Real non-oil growth of Saudi Arabia is expected to strengthen to 2.9 per cent in 2019 as government spending and confidence increase, but real GDP growth is projected to slow to 1.9 per cent as real oil growth slows to 0.7 per cent, according to Executive Board of the International Monetary Fund (IMF).
The IMF recently concluded the Article IV Consultation with Saudi Arabia and expects that the implementation of the Opec+ agreement will act as drag on the real GDP growth this year. However, the Fund expects growth to pick-up over the medium-term as ongoing reforms take hold.
Data showed the unemployment rate among Saudi nationals has moved down but remains high at 12.5 per cent. The fiscal deficit is projected to widen to 6.5 per cent of GDP in 2019 from 5.9 per cent of GDP in 2018 as spending is projected to increase and exceed the budgeted amount and offset an increase in non-oil revenues. The deficit is then projected to decline to 5.1 per cent of GDP in 2020. With oil prices implied by futures markets declining over the medium-term, the deficit is then projected to widen, the IMF report said.
The current account surplus is projected to narrow to 6.9 per cent of GDP in 2019 from 9.2 per cent of GDP in 2018 as oil export revenues moderates and import growth picks up. CPI inflation has declined in recent months, mainly due to falling rents, and is forecast to decline by 1.1 per cent in 2019, before turning positive in 2020 as further energy price increases are implemented. Credit growth is expected to strengthen with the stronger non-oil economy and bank liquidity should remain comfortable.
The authorities are continuing to implement their reform agenda. Fiscal reforms include lowering the registration threshold for the VAT, adjusting gasoline prices on a quarterly basis, and increasing fiscal transparency. Reforms to the capital markets, legal framework, business environment, and SME sector are ongoing.
The IMF Executive Board commended the authorities for the progress in implementing their economic and social reform agenda, including the introduction of the value-added tax and energy price reforms. Directors noted that reforms have started to yield results and that the outlook for the economy is positive; however, volatility in global oil prices poses uncertainty. They emphasised that continued commitment to prudent macroeconomic policies and appropriate prioritisation of reforms will be key to promoting non-oil growth, creating jobs for nationals, and achieving the objectives of the authorities’ Vision 2030 agenda.
The IMF reiterated its emphasis on fiscal consolidation and said it is key to rebuilding fiscal buffers and reducing medium-term fiscal vulnerabilities. They encouraged the authorities to build on their fiscal reforms, including by continuing with the planned energy and water price reforms and increases in expatriate labour fees.
The IMF directors welcomed the authorities’ ambitious reforms to develop the non-oil economy. They noted the ongoing efforts to strengthen the business environment and considered that careful implementation of industrial policies could encourage the development of new sectors of the economy. They agreed that given the current structure of the economy, the exchange rate peg to the US dollar continues to serve the economy well.