On July 17, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Saudi Arabia.

Non-oil growth is projected to pick up to 1.7 percent in 2017, but overall real GDP growth is expected to be close to zero as oil GDP declines in line with Saudi Arabia’s commitments under the OPEC+ agreement. Growth is expected to strengthen over the medium-term as structural reforms are implemented. Risks mainly come from uncertainties about future oil prices, as well as questions about how the ongoing reforms will affect the economy. Employment growth has weakened, and the unemployment rate among Saudi nationals has increased to 12.3 percent.

After increasing in early 2016 due to higher energy and water prices, CPI inflation has turned negative in recent months. It is, however, expected to increase over the next year due to the recently introduced excises taxes, further energy price reforms, and the introduction of the VAT at the beginning of 2018.

The fiscal deficit is projected to narrow substantially in the coming years. It is expected to decline from 17.2 percent of GDP in 2016 to 9.3 percent of GDP in 2017 and to just under 1 percent of GDP by 2022. This assumes that the major non-oil revenue reforms and energy price increases outlined in the Fiscal Balance Program are introduced on schedule and that operational and expenditure savings identified so far by the Bureau of Spending Rationalizations are realized. The deficit is expected to continue to be financed by a combination of asset drawdowns and domestic and international borrowing.

The current account balance is expected to move into a small surplus in 2017 as oil export revenues increase and import growth and remittance outflows remain relatively subdued. Net financial outflows are expected to continue, and SAMA’s NFA is projected to continue to decline, although it will remain at a comfortable level.

Credit and deposit growth are weak and are only expected to recover gradually. Interbank interest rates, which spiked higher during 2016, have fallen, and liquidity in the banking system is at adequate levels. Non-performing loans (NPLs) increased slightly to 1.4 percent, but remain low.

Saudi Arabia has embarked on a bold reform program under Vision 2030 that was announced in 2016. The authorities have made considerable progress in initiating the implementation of their ambitious reform agenda. Fiscal consolidation efforts are beginning to bear fruit, progress with reforms to improve the business environment are gaining momentum, and a framework to increase the transparency and accountability of government is largely in place. Effective prioritization, sequencing, and coordination of the reforms is essential, and they need to be well-communicated and equitable to gain social buy-in and ensure their success.

Executive Board Assessment [2]

Executive Directors noted that the Saudi economy is adjusting to the effects of lower oil prices and fiscal consolidation, but that non‑oil growth is expected to pick up this year and overall growth is expected to strengthen over the medium term as structural reforms are implemented. Directors commended the authorities’ progress in implementing their ambitious reform agenda. They emphasized that proper calibration and sequencing of reforms will be crucial to their success.

Directors welcomed the direction of the authorities’ fiscal reforms. They agreed that a large, sustained, and well‑paced fiscal adjustment is needed over the medium term. Most Directors noted that Saudi Arabia has the fiscal space to allow a more gradual consolidation than envisaged in the Fiscal Balance Program. A few Directors cautioned, however, that backloading adjustment could incur risks. In this regard, Directors welcomed the authorities’ intention to carefully monitor the impact of consolidation and reform and make corrections if needed.

Directors commended the authorities’ efforts to enhance non‑oil revenue. In this context, they emphasized the importance of establishing an effective and efficient tax system. They noted the recent implementation of excises on tobacco and carbonated/energy drinks, and welcomed the authorities’ commitment to introduce the VAT at the beginning of 2018, although a few noted that the timetable could be challenging. Directors recommended keeping exemptions and zero‑rated items to a minimum.

Directors welcomed the authorities’ plan for further energy price reforms. They emphasized the importance of ensuring that the reforms are equitable, and supported the planned household allowance to cushion the impact of the price increases on low‑ and middle‑income households. A number of Directors saw scope for a more gradual phasing of the price increases to allow households and businesses more time to adjust.

Directors welcomed recent improvements in the fiscal framework and fiscal transparency, and encouraged further progress in these areas. They supported the planned public expenditure review, and emphasized the importance of gradually reducing the wage bill, strengthening social safety nets, and continuing to improve the efficiency of capital spending.

Directors noted the good progress being made in identifying and removing obstacles to private sector growth, and welcomed the intensive consultation with the business community. Directors welcomed the authorities’ privatization and public‑private partnership plans, and cautioned them to guard against fiscal risks.

Directors agreed that increasing the employment of Saudi nationals in the private sector is essential. They highlighted the importance of strengthening education and training. They also noted that clear communication of the limited prospects for future public sector employment would incentivize nationals to look for private sector work. Directors called for further steps to boost female labor force participation and employment.

Directors welcomed the findings of the Financial System Stability Assessment report that banks are well regulated and supervised. They welcomed the steps taken by SAMA to strengthen its regulatory and supervisory frameworks and to develop the macroprudential framework and the financial safety net. They saw scope for SAMA to strengthen its liquidity management framework. Directors welcomed the authorities’ efforts to further strengthen their AML/CFT framework, and looked forward to the finalization of their risk assessments.

Directors agreed that the exchange rate peg to the U.S. dollar remains appropriate given the structure of the Saudi economy, and emphasized that continued fiscal adjustment is crucial to support the peg. They saw merit in reviewing the peg periodically to ensure it remains appropriate.

Directors encouraged the authorities to continue to address data gaps and subscribe to the Special Data Dissemination Standard.