IMF Executive Board Concludes 2011 Article IV Consultation with Saudi Arabia
Public Information Notice (PIN) No. 11/114
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July 18, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Saudi Arabia.1
Over the last few decades, Saudi Arabia has achieved substantial gains in social development indicators which are now close to G-20 averages. Important challenges still remain, particularly the high level of youth unemployment for nationals and pressures in the housing market. With oil prices having rebounded following the global financial crisis, strong fiscal and external balances, coupled with high international reserves and very low debt, Saudi Arabia has the fiscal space to address these social priorities.
Growth recovered strongly in 2010 to an estimated 4.1 percent, following the 0.1 percent recorded in 2009. The acceleration in growth stemmed from both the oil and non-oil sectors, supported by higher public spending as well as a recovery in global demand. Profitability of corporates listed on the stock exchange improved significantly in 2010, with net profits some 56 percent higher than in 2009.
The fiscal accounts moved back into surplus in 2010 as increased oil revenues more than offset higher spending. Royal Decrees issued in February and March 2011 introduced new initiatives to tackle housing needs, to expand employment opportunities, and to broaden the social safety net.
Broad money growth slowed in 2010, but together with private sector credit has now begun to pick up. Monetary policy rates were left unchanged during 2010 in order to support private sector activity, and in line with domestic monetary indicators and monetary conditions in the U.S. and the exchange rate peg. Banks remain highly liquid and continue to hold capital well in excess of statutory limits.
Looking ahead, oil revenues are likely to be significantly higher than in 2010, reflecting both higher oil prices and increased oil volumes as Saudi Arabia expands production to make up for supply shortfalls from other countries. Fiscal and external balances are expected to strengthen further in the near-term. Available leading indicators point to an acceleration in private sector activity in early 2011, with overall real GDP growth now expected at 6.5 percent. Inflation has been subdued but the combination of continued pressure from imported food prices, rents, increased government spending and high domestic liquidity is likely to result in inflation rising to an average of about 6 percent for the year as a whole
Executive Board Assessment
Executive Directors noted that policy and financial buffers, combined with prudent financial sector regulation and supervision, had allowed Saudi Arabia to weather the global slowdown well. The near-term outlook for the economy is favorable. Over the medium term, policy priorities should focus on maintaining fiscal sustainability, securing broad-based growth and fostering job creation. Directors commended the authorities for their continued stabilizing role in the oil markets. They noted the significant positive spillover effects of Saudi policies on the regional and global economies, including the provision of generous official development assistance.
Directors supported the authorities’ actions to use the higher oil revenues to accelerate initiatives to address important social issues, notably in housing, unemployment, and extending the social safety net. At the same time, they highlighted the need to carefully monitor possible inflationary pressures and encouraged the proactive use of fiscal policy, supported by available monetary policy instruments, if needed.
Directors noted that the recent initiatives have increased spending entitlements over the medium term and raised vulnerabilities to a sustained decline in the oil price. They considered that spending programs that would complement private sector activity would enhance the economic impact of higher spending. The establishment of a formal medium-term expenditure framework, supported by a macro-fiscal unit, would help strengthen the implementation of fiscal policy over time. Directors welcomed ongoing initiatives to strengthen revenues, including modernizing tax administration, and looked forward to further progress towards a GCC-wide VAT. They also highlighted the importance of gradually reforming domestic energy pricing.
Directors noted that the supervision and regulation of the financial system by the central bank has been effective, as evidenced by the banking system’s resilience to recent shocks and confirmed by the conclusions of the recent FSAP update. Directors commended the authorities for the improvements in the areas of banking regulation and supervision in recent years. They encouraged the central bank to continue to strengthen the regulatory and supervisory framework, including by aligning the legal framework with actual practice. Directors also commended the authorities for their strong efforts in combating money laundering and the financing of terrorism, and encouraged further enhancement of the AML/CFT framework.
Directors agreed that the exchange rate peg to the U.S. dollar has provided a credible nominal anchor, while facilitating investment and financial sector development.
Directors welcomed the authorities’ multi-pronged strategy for stimulating job creation in the private sector, which would allow to scale back reliance on the public sector to absorb domestic labor. They noted the importance of efforts to increase access to finance and to deepen trade relationships with emerging trading partners. Directors emphasized that labor market policies should be designed in a market-friendly manner to avoid distortions and preserve competitiveness.
Directors acknowledged the steps to enhance access to housing finance, as part of a broader effort to address pressures on the availability of affordable housing. They looked forward to the final approval of the new mortgage law while stressing the importance of maintaining a strong prudential framework to ensure loan soundness and contain risk in the financial system.
Directors noted the ongoing efforts to improve the quality and dissemination of statistics and encouraged continued progress to address remaining data gaps.
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