IMF says Saudi economy recovering strongly, expects growth to accelerate on reforms

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Saudi Arabia is recovering strongly following a deep pandemic-induced recession, experts of the International Monetary Fund (IMF) stated in a report, following the conclusion of the 2022 Article IV consultation with Saudi Arabia.

The fund added that economic prospects improved significantly on the receding effects of the pandemic, high oil output and prices, as well as strengthening economy.

This performance reflects the early policy support provided during the pandemic and strong reforms implemented within the framework of the structural reforms agenda as part of Vision 2030. This was also driven by the rise in international oil prices and increased oil production. Accordingly, Saudi authorities should continue the momentum of reforms.

According to the statement, inflation in the Kingdom is still under control, and is expected to decline to 2.8% in 2022. This is despite some expected inflationary pressures as a result of wholesale price inflation and high shipping rates.

Growth rates will exceed 7% in 2022, with such pressures likely to be contained, the IMF stated, adding that the current account surplus is also set to reach more than 17% of GDP, the highest level since 2012.

High oil prices will reflect positively on Saudi Arabia, especially in terms of oil revenues and capital flows. This is because the Kingdom has only limited direct commercial and financial links with Russia, as well as slight direct exposures through the Public Investment Fund’s (PIF) investments in equities and other strategic activities, with almost no direct links with the financial sector.

The IMF expects accelerated growth in the Kingdome, while reaping the benefits of continued implementation of the reform agenda and the National Investment Strategy in the medium term, supported by contributions from the PIF.

The impact of tightening global monetary policy conditions is expected to be positive for the banking sector, albeit limited to the economy in general, in light of liquidity levels and high oil prices.

IMF experts believe that the full implementation of the National Investment Strategy and the reforms set within the framework of Vision 2030 could lead to non-oil growth by an additional three percentage points to exceed 8% in the medium term.

The Kingdom should continue to carefully manage gains from rising oil revenues in the next period by maintaining public financial discipline and supporting the transition towards a green, more inclusive economy.

In addition, the momentum of reforms should continue, including steps to simplify regulations, encourage digitization, increase female labor force participation, strengthen governance, improve public financial management and implement the Saudi Green Initiative.

Fiscal consolidation should continue through the mobilization of non-oil revenues, energy price reforms and continued structural financial reforms that are already being implemented within the framework of Vision 2030. The creation of a financial base will help support pillars of public finance in the medium term.

The experts emphasized that pegging the SAR exchange rate to the US dollar is the most appropriate system for the Kingdom in light of its current economic structure.

The Saudi government confirmed that fiscal discipline remains the primary focus of its strategy, emphasizing that fluctuating oil prices do not affect the medium-term public financial framework. In addition, the government agreed to accelerate the pace of work on the asset-liability management framework, making significant progress in this regard.

According to the report, the government is currently working to set a financial base with the purpose of determining maximum limits on expenditures, excluding oil prices, as well as establishing clear criteria for distributing surpluses. The government also indicated that mobilizing non-oil revenues remains key to the Kingdom’s Fiscal Sustainability Program.

The government agrees that the current fiscal year will witness a budget surplus, despite the planned slight increases in some budget items, such as food subsidies, to offset the impact of high global food prices and accelerate the implementation of some strategic projects within the framework of Vision 2030.

The government indicated that the PIF’s investment plans are not based on oil revenues and any increase in the fund’s expenditures and the National Development Fund (NDF) should be viewed as private investments and not as a way to reach financial discipline.

The government affirmed that the implementation of reforms aimed at enhancing the mechanisms of budget announcement, including the public finance risks, establishment of the unified treasury account and the application of a medium-term public finance framework, are all factors that will together contribute to maintaining financial sustainability.

On energy subsidies, the IMF said the Saudi government noted that reforms are ongoing through applying gradual price hikes until subsidies are fully removed by 2030. However, the government objected to canceling the maximum limit of fuel prices, pointing to the importance of maintaining social consolidation and ensuring that industries are able to bear costs at a time when the Kingdom seeks to boost the private sector development.

The Saudi government added that work is ongoing on developing the planned social safety net program.