Saudi Arabia: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, June 22, 2022
Source details
- Canonical URL
- Saudi Arabia: Staff Concluding Statement of the 2022 Article IV Mission
Other formats
Bibliographic details
- Published: June 22, 2022
Executive summary
- IMF mission led by Mr. Amine Mati conducted discussions for the 2022 Article IV Consultation from May 23‒June 6.
- Saudi Arabia managed the COVID-19 pandemic well, is well-positioned to weather risks from the war in Ukraine and global monetary policy tightening, and is experiencing a strong recovery supported by higher oil prices and Vision 2030 reforms.
- Key near-term projection highlights: GDP growth of 7.6 percent in 2022; current account surplus of 17.4 percent of GDP in 2022; headline inflation averaging 2.8 percent in 2022.
Recent performance (2021 and early 2022)
- Overall growth: 3.2 percent in 2021.
- Sector drivers: recovering non-oil manufacturing, retail (including e-commerce), and trade.
- Unemployment: 11 percent in 2021, a 1.6 percentage drop from 2020, mainly due to higher employment for Saudi nationals, particularly women, in the private sector.
- Inflation:
- Average inflation in 2021: 3.1 percent.
- CPI inflation in April 2022: 2.3 percent (y/y).
- Noted pressures: higher food and gasoline prices; double-digit wholesale price inflation; rising commodity and shipping/logistics costs.
- External position and reserves:
- Current account: surplus of 5.3 percent of GDP in 2021, up from a deficit of 3.2 percent of GDP in 2020.
- Net foreign assets declined but remain at very comfortable levels.
Economic prospects and risks
- Near- and medium-term outlook: positive with balanced risks.
- Forecasts and projections:
- Overall GDP: 7.6 percent in 2022.
- Non-oil growth: 4.2 percent in 2022.
- Headline inflation: 2.8 percent on average in 2022.
- Current account surplus: 17.4 percent of GDP in 2022.
- Reserve buffers: expected to stabilize at about 28 months of imports over the medium term.
- Risk factors:
- Upside: successful implementation of the National Investment Strategy (NIS) and labor market reforms; further increases in oil production.
- Downside: pressures to spend oil windfalls and deviate from the reform agenda; inflationary pressures from higher food prices; another COVID surge; lower oil prices from weaker global activity if the war in Ukraine has lasting effects; an abrupt slowdown in China.
- Direct spillovers from the war in Ukraine are negligible; elevated oil prices strengthen fiscal and external buffers. Limited trade and financial links with Russia and Ukraine and negligible exposure through the sovereign wealth fund limit impact.
Fiscal policy: managing windfall gains and consolidation
- 2022 fiscal performance:
- IMF staff projects a fiscal surplus of 5.6 percent of GDP in 2022 (relative to 2.5 percent budgeted).
- Central government debt-to-GDP ratio projected to decline to 24.2 percent.
- Central government net financial asset-to-GDP ratio projected to improve to –8.7 percent, from –17.7 percent in 2021.
- Recommended fiscal priorities:
- Manage higher oil revenue gains sustainably while continuing fiscal consolidation and avoiding procyclicality.
- Continue implementing Vision 2030 reforms and the NIS to diversify the economy.
- Rely on expenditure cuts for non-oil related adjustment, including phasing out pandemic-related measures, compressed capital expenditures for projects already implemented, efficiency gains from full utilization of the ETIMAD online platform, and rationalizing the wage bill.
- Medium-term consolidation and structural fiscal reforms:
- Non-oil revenue mobilization: non-oil revenues doubled to 12.8 percent of GDP over the past four years; continue efforts including maintaining the tripled VAT rate and broadening revenue bases.
- Energy price reforms: subsidies halved between 2010 and 2020; scope exists to lift the cap on gasoline prices and consider larger-than-planned step increases for other fuel products, with part of savings used to scale up targeted social programs (Daman program and Citizens’ Account) and pursue social security reform toward a unified social registry and needs-based safety net.
- Expenditure rule: mission recommends setting an expenditure rule based on a long-term fiscal anchor to delink spending from oil price fluctuations and support the Fiscal Sustainability Program.
- Public sector coverage and asset-liability management: incorporate and monitor activities of PIF, NDF, and other public investment entities; accelerate work on a sovereign asset-liability management framework.
- Public financial management: continue establishing a medium-term fiscal framework, move toward performance-based budgeting, prepare for a treasury single account, enhance budget disclosure, and carefully monitor guarantees and contingent liabilities (especially with expected PPP growth).
- Debt management:
- Public debt remains sustainable; Kingdom plans to refinance existing debt rather than use higher oil revenue to repay debt.
- Strategy supported: lengthen debt maturities, reduce refinancing costs, build yield curve in domestic and international markets.
- Plans for issuing a green bond in 2022 are welcomed.
Monetary and financial sector policy
- Impact of global monetary tightening: expected to be limited given high oil prices and the structure of the banking system.
- Banking system characteristics and resilience:
- Low wholesale funding and high level of non-interest-bearing deposits.
- Additional interest rate hikes aligned with US tightening likely to have a positive effect on banks’ profitability.
- Staff’s preliminary analysis: negligible impact on credit growth and non-oil GDP; positive for banking sector profitability when oil prices and liquidity are high.
- Financial stability: banks are profitable, liquid, and well-capitalized; NPLs remain low despite the end of the deferred loan program for SMEs.
- Macroprudential measures (loan-to-value ratio, debt service-to-income ratio, explicit links to salaries) help limit risks from rapid rise in residential mortgages.
- Continued implementation needed: new regulatory and legal framework for Islamic banks, new resolution framework, and steps toward Basel IV.
- Exchange rate policy:
- The currency peg to the U.S. dollar remains appropriate given the structure of the economy and continues to support monetary stability.
- Saudi Arabia’s external position is broadly in line with medium-term fundamentals with adequate buffers to maintain the peg.
Structural reforms and climate policy
- Vision 2030 implementation: essential for diversification and boosting growth; supported by Vision Realization Plans and 13 Vision Realization Programs (VRPs).
- Achievements cited:
- Attracting foreign investment through 300+ initiatives and streamlined regulations.
- Increased home ownership.
- Female labor participation: 35 percent, already surpassing the 30 percent target set for 2030.
- Ease of doing business: one-stop shop to register a business in 3 minutes.
- Enhanced digitalization of government operations (procurement, pay, social services).
- Increased investment aligned with the National Investment Strategy.
- Remaining structural challenges:
- FDI remains low despite significant pickup in 2021; diversification into more sophisticated products is limited.
- Boosting private sector investment requires rigorous cost-benefit analysis for public resource use (including PIF projects) to ensure high returns and greater private participation.
- Labor market reforms needed: increase mobility of expatriate workers via visa reforms; strengthen education and training; close gender gaps; compress wage differentials.
- Strengthen governance, SME development, and digitalization to enhance private sector development.
- Climate and green transition:
- Saudi Green Initiative (announced 2021) objectives:
- Meet 50 percent of the Kingdom’s domestic energy needs from renewables by 2030 (up from 1 percent currently).
- Increase vegetation cover by planting 10 billion trees to serve as a carbon sink.
- Backed by a water strategy considering Riyadh’s vulnerabilities to climate change.
- Ramp up investments in blue and green hydrogen and R&D focusing on the circular carbon economy.
- Implementation needs: a detailed roadmap specifying investment magnitude and technological feasibility; consistency with energy price reforms and water price reforms to reduce emissions.
Source: Saudi Arabia: Staff Concluding Statement of the 2022 Article IV Mission (June 22, 2022).