Saudi Arabia’s economic reforms agenda has started yielding positive results for the kingdom and employment along with the non-oil growth, one of the key objectives of the economic diversification strategy, has picked up pace, the International Monetary Fund said.
The economic outcome improved last year in Saudi Arabia, the biggest Arab economy, with gross domestic product growth rebounding to 2.2 per cent after contracting in 2017. Real oil GDP increased by 2.8 per cent while non-oil GDP growth rose to 2.1, the IMF said after article IV consultations with the kingdom.
The non-oil economy of Opec’s top oil exporter is expected to further strengthen to 2.9 per cent in 2019, the IMF noted.
“Recent monthly indicators have been positive and the increase in oil prices since the turn of the year is boosting confidence [in the kingdom’s economy],” the fund said.
It added that it is difficult to assess future developments in the oil market given uncertainties. However, on the assumption that Saudi Arabia produces at its agreed level under the current Opec + agreement, the IMF expects its oil GDP growth of 0.7 per cent this year and overall real GDP growth of 1.9 per cent.
“If Saudi Arabia increases oil production, then oil GDP growth would be higher - as would export and fiscal revenues,” the IMF said. “Over the medium-term, the [IMF] team expects a strengthening in non-oil growth to around 3 to 3.25 per cent as the ongoing reforms yield dividends and overall real GDP growth to settle around 2.5 per cent.”
Although government spending has increased, the exit of expatriate workers and their dependents on the back of higher residency fees appears to have held back growth,” the IMF noted. The country's consumer price index inflation rose with the introduction of the VAT and an increase in energy prices in January last year. However, inflation has since eased as housing rents have fallen, pulling consumer prices down by 2.1 per cent year-on-year in March.
Saudi Arabia is going through a huge reform programme to wean its economy off oil, which still accounts for a major chunk of government revenues. Riyadh is vying to reduce the public sector spending footprint on the broader economy and has cut back on some of the state subsidies to rationalise expenditures. It introduced VAT at the beginning of last year to create alternative revenue lines as it continues to prepare state-controlled entities for part privatisation to unlock value.
The IMF said higher government spending - on the back of relatively higher oil prices - has supported growth and the implementation of reforms but has also increased some medium-term fiscal vulnerabilities.
The Saudi fiscal deficit narrowed in 2018 to 5.9 per cent of GDP. Oil and non-oil revenues increased substantially in 2018 and despite the budget surplus in the first quarter of this year, and the IMF team projects that the fiscal deficit will likely rise to 7 per cent of GDP in 2019.
The fund said, despite progress, fiscal consolidation is needed to reduce the medium-term vulnerabilities in the Saudi economy.
“The team understands the authorities’ desire to support growth and the Vision 2030 reform programme through higher spending but believes that fiscal policy should strike the right balance between fiscal sustainability, social spending, and development,” the IMF said.
“If oil prices are lower than assumed in the government’s budget plan, the country would face large fiscal deficits unless spending was reduced, but from a starting position of weaker fiscal buffers than in 2014,” the Washington-based fund noted.
The IMF suggested that planned energy and water price reforms, supported by compensation for low and middle-income households through the Citizens Account programme, and increases in expatriate labour fees, should proceed.
A reduction in the government wage bill, a more measured increase in capital spending, and the better targeting of social benefits, will all yield additional fiscal savings, it said.