World Bank says Saudi economy likely to grow by 8.3% in 2022

World Bank's Regional Director for the GCC Issam Abu Sulaiman

Saudi economic growth would accelerate to 8.3% in 2022, Issam Abu Sulaiman, the World Bank's Regional Director for the GCC, told Argaam.

However, the growth is expected to slow down to 3.7% and 2.3% in 2023 and 2024, respectively, Abu Sulaiman said. He expected the non-oil sector to continue its growth trajectory at 4.3% in 2022, buoyed by support packages, but will likely decline to 3.4% in the coming years.

Meanwhile, the oil sector will remain the main driver for the Kingdom's economy despite recent indications of a more cautious approach represented in OPEC+ scheduled output, with an expected increase of 15.5% in oil production this year.

The significant rise in US inflation and decisions of the US Federal Reserve represent a policy dilemma for the Saudi Central Bank (SAMA) and other GCC countries. This is because the exchange rates pegged to the US dollar would force such countries to follow the US monetary policy.

Inflation in Saudi Arabia is expected to remain limited in 2022, hovering around 2.5% before declining slightly to 2.3% on average in the medium term.

Here are details of the interview:

Q: What are your forecasts for the GCC and Saudi economies by the end of this year?

A: The GCC is a bright spot when compared to other regions. Outlook for most developed and emerging markets turned negative, amid weak global growth, which reflects a deterioration in confidence, increase in inflation and tightening of financing conditions globally. Meanwhile, outlook for the GCC remains strong, supported not only by favorable global oil market conditions, but also by the recent structural reforms. However, additional reforms will be needed before the GCC economies can tap their full potential to achieve growth.

The GCC economy is expected to grow by 6.9% in 2022 before slowing down to 3.7% and 2.4% in 2023 and 2024, respectively. The strong performance is mainly supported by the hydrocarbon sector, which is expected to grow by 11.5% in 2022. The Russia-Ukraine war led to higher-than-expected oil production in the GCC and in line with the production quotas of OPEC+ until the third quarter of 2022.

With recent indications of a more cautious approach represented in OPEC+ scheduled production, the oil sector is expected to continue its growth by 3.3% in the medium term. Meanwhile, the non-oil sector will likely continue its growth by 4.3% in 2022 and 2.9% in the medium term. The main growth drivers during the forecast period are private consumption, amid easing of all forms of social distancing across the region, as well as fixed investments and exports. Higher oil revenues will also boost capital spending.

As for Saudi Arabia, growth is expected to accelerate to 8.3% in 2022 before falling to 3.7% and 2.3% in 2023 and 2024, respectively. Despite recent signs of a more cautious approach represented in OPEC+ scheduled production, the oil sector will remain the main driver of this growth, with production expected to rise by 15.5% in 2022. The non-oil sector would also continue its growth trajectory at 4.3% in 2022, supported by the economic relief package. It would then decline to 3.4% in the coming years.

Q: What are your recommendations for the GCC and Saudi economies?

A: This is a very generic question. However, the main policy challenge for the GCC countries is to reduce dependence on the hydrocarbon sector, as such countries seek to diversify their economies. Despite their great efforts in this regard, diversification is still below potential levels and requires further reforms. The non-oil economy witnessed further progress, but success was limited at the level of non-oil exports. The non-oil sector also achieved success, constituting 64% of the current total GDP in the GCC countries, compared with 58% in 2012. However, progress was limited in terms of growth in non-oil exports to GDP. Most of the GCC countries witnessed slight gains in non-oil exports over the past two decades. Therefore, there is an urgent need to adopt structural reforms to achieve strong, sustainable, inclusive and more environment-friendly growth.

The current hydrocarbon gains should play a significant role in financing the accelerated transformation and adaption of these reforms. There is a dire need, in particular, for reforms that target the private sector and green growth, and create job opportunities. This will open doors to a green industry that will be export-oriented and will help further drive the economic diversification agenda. Saudi Arabia plans to export 160,000 electric vehicles by 2026. More can be done to encourage and invest in decarbonizing industries globally.

Additionally, the GCC countries can improve orienting their public sectors to knowledge economy. The World Bank has recently published a report on this issue in Kuwait, which will be reflected on the GCC countries. The latter can focus on investment goals in the research and development sector, enhance ties between universities and the private sector to create the knowledge economy skills needed by the private sector through local universities. Meanwhile, business incubators linked to investment capital can also play a role to market the researches issued by local universities.

Q: How do you see potential changes in Saudi inflation this year? What are economic and financial instruments to control inflation rates?

A: Despite the rise in global commodity prices, overall inflation in Saudi Arabia was relatively contained, averaging 2.3% during the first nine months of 2022. Subsidies such as capping domestic gasoline prices since July 2021 and the soaring US dollar, as well as stable housing rents that constitute 21% of Saudi Arabia's consumer price index (CPI) contributed to limiting the repercussions of high global prices. This, accordingly, kept inflation rates at low levels. Inflation will likely remain limited during 2022 and hover around 2.5% before falling slightly to 2.3% on average in the medium term.

Since early 2022, SAMA hiked interest rates five times as the Federal Reserve tightened its monetary policy. We expect SAMA to follow suit of regional peers and adopt more tightened monetary policies.

On the public finance level, it is important to improve the quality and efficiency of public spending. While not many options might be available in the short term, it is noteworthy that the Kingdom launched in January 2022 a new social safety net to allow the government to better manage subsidies and remove ineligible people.

Q: What is the impact of higher interest rates on GCC and Saudi economies?

A: As inflation rises significantly in the US, the Federal Reserve, in line with consensus forecasts, said it will continue lifting policy rates in the coming quarters. This poses a hurdle on the level of policies to SAMA and the other GCC central banks, as the foreign exchange rates that are pegged to the US dollar will push them to follow the US monetary policy. This might be too much for the objectives of domestic demand management in the GCC economies at the current time.

Higher interest rates also coincided with a sharp slowdown in the Qatari private sector’s allocations, which grew nearly 14% in mid-2021, but fell to less than 2% currently. Lifting interest rates, in tandem with the US central bank, might have increasingly adverse effects on the GCC countries and their ambition to diversify their non-oil economies through expanding the private sector’s activity in various business sectors.