Saudi Arabia can ease austerity measures, says IMF

Saudi Arabia can slow the pace of fiscal consolidation in order reduce the effects on economic growth in the near-term, even if it means that the Kingdom will miss its own deadline of balancing the budget by 2019, the International Monetary Fund (IMF) said on Wednesday.

Given the Kingdom’s strong financial asset position and low debt, it does not need to ensure budget balance by 2019, IMF’s Saudi mission chief Tim Callen said in his report after completing the Article IV mission to the Kingdom.

The Fund suggested that “well-paced” fiscal adjustment is needed to achieve budget balance over the medium-term.

Saudi Arabia, the world’s biggest oil exporter, is in the process of restructuring its fiscal policy with the aim to narrow its budget deficit, since oil prices began to slide in 2014.

The measures include cutting subsidies on fuel and reducing government spending.

“Energy price reforms are a key priority, but there is scope for a gradual implementation to give households and businesses more time to adjust,” Callen said.

He noted that the successful implementation of non-oil revenue reforms, such as the excises and VAT, is very important.

Saudi Arabia’s reform program – Vision 2030 – is geared towards diversifying the economy, giving larger role to the private sector, increasing the number of jobs for Saudis in the private sector, and adjusting fiscal policy to ensure macroeconomic stability.

“The reforms are ambitious and further efforts on effective prioritization, sequencing, coordination, and communication will be needed to maximize the chances of their successful implementation,” Callen added.

The IMF also recommended improving employment generating initiatives, especially to include women in the work-force.

“Creating more jobs for Saudi nationals in the private sector is essential,” Callen said, adding that encouraging more female employment will have a positive economic impact in the country.

In addition, the Fund underlined the need to boost private sector growth. The government has started to improve the regulatory framework for private sector and is also working toward an “ambitious” privatization and public-private partnership (PPP) program to reduce the role of the government in the economy, the report said.

“Banks are well regulated and supervised, and SAMA (Saudi Arabian Monetary Authority) has successfully managed emerging financial sector risks over the past year,” said Callen.

“Efforts by the Capital Market Authority to develop the local capital markets are very welcome and will provide more financing and saving opportunities in the domestic economy,” he added.

The IMF also noted that Saudi Arabia’s decision to maintain its exchange rate peg to the US dollar continues to serve the country well, given the structure of the economy.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com