## Public Information Notice: IMF Concludes 2002 Article IV Consultation with Saudi Arabia

_IMF News, October 25, 2002_

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## Bibliographic details
- Published: October 25, 2002

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### Background
- Executive Board concluded the Article IV consultation with Saudi Arabia on October 9, 2002.
- In 2001:
  - Overall real growth slowed substantially.
  - Oil output dropped following OPEC-mandated production cuts.
  - Real non-oil GDP growth fell to 2.9 percent from 3.9 percent in 2000.
  - Inflation remained negative.
- Fiscal and external positions in 2001:
  - Overall central government budget shifted to a deficit of about 4 percent of GDP.
  - Government domestic debt rose to 92 percent of GDP by mid-2001.
  - External current account registered a surplus equivalent to about 8 percent of GDP.
  - SAMA's net foreign assets rose slightly to the equivalent of 11 months of prospective imports of goods and services.
- Financial and structural developments:
  - Domestic credit increased by over 8 percent in terms of the beginning money stock in 2001.
  - Financial sector performed well; stock market registered gains.
  - Saudi riyal appreciated in real effective terms by about 2 percent.
  - Progress on structural reforms focused on legal and institutional foundations for market-based allocation: end of state telecommunications monopoly, liberalized FDI rules under the new Investment Law, vocational training and specialized educational facilities, import tariff reduced from 12 percent to 5 percent.
- 2002 outlook highlighted:
  - Oil prices firmed up and macroeconomic position expected to be better than initially anticipated.
  - Fiscal deficit expected to moderate.
  - External current account surplus expected to remain lower than in 2001.
  - SAMA's net foreign assets could moderate to the equivalent of 10 months of prospective imports.
  - Real non-oil GDP growth expected to pick up to about 4 percent.
  - Credit to the private sector expected to increase by about 10 percent.

### Executive Board Assessment — Key Findings and Recommendations
- Commendation and strategic view:
  - Directors commended authorities for a comprehensive policy strategy combining structural reforms and sound macroeconomic policies aimed at accelerating non-oil growth and job creation.
  - Strategy emphasized promotion of the private sector, encouragement of FDI, privatization, labor market reforms, and deepening the financial sector.
- Fiscal policy and medium-term framework:
  - Directors welcomed plans to gradually achieve budget balance or a small budget surplus by 2005.
  - Recommended implementing plans as part of an overall medium-term macroeconomic strategy governed by explicitly defined fiscal rules to protect against downward rigidity in expenditure.
  - Encouraged considering a specific mechanism to save and appropriately allocate any temporary unanticipated increases in oil revenues.
  - Urged improving budget structure and taking early concrete steps to increase effectiveness of demand management and reduce fiscal volatility.
- Revenue and expenditure measures:
  - Reduction in the budget deficit requires broadening the non-oil revenue base and reducing expenditure.
  - Urged expedited implementation of the proposed income tax; some Directors suggested a sales tax as an interim measure pending VAT.
  - Prioritized strengthening and modernizing revenue administration.
  - Supported measures to reduce expenditure: merger of ministries and departments, performance contracts and accountability, targeted reductions in government employment under civil service reform, time-specific and targeted subsidies, rationalization of social expenditures, better planning of capital outlays, elimination of extrabudgetary spending, and avoidance of late payments.
- Privatization and FDI:
  - Commended comprehensive privatization strategy; noted cabinet approval to divest 30 percent of government ownership in the telecommunications company.
  - Urged establishment of a clearer timetable to execute privatization steps and use part of proceeds to reduce public debt.
  - Supported reducing barriers to FDI: narrow the "negative list", streamline procedures, finalize Gas Initiative agreements, reduce corporate income tax rate, introduce accelerated depreciation.
  - Suggested considering a simple, nondiscriminatory, broad-based tax on domestic and foreign businesses combined with liberalized access to financial and capital markets to boost FDI.
- Financial sector and regulatory reforms:
  - Commended effective supervision yielding well-capitalized, well-provisioned, financially sound banks.
  - Emphasized continued financial sector reform and opening to foreign competition.
  - Recommended strengthening banks' credit risk assessment, introducing uniform loan classification standards, removing legal constraints to longer-term financing (notably mortgage finance), and early approval of Capital Market and Insurance laws.
  - Welcomed decision to undertake an FSAP exercise.
  - Commended development of a comprehensive framework to combat money laundering and the financing of terrorism, including regulation of informal flows.
- Labor market and social policy:
  - Supported addressing unemployment through training and education, flexible Saudiization, measures to bridge cost gaps between local and expatriate labor and between government and private sectors.
  - Cited proposed transfer of benefits between the pension fund and social security system and extension of social security to small private enterprises.
  - Recommended civil service reform and realignment of public sector benefits to promote mobility to private sector.
  - Some Directors cautioned that proposed income tax on expatriate workers should not erode private sector competitiveness.
- Monetary and exchange rate policy:
  - In absence of inflationary pressures, endorsed accommodative monetary policy to support private activity.
  - Endorsed maintaining a pegged exchange rate arrangement within an open exchange and trade system, stressing need for strong fiscal position and sound banking system.
- Regional integration and trade:
  - Welcomed progress toward GCC economic and financial integration; customs union target date brought forward to 2003 and planned monetary union by 2010 noted.
  - Encouraged reaching remaining bilateral agreements to enable early WTO accession.
  - Welcomed lowering of import tariffs as helpful for non-oil sector competitiveness.
- Data, technical assistance, and external contributions:
  - Welcomed progress in economic data compilation and dissemination; urged further improvements, particularly oil sector data and public sector accounts consolidation.
  - Encouraged compiling data on the international investment position of the nonfinancial private sector and participation in the IMF's General Data Dissemination System.
  - Endorsed a role for Fund technical assistance in tax administration, financial sector, and data collection.
  - Expressed appreciation for Saudi development assistance to low-income countries, consistently exceeding the United Nations target of 0.7 percent of GNP.

### Saudi Arabia: Selected Economic Indicators, 1998-2001 (key figures preserved)
- Production and prices (Percent change)
  - Real GDP: 1998: 2.8; 1999: -0.8; 2000: 4.9; Prel. 2001: 1.2
  - Real oil GDP: 1998: 3.2; 1999: -7.5; 2000: 6.9; Prel. 2001: -1.2
  - Real non-oil GDP: 1998: 2.4; 1999: 3.1; 2000: 3.9; Prel. 2001: 2.9
  - Nominal GDP (in billions of U.S. dollars): 1998: 145.9; 1999: 161.2; 2000: 188.7; Prel. 2001: 186.5
  - Consumer price index: 1998: -0.2; 1999: -1.3; 2000: -0.6
- Financial variables (In percent of GDP; unless otherwise indicated) 1/
  - Total revenue: 1998: 25.8; 1999: 24.4; 2000: 36.5; Prel. 2001: 32.7
  - Of which: oil revenue: 1998: 14.6; 1999: 17.3; 2000: 30.3; Prel. 2001: 26.3
  - Total expenditure: 1998: 34.8; 1999: 30.5; 2000: 33.3; Prel. 2001:
  - Fiscal balance (deficit -): 1998: -8.9; 1999: -6.0; 2000: -3.9
  - Change in broad money (in percent): 1998: 3.7; 1999: 6.8; 2000: 4.5; Prel. 2001: 5.0
  - Interest rates (in percent) 2/: 1998: 6.2; 1999: 6.1; 2000: 6.7
- External sector (In billions of U.S. dollars; unless otherwise indicated)
  - Exports: 1998: 38.7; 1999: 50.6; 2000: 77.4; Prel. 2001: 72.8
  - Of which Oil and refined products: 1998: 32.5; 1999: 44.8; 2000: 70.7; Prel. 2001: 64.5
  - Imports: 1998: 27.5; 1999: 25.7; 2000: 27.7; Prel. 2001: 28.6
  - Current account (in billions): 1998: -13.1; 1999: 0.4; 2000: 14.3; Prel. 2001: 14.5
  - Current account (In percent of GDP): 1998: -9.0; 1999: 0.3; 2000: 7.6; Prel. 2001: 7.8
  - SAMA's net foreign assets 3/ (in billions): 1998: 45.4; 1999: 37.9; 2000: 47.6; Prel. 2001: 48.4
  - SAMA's net foreign assets (In months of imports of goods and services): 1998: 11.5; 1999: 8.1; 2000: 10.9; Prel. 2001: 11.0
  - Real effective exchange rate (percent change): 1998: 3.5; 1999: -4.5; 2000: 2.3

*Public Information Notice: IMF Concludes 2002 Article IV Consultation with Saudi Arabia (October 25, 2002).*

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## References

- [Saudi Arabia and the IMF](http://www.imf.org/external/country/SAU/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn02121_