-exported oil primary balance (% Nonoil GDP):
- 2019: -33.5
- 2020: -36.1
- 2021: -25.9
- 2022: -22.5
Money and credit:
- Broad money (% change):
- 2019: 7.1
- 2020: 8.3
- 2021: 6.8
- 2022: 4.0
- Credit to the private sector (% change):
- 2019: 7.0
- 2020: 14.0
- 2021: 11.7
- 2022: 4.5
Balance of payments:
- Current account (% GDP):
- 2019: -2.8
- 2020: 3.9
- FDI (% GDP):
- 2019: 0.6
- 2020: 0.8
- Reserves (months imports)1:
- 2019: 33.0
- 2020: 25.1
- 2021: 24.8
- External debt (% GDP):
- 2019: 23.5
- 2020: 34.1
- 2021: 29.9
Exchange rate:
- REER (% change)2:
- 2019: -2.0
- 2020: 1.1
- 2021: -2.6
Unemployment rate:
- Overall (% total labor force):
- 2019: 5.5
- 2020: 7.4
- Nationals (% total labor force):
- 2019: 12.0
- 2020: 12.6

1 Imports of goods and services. 2 For 2021, data is latest available.

IMF Communications Department, Press Release No. 21/210, July 8, 2021 — Executive Board Concluding Statement