IMF offers Riyadh praise and words of caution

The most recent International Monetary Fund (IMF) report on Saudi Arabia is bullish on Riyadh’s economic reforms. The IMF’s analysis indicates the organisation is pleased with the pace of reform and economic revitalisation in Saudi Arabia after expressing concern last November that the Saudis were moving too quickly in implementing changes that could backfire and harm the domestic economy.

In its August report, the IMF contended that economic measures enacted by the government of King Salman bin Abdulaziz Al Saud contributed to strong non-oil growth, an increase in Saudi real GDP and the shrinking of the budget deficit. The measures enhance the domestic business environment, energy-related subsidy cuts and the introduction of taxes on citizens and foreign workers.

“Growth is expected to pick up further over the medium-term as reforms take hold and oil output increases,” the IMF report stated.

The IMF expressed concerns, however, about the effect that a global oil price collapse could have on the Saudi budget unless Riyadh exhibits sensible spending restraint. It said that, while global oil price trends have had a positive effect on Riyadh’s fiscal and external balances, “higher oil prices provide both an opportunity and a risk to the fiscal reforms.”

Interestingly, the IMF does not say that a significant delay in the much-anticipated initial public offering of state oil and gas conglomerate Saudi Aramco would negatively affect growth in the kingdom’s non-oil economy. Reports suggest that the limited sale of Saudi Aramco shares has been shelved for the foreseeable future.

IMF Mission Chief for Saudi Arabia Tim Callen, speaking after the report’s release, said: “Aramco was one part of the reform programme. Other parts are moving ahead pretty well.” He added that the IMF’s forecast of improved Saudi economic growth over the next few years was based on the Saudi government continuing its broad range of reforms.

While praising the reforms introduced under the kingdom’s economic overhaul programme known as Saudi Vision 2030, the IMF cautioned Riyadh against raising public spending amid higher oil prices. The IMF report noted: “The increase in spending in 2018 has increased the vulnerability of the budget to an unexpected drop in oil prices, and these vulnerabilities will rise further if spending increases in response to the recent increase in oil prices.”

The IMF stressed the need for the Saudi government to ensure that “spending remains at a sustainable level in different oil price environments.” The Saudi government’s 2018 budget is the kingdom’s largest ever, with spending put at $261 billion and an additional $30 billion of spending deriving from the sovereign wealth fund and the national development fund.

The IMF report predicted that the kingdom’s real GDP would increase 1.9% in 2018 — after contracting 0.9% in 2017 — having been buffered by a 2.3% rise in non-oil growth, a sizeable leap from the 1.1% rise in the non-oil sector in 2017.

The IMF commended Riyadh for prioritising job creation for Saudi nationals, noting that “reforms should focus on levelling the playing field between Saudis and expatriate workers in areas where Saudis are likely to work.” The unemployment rate of Saudi nationals rose from 12.3% to 12.8% last year but the unemployment rate of Saudi women declined in 2017 to 31% from 34.5% the previous year, the report stated.

The kingdom’s fiscal deficit was anticipated to fall to 4.8% of GDP in 2018 — from 9.3% in 2017 — and plunge even more dramatically to 1.7% of GDP in 2019. The Saudi government’s imposition of a 5% value added tax at the beginning of 2018 is partly credited for shrinking the budget deficit, although higher crude prices have certainly helped.

The IMF predicted that declining oil prices would mean that the kingdom’s budget deficit will widen towards 3.6% of GDP in 2023, the year when Riyadh had hoped to balance its budget.

King Salman’s government had pledged to reach a balanced budget by 2020 but the IMF in its November 2017 report argued that the kingdom could comfortably delay balancing its budget until 2022, stating that the “strong fiscal buffers, the availability of financ­ing and the current cyclical posi­tion of the economy mean that rapid fiscal consolidation is nei­ther necessary nor desirable.”

In its analysis of the Saudi economy, the IMF said the Saudi government’s goal of a balanced budget by 2023 remains “appropriate… but if oil prices are higher than in the budget, the additional revenues should be saved.”

The IMF is clearly advising Riyadh to ponder that possible rainy day five years away when oil prices could be substantially lower while spending has continued unabated.

Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.

This article was originally published in The Arab Weekly.