High youth unemployment and a lack of affordable housing are the biggest challenges for Saudi Arabia, the IMF says. But the kingdom has the fiscal power to meet the social priorities.
"Over the last few decades, Saudi Arabia has achieved substantial gains in social development indicators which are now close to G20 averages," the executive board of the IMF wrote in a report released on Tuesday.
"Important challenges still remain, particularly the high level of youth unemployment for nationals and pressures in the housing market."
As much as 40 per cent of Saudi youth is estimated to be out of work, one of the highest unemployment rates in the Arab world.
An estimated 70 per cent of existing housing projects in Riyadh, the capital, target households in the top 10 per cent income bracket, according to a report by Samba Financial Group.
Against a backdrop of unrest across the region, King Abdullah unveiled spending packages of US$129 billion (Dh474bn) in February and March, including funds for housing loans and handouts for the jobless.
"With oil prices having rebounded following the global financial crisis, strong fiscal and external balances, coupled with high international reserves and very low debt, Saudi Arabia has the fiscal space to address these social priorities," the IMF said.
Over the medium term, policy priorities should also focus on maintaining fiscal sustainability and securing growth across all sectors, its report said. Gradually reforming domestic energy pricing was also important.
The benefit from additional government spending and increased oil revenue meant the outlook for the Saudi economy was "favourable".
Overall, real GDP growth was expected at 6.5 per cent for the year, compared with 4.1 per cent last year, buoyed by leading indicators pointing to an acceleration in private-sector activity in the early part of the year, the report said.
The economy might grow by 6 per cent this year, up from an initial estimate of 4.3 per cent, the Saudi Arabian Monetary Agency said in June.
The IMF also warned that the country needed to "carefully monitor" inflationary pressures.
The combination of continued pressure from imported food prices, rents, increased government spending and high domestic liquidity was likely to contribute to pushing inflation up to an average of about 6 per cent for the year.
Inflation accelerated to 4.9 per cent last month compared with 4.7 per cent in June, according to official data.