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Assessing the IMF findings on Saudi Arabia

The International Monetary Fund (IMF) has just given the Saudi Arabian economy its annual road test, and it does more than just glance under the bonnet and kick the tires.

Its Article IV Consultation report is based on a visit to the country by a team of top IMF experts, experts in Middle East economics, and meetings with top financial and economic policymakers, followed by a written report which is discussed by the full IMF team of 30 or so executive directors in Washington.

The result is as accurate and independent a snapshot of the roadworthiness of a country’s economy as it is possible to produce. In essence the 2017 report just produced finds the Saudi engine in good condition, benefiting from the increased level servicing it is getting.

But, the IMF cautions, there is a long and demanding journey ahead, and policymakers will have to keep their eyes open for any warning signs flashing.

“(IMF) directors commended the authorities’ progress in implementing their ambitious reform agenda. They emphasized that proper calibration and sequencing of reforms will be crucial to their success,” the report said. In other words: Do not take your eye off the dashboard.

The basic issue the Saudi economy faces is the familiar one: the price of oil, and the immediate effect fluctuations in the price of crude have on the essential economic indicators.

Overall real gross domestic product (GDP) in Saudi Arabia will be at near zero this year, with oil still struggling to get above the $50 per barrel mark for any sustained period of time. That has an immediate knock-on effect for employment, which has risen to 12.3 percent for Saudi nationals.

That is the bad news. The good news is that non-oil GDP growth is forecast at a healthy 1.7 percent this year, showing the diversification strategy is beginning to pay off. Growth is expected to strengthen in the medium term, as the structural reforms of the Vision 2030 strategy take hold, but the oil price will continue to be the single biggest factor affecting economic growth.

Inflation has turned negative in the first part of 2017 — good news for consumers — but is set to increase this year and next with energy price reforms and the introduction of VAT.

Despite the low oil price, one of the most encouraging signs to come from the IMF report is that the fiscal deficit is forecast to fall substantially in the medium term — 17.2 percent last year, 9.3 percent now and a projected 1 percent or less by 2022.

The fund commended the Kingdom’s plans for diversification, energy price reforms, cultivating private-sector growth, and for moves toward greater financial transparency in the national accounts.

Frank Kane

The current account deficit is also expected to decline this year, mainly because of slowing imports and falling remittances from foreign workers, but much here inevitably depends on the level of oil prices. The non-oil deficit is falling fast, again indicating that the diversification plan is working.

One key needle on the Saudi dashboard is the level of net foreign assets held by the Saudi Arabian Monetary Agency. From a high of $724.3 billion in 2014, this has fallen to $472.6 billion in 2017. The IMF says that this level is still “comfortable.”

Overall credit conditions remain weak, with deposit growth and loans only expected to recover gradually. Levels of non-performing loans remain low. Overall, the Saudi cash position, both on a macro national level and within the financial sector, remains relatively strong.

This is just as well because, as the report highlights, “a large, sustained and well-paced fiscal adjustment” is needed in the years ahead. This means that Saudi Arabia will have to learn to live within its means in the new era of low oil prices.

Some of the IMF directors cautioned that “backloading adjustments” could incur risks, and you must assume they had in mind the recent measures to reinstate government employee benefits. This will remain a sensitive issue, where benefits to the consumer economy are weighed against the fiscal position, and has to be “carefully monitored.”

But for the most part, the IMF commends Saudi policymakers’ plans for non-oil diversification, energy price reforms, cultivating private-sector growth, and for moves toward greater financial transparency in the national accounts.

But further work still needs to be done in key areas: Private-sector jobs for Saudi nationals have to be encouraged through the “clear communication of the limited prospects for future public-sector employment.” Education and training have to be augmented, and further steps taken to increase the number of women in employment.

So the driver gets a pat on the back, the engineers are doing their jobs properly, and the fuel tank is full. But there is a long road ahead, and it will be essential to watch out for any bumps in the road or flashing hazard signs.

• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai