Saudi growth forecast cut due to lower oil output: IMF

The downward revision of Saudi Arabia's growth forecast for 2019 is entirely due to the lowering of the Kingdom’s oil GDP forecast following the OPEC+ production agreement in December, the International Monetary Fund (IMF) mission chief for Saudi Arabia and Assistant Director in the Middle East Department Tim Callen told Argaam in an exclusive.

He, however, stated that the fund has raised its estimate for non-oil growth to 2.6 percent for this year from 2.1 percent previously.

In December, OPEC and its non-OPEC allies reached a deal to cut oil production by 1.2 million barrels per day (mbd) for the first six months of 2019 in a bid to boost energy prices.

Though praising tax authorities in Saudi Arabia for implementing their plan of lowering the VAT registration threshold on time, the IMF official said bringing smaller companies into the tax net will be “very challenging” and lot needs to be done for smooth operation of the VAT this year.

The 5 percent VAT rate was introduced on January 1, 2018 and was applied to businesses with revenues exceeding SAR 1 million in the first year. The registration threshold was lowered to SAR 375,000 from January 1.

Here is the full interview with Callen.

Q: The IMF has lowered its Saudi growth forecast to 1.8 percent for 2019, down from its October 2018 prediction of 2.4 percent. What are the reasons for this reduction?

A: The reduction in the forecast is entirely due to the lowering of our oil GDP forecast following the OPEC+ production agreement in December. We have actually raised our forecast for non-oil growth to 2.6 percent for 2019 (from 2.1 percent previously).

Lower oil production directly affects oil GDP as measured in the national accounts and therefore overall GDP. The oil sector accounts for about 40 percent of GDP.

Q: The fund, however, has increased 2020 forecast to 2.1 percent. What factors are driving this increase?

A: The increase in the growth forecast for 2020 is very marginal and reflects small adjustments in the projections for the oil and non-oil sectors.

Q: Do you expect Saudi Arabia to balance its budget by 2023?

A: That will depend on the level of oil prices and the fiscal reforms that are implemented in the coming years. In last year’s Article IV report, we did not think that the budget would be balanced in 2023 given the oil price path we assumed and the policies in place at the time. Our view has not changed since then.

Q: Saudi Arabia lowered its VAT registration threshold in 2019. Is the IMF satisfied with the move?

A: We see the VAT implementation in Saudi Arabia as having been successful. It was the right move to start with a high registration threshold for the VAT to reduce the initial administrative complexity and it is right to have lowered the threshold from the beginning of the year. This brings credibility to the VAT and to the tax authorities that they have carried out the announced plan. However, bringing more and smaller companies into the tax net will be very challenging, and there is a lot of work still to do to continue to ensure the smooth operation of the VAT this year.

Q: The Kingdom is focusing on developing a knowledge-based economy. How important is it for the country?

A: Of course, a knowledge-based economy is important. This will bring opportunities of greater productivity and growth and more well-paid jobs. However, the focus needs to be on developing the Saudi economy broadly. This will require improving the business environment by reducing bureaucratic and regulatory hurdles for private sector companies, opening further to trade and investment, and ensuring financing is available for all good businesses, big and small. Improved education and training will also be key to ensuring the workforce is well prepared for the demands of working in the private sector. Clearly, the availability of a well-educated and motivated workforce is an important prerequisite for domestic and foreign investors.

Write to Parag Deulgaonkar at parag.d@argaamplus.com