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After the recently concluded article IV consultations with Saudi Arabia, the International Monetary Fund (IMF) has announced that the kingdom’s economic reforms have started to yield positive results. Non-oil growth, a key objective of Saudi Arabia’s economic diversification strategy, has showed positive growth, along with employment figures.
The kingdom’s GDP growth contracted in 2017, but showed signs of recovery in 2018, growing at 2.2%. Real oil GDP increased by 2.8%, while non-oil GDP growth was 2.1%, according to the fund. The IMF expects this to rise to 2.9% in 2019.
The IMF expects oil GDP growth of 0.7% in 2019, with an overall real GDP growth rate of 1.9%. However, given the uncertainties in the oil market, it remains difficult to predict economic outcomes. This is also contingent on Saudi Arabia continuing to produce oil at the currently agreed levels.
Despite the rise in government spending, the exodus of expatriate workers and their dependents on the back of higher residency fees impacted growth. Higher government spending, spurred by relatively higher oil prices, has supported growth and the implementation of reforms. This has also introduced medium-term fiscal vulnerabilities, the IMF said. Saudi Arabia’s consumer price index inflation rose with the introduction of VAT and an increase in energy prices in January last year. However, inflation has since eased, house rents have fallen, and consumer prices decreased by 2.1% year-on-year in March 2019.
The kingdom’s fiscal deficit narrowed in 2018 to 5.9% of GDP. However, the IMF projects that the fiscal deficit could rise to 7% of GDP in 2019. This is despite the Q1 2019 budget surplus and increased oil and non-oil revenues. It advised that 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.
The fund 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. Additionally, a reduction in the government wage bill, a more measured increase in capital spending, and the better targeting of social benefits could all yield additional fiscal savings.
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