Saudi Arabia: Staff Concluding Statement of the 2023 Article IV Mission

June 7, 2023

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 Saudi economy is booming, spurred by high oil prices, a strong pick up in private investment and reform implementation. The current account surplus has reached a decade-high surplus and inflation is contained. Uncertainty in the global economy—both impacting financial conditions and oil prices—requires continued efforts to further build buffers and diversify the economy. Going forward, continued fiscal reforms, coupled with careful calibration of investment programs, will help strengthen fiscal and external sustainability while implementation of the impressive structural reform agenda will help generate a strong, inclusive and more sustainable growth.


Saudi Arabia was the fastest growing G20 economy in 2022. Overall growth reached 8.7 percent, reflecting both strong oil production and a 4.8 percent non-oil GDP growth driven by robust private consumption and non-oil private investment, including giga projects. Wholesale, retail trade, construction, and transport were the main drivers of non-oil growth. The output gap is estimated to have closed during 2022 and the momentum is continuing in 2023, with nowcasting estimates suggesting non-oil growth above 5 percent in H1 2023.

The Saudi unemployment rate is at a historical low. Amid an increase in labor force participation, total unemployment dropped to 4.8 percent by end-2022—from 9 percent during Covid—reflecting both an increase in Saudi workers in the private sector and expatriate workers (mostly in the construction and agricultural sector) rising back above pre-Covid levels. Youth unemployment was halved to 16 percent in 2022 over the past two years while female participation in the labor force reached 36 percent in 2022, exceeding the 30 percent target under Vision 2030.

Despite a booming economic activity, inflation remains low and appears to be easing. Average CPI grew by 2.5 percent y-o-y in 2022, in part contained by domestic subsidies/price cap and a strong US dollar. Despite an uptick in early 2023 to 3.4 percent y-o-y, headline inflation is back at 2.7 percent y-o-y in April 2023, as declining contributions from transport and food prices offset the substantial increase in rent. Some wage pressure was observed for low skilled workers and highly specialized workers, but average wages remain flat.

Higher oil prices and stepped-up oil production improved the current account to a 10-year high surplus in 2022. However, the 13.6 percent of GDP surplus did not lead to a corresponding increase in official reserves in view of the large accumulation of assets abroad.Reserves fell by $30 billion in April 2023 relative to 2022 —but remain at comfortable levels (about 20-month import cover).


Non-oil growth momentum is expected to remain strong.While the April 2023 OPEC+ production cuts would reduce overall real growth to 2.1 percent in 2023, non-oil growth is expected to average 5 percent in 2023 and remain above potential as strong consumption spending and accelerated project implementation boost demand.

Headline inflation will be contained in 2023.At 2.8 percent, the average CPI will be slightly higher than in 2022, even though a strong currency, subsidies, and gasoline price cap offset inflationary pressures from diminishing labor market slack and a booming non-oil economy.

The significant improvement in the current account is expected to abate as oil prices stabilize and imports pick up, supported by a sizable investment program. Reserves are expected to stabilize at slightly lower levels of import coverage over the medium term, albeit remaining well above standard reserve adequacy metrics.

Risks to the outlook are balanced. On the upside, higher oil prices—as expectations of strong oil demand for the rest of the year persist—possible change in OPEC+ oil production cuts and accelerated structural reforms and investment could spur growth. Conversely, too rapid a rise in non-oil investment could further raise domestic demand, thereby adding pressure on prices and external accounts. On the downside, lower oil prices due to subdued global activity represent a key short-term risk while a quicker shift in demand for fossil fuel could hamper growth in the medium to long term.


Fiscal policy – Maintaining the path for stronger buffers and intergenerational equity

Favorable oil market dynamics strengthened the fiscal position, creating space for additional spending that was not initially budgeted for. The fiscal surplus in 2022—the first since 2013—was halved relative to staff’s initial projection of 5.5 percent of GDP. This mostly reflect increases in goods and services and capital spending. About 2.5 percent of GDP of additional expenditures were estimated to be one-off non-recurrent spending (about half in goods and services). At 23 percent of GDP public debt is low and sustainable, with fiscal space available to address potential headwinds.

In 2023, lower oil revenue would shift the fiscal surplus back to deficit. Robust non-oil revenue and lower spending—mostly because of 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.

Sustaining medium-term fiscal consolidation would be necessary to ensure intergenerational equity. Staff’s analysis shows that the higher-than-initially planned increase in spending (until 2030) would prolong the transition phase to achieve the medium-term fiscal stance consistent with stabilizing the Central Government Net Financial Asset (CGNFA) ratio. The mission supports the authorities’ plans for continued fiscal prudence and medium-term fiscal consolidation.To mitigate risks from oil price volatility, it recommendsadditional fiscal adjustment, building on the impressive reforms already initiated:

  • Non-oil revenue collection should continue to be prioritized. Tax reforms should build on strong efforts made to close the tax gap with the G20 average, including through a broader reform that at least maintains the VAT rate at 15 percent and rationalizes tax expenditures. Such reforms should be accompanied by strengthened tax administration.
  • Energy price reforms. The welcome measures taken in 2021-22—such as increasing prices for heavily subsidized diesel and asphalt—were not enough to prevent a rise in energy subsidies (as measured by the government compensation to the national oil company, ARAMCO) in 2022. In addition to the sizable diesel price increase implemented already in 2023, the mission recommends going further by lifting the cap on gasoline prices and adjusting the current formula to allow faster increases for electricity and other fuel prices.
  • Strengthening the safety net. The mission welcomes the elaboration of a new social protection strategy and move to a single social registry. To accompany the higher pace of energy subsidy removal, the mission recommends scaling up well-targeted social programs—such as the needs-based Damaan program—which could also be supported through savings from a narrower coverage of the existing Citizens’ account program.
  • Expenditure rationalization. Main priorities are to continue rationalizing the public sector wage bill, including through the ongoing strategic workforce planning and review, greater efficiency in public investment including through the ongoing work of the Spending Efficiency and Governmental Projects Authority, and full utilization of the expenditure chain (ETIMAD).

The authorities’ welcomeefforts todelink spending from oil price fluctuations should be strengthened by a strict application of a fiscal rule.Such a rule should avoid sudden jumps in spendingthat deviate from the medium-term fiscal framework (MTFF) and be based ona long-term fiscal anchor that best help Saudi Arabia serve its growth and stabilization objectives. Moves to strengthen the MTFF, improve budget forecasting and cash management, strengthen further disclosure and broaden public sector coverage—including for the Saudi Arabia Sovereign Wealth Fund (PIF) and the National Development Fund—would be important pre-requisites for an effective fiscal rule.

Progress towards developing a sovereign asset-liability management (SALM) framework is welcome and should be accelerated. Ongoing work towards establishing a public sector balance sheet is commendable. This would help move towards a SALM framework that will allow the authorities to monitor sovereign balance sheet exposures in an integrated manner and manage identified risks more efficiently. Thus, it will enable the authorities to assess future investment commitments and their funding in a comprehensive manner and implement a more cost-effective management of public-sector debt and assets.

Monetary policy – Managing liquidity and supporting the exchange rate peg

Liquidity squeezes that appeared in 2022 have been eased.With credit expansion outpacing deposit growth, the three-month Saibor-Libor spreads widened to over 150 basis points during June and October 2022. Central bank intervention at both times have helped alleviate liquidity strains as interest rate spreads have now normalized to their historical averages.

The exchange rate peg to the US dollar remains appropriate given the current economic structure. It is a policy that has been serving the country well to support monetary stability. In view of 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 exchange rate peg. To that end, the monetary policy framework should continue aiming at keeping the interbank rate in line with the policy rate through continued use of market-based instruments (such as open market operations). This could be assisted by improved liquidity forecasting—carefully coordinated with all institutions (including through calibration of the ongoing implementation of the Treasury Single Account).

Financial sector policies – Remaining vigilant

The banking system remains on a strong footing. The aggregate capital adequacy ratio is strong, profitability—driven by net interest margins—is high and above pre-pandemic levels, and the NPL ratio is low and declining. While growth in mortgages has recently moderated, demand for project-related and consumer loans remains strong, helping offset the impact on profitability from rising funding costs linked to higher interest rates and a greater share of time and saving deposits in banks’ liabilities. There was almost no direct spillovers from the collapse of Credit Suisse and several mid-sized US banks.

Strong performance of banks is underpinned by ongoing efforts to modernize the regulatory and supervisory frameworks . The rolling out of a risk-based supervisory framework that is relying on regular ICAAP results, the adoption of IFRS9 requirements for banks and full implementation of Basel III final reforms with respect to capital requirements are helping reduce risks. The temporary regulatory measures introduced in 2020 in response to the COVID-19 pandemic were phased out in 2022 and early 2023 (these included loan deferral and guaranteed lending programs) with no impact so far on asset quality. The mission welcomes progress made in revising the Banking Control Law and urges its swift adoption.

Despite the mortgage boom in recent years, banking sector risks from the housing sector are assessed to be limited so far . Driven by the initiatives under the Saudi Housing Program, mortgages have expanded since 2018 becoming an important part of banks’ portfolios. However, the risks emanating from mortgage lending are relatively contained. Although house prices have been growing fast in a few specific cities or areas, there are no signs of over-heating and house prices in Saudi Arabia remain moderate relative to other GCC economies. Most mortgages are subsidized and issued at a fixed interest rate, with a full recourse and repayments directly linked to salary assignments, which contribute to repayment discipline.

Nevertheless, the authorities should remain vigilant. Rapid credit growth—including mortgages—calls for continuing to closely monitor credit underwriting and management practices in banks. Early detection of borrowers and exposures in distress, timely recognition of loan delinquencies, and adequate provisioning are very important. The mission welcomes the thematic onsite inspections by the central bank (SAMA) of banks focusing on review of corporate loan portfolios or evaluation of mortgage portfolios. Gradually tightening macroprudential guidelines/regulations and phasing out fiscal incentives should be considered if credit growth remains strong. In this regard, SAMA’s ongoing annual assessment of the countercyclical capital buffer is very timely.

Structural reforms – Achieving strong, sustained, inclusive, and greener growth

The implementation of Vision 2030 reform agenda is continuing unimpeded towards a productive and green economy. A mid-way stocktaking of the objectives set under Vision 2030 has identified progress on digitalization, the regulatory and business environment, female labor force participation, and higher private sector investment—in some cases with targets set for 2030 already surpassed. Ongoing work to boost human capital through the Human Capital Development program, streamlining of multiple fees, higher access to finance, a new investment law, and stronger governance would further enhance private sector growth and total factor productivity.

The authorities’ industrial policy agenda should be supporting the impressive structural reform efforts. Saudi Arabia's National Industrial Strategy aims to reduce the Kingdom’s reliance on oil through targeted interventions, incentives, and the establishment of Special Economic Zones (SEZ). Risks associated with interventions should be minimized, including through a special emphasis on export orientation.The establishment of SEZs should be regularly assessed to ensure effective linkages with the broader economy, including through technology upgrading and skills training.The mission notes the ongoing efforts to monitor tax incentives, and welcomes the authorities’ plans to include strict exit criteria, claw-back mechanisms, sunset clauses and time-bound incentives.

Careful calibration of the various investment programs would be needed to ensure catalytic effects are in place. Improvements in government project selection, appraisal and feasibility would help improve public investment efficiency in Saudi Arabia. A unified public investment management system would be critical to ensure that the same rigorous standards are used across the Kingdom, including for giga projects. Comprehensive guidelines—including using the new central government PPP framework—should be applied to all projects funded with government guarantees. PIF interventions to kickstart new activities should continue to be regularly monitored, with a view to ensuring their catalytic effect and avoiding crowding out of the private sector.

Implementing the Green Initiative is essential to meet Saudi Arabia’s net emissions target . The mission welcomes ongoing plans to increase renewable energy by an additional 2.1 GW capacity by 2024, generate savings through efficiency programs (tarshid), deploying carbon Capture, Usage and Storage technologies, and become the world’s leading hydrogen exporter. A detailing of specific initiatives linked to each target will help assess the progress and adjustment necessary to reduce emissions by 278 mtpa by 2030 and attain Saudi Arabia’s net zero emissions target by 2060. Staff Estimates that eliminating fuel subsidies by 2030 could help the authorities achieve a third of their 2030 emissions reduction target.


The mission team would like to thank the Saudi Arabian authorities and the people they met outside the government sector for their close collaboration, generous sharing of their time, and candid and informative discussions.

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