fiscal and external vulnerabilities have increased in the wake of the oil price decline, the IMF said today in a statement following the end of its annual Article IV consultation with the government of the kingdom.
Real GDP growth is expected to slow to 2.3 per cent in 2017 from 3 per cent in 2016. Growth is projected to be 1.6 per cent in 2018.
The fiscal deficit is projected to fall to 12.2 per cent of GDP in 2017 on higher oil prices and further public spending cuts.
“Over the medium term, the fiscal deficit is projected to narrow only slightly because of rising interest payments that offset some of the revenues from the planned implementation of the VAT,” the statement said. “The current account deficit is estimated to reach over 3.5 per cent of GDP in 2017, and is projected to narrow gradually over the medium-term.”
“… additional sizable and frontloaded fiscal adjustment is urgently needed to restore fiscal sustainability and reduce the large fiscal and external financing needs,” the statement said. “Sustained fiscal efforts will be needed over the medium term to put debt on a downward path and rebuild policy space.”
Action recommended by the IMF includes:
- measures to contain current expenditure, including the wage bill, and a further reduction in energy subsidies
- raising non-oil revenue, including through the VAT and exploring other revenue measures.
The IMF called for a stronger revenue administration system and the establishment of a medium-term fiscal framework to support fiscal consolidation.
Strong fiscal adjustment, sizable external financing, and structural reforms are needed to support the peg and strengthen the international reserve position, the statement said.
“Gradually raising interest rate differentials vis-à-vis the United States through the stepped-up issuance of government securities could also help discourage capital outflows and rebuild reserves,” it said.
The IMF stressed the importance of discontinuing central bank lending to the government.
Liquidity stress tests suggest that most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets.
“A clear legal mandate for financial stability, stronger risk-based supervision, and enhanced crisis management and resolution framework will also help support the financial sector,” the statement said.