An International Monetary Fund (IMF) team led by Tim Callen held discussions from May 17–28 on the 2015 Article IV Consultation with Saudi Arabia. At the conclusion of the mission, Callen made the following statement:
“The decline in oil prices is resulting in substantially lower export and fiscal revenues, but the effect on the rest of the economy has so far been limited. Real GDP growth is projected by IMF staff at a healthy 3.5 percent this year, unchanged from 2014, with an increase in oil production and continued government spending expected to support the economy. Growth, however, is projected to slow to 2.7 percent in 2016 as government spending begins to adjust to the lower oil price environment. Over the medium-term, growth is expected to be around 3 percent. Inflation is likely to remain subdued.
“Government spending in 2015 is expected to remain strong, partly due to a number of one-off factors, while oil revenues have declined. As a result, IMF staff projects that the government will run a fiscal deficit of around 20 percent of GDP in 2015. Government deposits with the Saudi Arabian Monetary Agency (SAMA) have declined in recent months to finance the deficit and smooth the pace of fiscal adjustment. While this is an appropriate policy at this conjuncture given the large stock of deposits and very low government debt, a sizable fiscal policy consolidation will be needed over the next few years to put the deficit on a gradual but firm downward path. Going forward, the decline in government deposits will slow as the government starts to issue debt to finance the deficit.
“A strong fiscal framework that sets the annual budget in a medium-term framework and clearly establishes fiscal policy goals would support the fiscal adjustment. Improving the efficiency of government spending, comprehensive energy efficiency and price reforms, and expanding non-oil revenues will need to form central elements of the fiscal consolidation strategy.
“Saudi banks’ strong capital, profitability, and liquidity will help them weather a slowing in the pace of economic growth. SAMA continues to further strengthen its regulations and supervision of the financial sector and this will support the continued development and stability of the financial system. The exchange rate peg to the U.S. dollar continues to serve Saudi Arabia well given the current structure of the economy.
“The opening of the Tadawul (Saudi Stock Exchange) to qualified foreign investors this month is a welcome development that will help deepen the equity market and broaden the investor base. The depth of the local debt market will be enhanced by the issuing of more debt and sukuk. Government debt issuance to finance part of the fiscal deficit would help in starting to build a benchmark yield curve, an important step in developing the debt market.
“The decline in oil prices has emphasized the importance of economic diversification. Policies are continuing to strengthen the business environment, but more needs to be done to encourage firms to focus more on tradable rather than nontradable production in the non-oil sector.
“The government is undertaking an ambitious reform program to increase the employment of nationals in the private sector. With a young educated population entering the labor force in large numbers each year, creating a sufficient number of well-paying jobs is a critical challenge to support sustained and inclusive growth. With employment in the government sector at a very high level, more jobs for nationals will need to be created in the private sector to employ the new labor market entrants. This will require a continued focus on making nationals more competitive in the private labor market combined with changes to the incentives people face so that they opt for entrepreneurship and private sector employment rather than jobs in the public sector.”