LONDON, 26 October — The International Monetary Fund has called for the acceleration of economic reforms in the Kingdom, warning that inaction would swell an already large public debt, put pressure on public finances and discourage investment, the Financial Times reported.
In a staff appraisal after consultations with the Saudi authorities, the IMF recommends that Saudi Arabia speed up the implementation of a proposed income tax on expatriate workers, who make up 48 percent of total manpower, but also extend the tax to Saudis.
It calls for measures to cut expenditure and strengthen controls over spending to eliminate extra-budgetary outlays. And it urges the authorities to make a clearer statement to the market of the timetable and steps that will taken to execute an announced privatization policy.
The IMF assessment of Saudi Arabia’s economic performance and recommendations are contained in an article IV consultation done in August and seen by the Financial Times.
The report endorses the government’s stated reform policy. But it warns that under an "unchanged policy stance" the Saudi economy over the next five years would remain vulnerable to a drop in oil prices, despite an expected pick-up in economic growth. The budget deficit would average about 4.5 percent of gross domestic product and government debt, now at 95 percent of GDP, would continue to rise.
The external current account would shift to a deficit and the central bank’s net foreign reserves, now at about 20 months of imports, could decline to about six months of imports. "Unless addressed effectively and expeditiously, macro-economic imbalances could weaken confidence, discourage investment and reduce non-oil growth, thus making it more difficult to achieve the employment objective," says the report.
The IMF assessment reflects the Kingdom’s difficult economic challenges, which will be exacerbated by any prolonged period of low oil prices. The government has made efforts to restructure the economy but businessmen and economists say implementation has been frustratingly slow. With a budget that is dominated by wages and debt service payments, the government has little room to maneuver when oil prices drop. Economic growth, meanwhile, is not keeping up with the population increase of about 3.5 percent a year. Real GDP growth, according to the fund, was a mere 1.2 percent last year and is projected at only 0.7 percent this year.
But some of the fund’s recommendations are controversial. Taxing expatriate workers, a move that the government aims to implement in two years, is seen as a way of bridging the gap between the wages of Saudis and expatriates and thus encouraging employment of locals. This is aimed at reducing a jobless rate, the IMF says.
But some Saudi officials say the move will be counter-productive, discouraging both local and foreign investment. Local economists say the Saudization of the workforce is best achieved through changes in immigration policies and improving an education system that fails to prepare graduates for the job market.
Ibrahim Al-Assaf, the finance minister, says the government is tackling overspending and the budget is in better shape than in the past, though more needs to be done. In an interview with the FT, he said off-budget expenditures all related to Aramco and other old government projects, saying efforts were under way to bring the non-Aramco spending within the budget.
"We’re working toward having a more stable fiscal situation through control of expenditures and giving the private sector what it can do better by privatizing state companies," he said.
