Saudi Arabia: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, June 7, 2023
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- Published: June 7, 2023
Recent economic developments
- Overall growth in 2022 reached 8.7 percent, making Saudi Arabia the fastest growing G20 economy in 2022.
- Non-oil GDP growth in 2022 was 4.8 percent, driven by robust private consumption and non-oil private investment, including giga projects.
- Main drivers of non-oil growth: wholesale, retail trade, construction, and transport.
- The output gap is estimated to have closed during 2022 and momentum continued into 2023; nowcasting estimates suggest non-oil growth above 5 percent in H1 2023.
- Unemployment:
- Total unemployment dropped to 4.8 percent by end-2022 (from 9 percent during Covid).
- Youth unemployment was halved to 16 percent in 2022 over the past two years.
- Female labor force participation reached 36 percent in 2022, exceeding the 30 percent target under Vision 2030.
- Inflation:
- Average CPI grew by 2.5 percent y-o-y in 2022.
- Inflation upticked to 3.4 percent y-o-y in early 2023 and was 2.7 percent y-o-y in April 2023.
- Declining contributions from transport and food prices offset substantial increases in rent.
- Current account and reserves:
- Current account recorded a 13.6 percent of GDP surplus in 2022—the highest in a decade.
- Reserves fell by $30 billion in April 2023 relative to 2022 but remain at comfortable levels (about 20-month import cover).
Economic prospects — positive outlook with balanced risks
- Growth projections and drivers:
- Overall real growth in 2023 reduced to 2.1 percent due to the April 2023 OPEC+ production cuts.
- Non-oil growth expected to average 5 percent in 2023 and remain above potential.
- Inflation outlook:
- Average CPI in 2023 expected at 2.8 percent.
- External sector and reserves:
- Improvement in the current account is expected to abate as oil prices stabilize and imports pick up.
- Reserves expected to stabilize at slightly lower levels of import coverage over the medium term, but remain well above standard reserve adequacy metrics.
- Risks to the outlook:
- Upside: higher oil prices, possible change in OPEC+ production cuts, accelerated structural reforms and investment.
- Downside: too rapid rise in non-oil investment adding pressure on prices and external accounts; lower oil prices due to subdued global activity; quicker shift in demand for fossil fuel hampering medium- to long-term growth.
Fiscal policy — maintaining the path for stronger buffers and intergenerational equity
- 2022 fiscal outcomes:
- Fiscal surplus in 2022—the first since 2013—was halved relative to staff’s initial projection of 5.5 percent of GDP.
- About 2.5 percent of GDP of additional expenditures were estimated to be one-off non-recurrent spending (about half in goods and services).
- Public debt at 23 percent of GDP is low and sustainable.
- 2023 fiscal dynamics:
- Lower oil revenue would shift the fiscal surplus back to deficit.
- Robust non-oil revenue and lower spending (mostly from one-off expenditure cuts) would improve the non-oil deficit, which would however remain considerably higher than budgeted.
- Potential additional dividends from Aramco could improve the fiscal position.
- Staff recommendations (policy measures and reforms):
- Prioritize non-oil revenue collection.
- Tax reforms: at least maintain the VAT rate at 15 percent and rationalize tax expenditures; strengthen tax administration.
- Energy price reforms:
- Go further by lifting the cap on gasoline prices and adjusting the current formula to allow faster increases for electricity and other fuel prices.
- Note: diesel price increase implemented already in 2023.
- Strengthen the safety net:
- Scale up well-targeted social programs—such as the needs-based Damaan program.
- Support through savings from a narrower coverage of the existing Citizens’ account program.
- Expenditure rationalization priorities:
- Continue rationalizing the public sector wage bill via strategic workforce planning and review.
- Improve efficiency in public investment via Spending Efficiency and Governmental Projects Authority and full utilization of the expenditure chain (ETIMAD).
- Strengthen fiscal frameworks:
- Strict application of a fiscal rule to avoid sudden jumps in spending that deviate from the medium-term fiscal framework (MTFF) and be based on a long-term fiscal anchor.
- Strengthen the MTFF, improve budget forecasting and cash management, strengthen disclosure and broaden public sector coverage—including for the Saudi Arabia Sovereign Wealth Fund (PIF) and the National Development Fund.
- Accelerate development of a sovereign asset-liability management (SALM) framework and establish a public sector balance sheet to monitor sovereign exposures integratedly and assess future investment commitments.
Monetary policy — managing liquidity and supporting the exchange rate peg
- Liquidity and interest rates:
- Liquidity squeezes in 2022 eased after central bank intervention.
- Three-month Saibor-Libor spreads widened to over 150 basis points during June and October 2022; spreads have normalized to historical averages.
- Exchange rate policy:
- The exchange rate peg to the US dollar remains appropriate and has supported monetary stability.
- With an open capital account, policy rates should continue to move in line with the Fed policy rate, with risk premia ensuring appropriate interest rate differential to support the peg.
- Monetary framework recommendations:
- Continue aiming to keep the interbank rate in line with the policy rate using market-based instruments (such as open market operations).
- Improve liquidity forecasting and coordinate with all institutions, including calibration of the ongoing implementation of the Treasury Single Account.
Financial sector policies — remaining vigilant
- Banking system soundness:
- Aggregate capital adequacy ratio is strong.
- Profitability—driven by net interest margins—is high and above pre-pandemic levels.
- NPL ratio is low and declining.
- Credit and loan dynamics:
- Mortgages growth has moderated recently; demand for project-related and consumer loans remains strong.
- Almost no direct spillovers from the collapse of Credit Suisse and several mid-sized US banks.
- Regulatory and supervisory progress:
- Rolling out of a risk-based supervisory framework relying on regular ICAAP results.
- Adoption of IFRS9 requirements for banks.
- Full implementation of Basel III final reforms with respect to capital requirements.
- Temporary regulatory measures from 2020 were phased out in 2022 and early 2023 with no impact so far on asset quality.
- Mission welcomes progress on revising the Banking Control Law and urges its swift adoption.
- Housing sector risks:
- Mortgage expansion since 2018 under the Saudi Housing Program; risks from mortgage lending are relatively contained.
- Most mortgages are subsidized and issued at a fixed interest rate, with full recourse and repayments directly linked to salary assignments.
- Vigilance and macroprudential guidance:
- Continue close monitoring of credit underwriting and management, early detection of distress, timely recognition of loan delinquencies, and adequate provisioning.
- Support thematic onsite inspections by SAMA focusing on corporate loan portfolios and mortgage portfolios.
- Consider gradually tightening macroprudential guidelines/regulations and phasing out fiscal incentives if credit growth remains strong.
- SAMA’s ongoing annual assessment of the countercyclical capital buffer is timely.
Structural reforms — achieving strong, sustained, inclusive, and greener growth
- Vision 2030 implementation and progress:
- Mid-way stocktaking identifies progress on digitalization, regulatory and business environment, female labor force participation, and higher private sector investment; some targets for 2030 already surpassed.
- Ongoing work on Human Capital Development, streamlining fees, higher access to finance, a new investment law, and stronger governance to enhance private sector growth and total factor productivity.
- Industrial policy and special economic zones (SEZ):
- National Industrial Strategy aims to reduce reliance on oil via targeted interventions, incentives, and SEZs.
- Risks from interventions should be minimized with special emphasis on export orientation.
- Establishment of SEZs should be regularly assessed to ensure effective linkages with the broader economy via technology upgrading and skills training.
- Monitor tax incentives and include strict exit criteria, claw-back mechanisms, sunset clauses and time-bound incentives.
- Public investment and project calibration:
- Careful calibration of investment programs needed to ensure catalytic effects and avoid crowding out the private sector.
- Improve government project selection, appraisal and feasibility, and adopt a unified public investment management system across the Kingdom, including for giga projects.
- Apply comprehensive guidelines, including the new central government PPP framework, to all projects funded with government guarantees.
- Regularly monitor PIF interventions to ensure catalytic effect and avoid crowding out.
- Green Initiative and emissions targets:
- Plans to increase renewable energy by an additional 2.1 GW capacity by 2024.
- Deploy efficiency programs (tarshid), carbon Capture, Usage and Storage technologies, and aim to become the world’s leading hydrogen exporter.
- Reduce emissions by 278 mtpa by 2030 and attain net zero emissions target by 2060.
- Staff estimates that eliminating fuel subsidies by 2030 could help achieve a third of the 2030 emissions reduction target.
- A detailing of specific initiatives linked to each target will help assess progress and necessary adjustments.
Source: Staff Concluding Statement of the 2023 Article IV Mission, June 7, 2023.