IMF calls for Saudi finance, energy and labour market reform

Saudi Arabia should develop a comprehensive macroprudential framework, reduce domestic energy subsidies and promote the employment of nationals, the IMF said in a report published on 15 October.

The report follows the publication last month of the IMF’s annual Article IV report on trends and prospects in the Saudi economy.

“A well-defined macroprudential policy framework is needed to guide the countercyclical use of MPIs (macroprudential policy instruments) in Saudi Arabia,” the report said. “In addition to measures to strengthen the macroprudential framework that are already underway at SAMA (Saudi Arabian Monetary Agency), a formal macroprudential framework would assign roles and responsibilities among SAMA, the Capital Markets Authority, and the Ministry of Finance to help strengthen macroprudential policy formulation and implementation within and across institutions.”

The IMF said that Sama has encouraged banks to build capital buffers and provisions for non-performing loans. Reserve requirements were adjusted during the global financial crisis to manage liquidity pressures on banks.

“As a result, the Saudi banking sector is well-capitalised and profitable and compares well with many other commodity exporting countries,” the IMF said.

The report said that Saudi Arabia needs a medium-term fiscal consolidation that will allow the government to focus on development priorities while reducing medium-term fiscal risks due to lower oil prices. “…continued reforms to support the diversification of the economy away from oil would provide a boost to non-oil growth and help offset the impact of weaker government spending,” the IMF said.

The IMF said that the implied cost of low petroleum products and natural gas prices, computed using the price gap between domestic and US prices, has fallen to $65.9bn due to lower oil prices since the summer of 2015. This compares with $83bn before the oil price drop.

About 86 per cent of the cost is due to petroleum products. The IMF estimates 14 per cent is due to natural gas. The IMF said the implicit fuel subsidies in the electricity sector total $11.4bn.

The IMF said that raising domestic gasoline and diesel prices to the average level in the GCC would yield about 2.5 per cent of GDP. “Raising them to the average export price of refined products from Saudi Arabia or to the price level in the U.A.E would yield an estimated 3.8 to 6 per cent of GDP in additional revenues in 2015,” the IMF said.

The IMF called for control of public sector employment and pay as a way of promoting job-seeking in the private sector; the gradual replacement of foreign workers and measures to reduce the pay gap between foreign and Saudi workers in the private sector. It also called for the adoption of new macroeconomic policies suitable for an economy in which foreign labour plays a less significant role.