Saudi Arabia’s economy is set to grow at the quickest pace in a decade and will likely be one of the world’s fastest-growing economies this year, according to the International Monetary Fund.
Sweeping pro-business reforms implemented by the country, together with a sharp rise in oil prices and increased crude production, have powered the kingdom’s recovery from the pandemic-induced recession in 2020, the IMF said on Wednesday.
“Growth, driven by both oil production expansion and a continued robust non-oil recovery, is expected to pick up strongly this year,” the IMF said in a report at the conclusion of its Article IV consultation with the kingdom.
“Sustained oil output, higher oil prices than previously forecasted and strong reform implementation will support non-oil growth over the medium term.”
Saudi Arabia’s gross domestic product is forecast to expand 7.6 per cent this year after 3.2 per cent growth in 2021, the IMF said in its World Economic Outlook update last month. Non-oil growth will increase to 4.2 per cent in 2022 before returning to its medium-term potential of 4 per cent.
Saudi Arabia’s economy, the largest in the Arab world, grew 11.8 per cent in the second quarter of 2022, with oil-related economic activity in the kingdom rising 23.1 per cent annually. Non-oil economic activity climbed 5.4 per cent during the period, according to government data released in July.
Oil prices have remained volatile this year amid the Russia-Ukraine conflict. Brent, the global benchmark for two-thirds of the world's oil that rose 67 per cent last year, has come off its recent highs amid concerns for demand outlook. It is, however, still about 20 per cent higher than at the beginning of this year.
Despite a sharp rise in prices of imported commodities, inflation in Saudi Arabia will remain contained at 2.8 per cent in 2022, as the central bank tightens policy in line with the US Federal Reserve, the IMF said on Wednesday.
Consumer prices in Saudi Arabia increased by 2.7 per cent on an annual basis in July, higher than the 2.3 per cent rate of inflation recorded in June, Saudi Arabia’s General Authority for Statistics said last week.
Inflation globally has risen sharply, driven by a steep increase in the prices of food and other commodities amid the war in Ukraine. However, it has been significantly lower in the GCC than in most advanced and emerging market countries amid improved economic activity.
The IMF said the kingdom’s overall fiscal balance increased by almost 9 percentage points of GDP to a 2.3 per cent of GDP deficit last year.
An increase in oil proceeds amid rising production also improved the current account by 8.5 percentage points in 2021, registering a surplus of 5.3 per cent of GDP.
Saudi Arabia’s public finances and the country’s external position will strengthen "substantially", along with the kingdom's net foreign assets, on the back of increased non-oil revenue and higher proceeds from oil exports, the fund said.
“Reserve buffers will remain ample” this year amid continued economic momentum, Amine Mati, an IMF assistant director and Sidra Rehman, an economist at the fund, said in a blogpost on Wednesday.
Maintaining control of public spending will be important for policymakers in Riyadh, but there is scope for “more targeted social spending”.
“Managing oil revenues in a sustainable manner, so that spending does not rise and fall in line with the price of oil, would promote fiscal sustainability,” IMF executives said.
“So too would far-sighted budget planning and policies to diversify the economy.”
With strong central bank supervision, Saudi Arabia’s financial sector remains resilient. Systemic risks are low and increases in interest rates are expected to have only a limited impact on the Saudi economy amid high oil prices and strong liquidity.
Banks remain liquid, well capitalised and their profitability — which declined during the pandemic — rebounded strongly in 2021 as net interest margins recovered, the fund said.
Credit to the private sector by Saudi financial institutions grew 15.4 per cent in 2021, mainly driven by mortgages and SME lending, it said.
The kingdom, Opec’s biggest oil producer, is overhauling its economy to cut its reliance on sale of hydrocarbons to generate revenue. Expanding the country’s industrial base, strengthening its financial sector and attracting foreign direct investment across sectors are among the main pillars of the overarching Vision 2030 programme.
Labour market reforms, boosting employment and ease of doing business are among the other priorities for Riyadh.
Over the medium term, growth is expected to accelerate as the kingdom’s National Investment Strategy, supported by the Public Investment Fund’s “interventions” into the local economy yield dividends, the fund said.
“The authorities’ continued implementation of Vision 2030 policies will help diversify and liberalise the economy and thus pave the way to more stable growth,” Mr Mati and Ms Rehman said.
“Saudi Arabia is taking impressive steps to improve the business environment, attract foreign investment and create private-sector employment.”