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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
07 Jul 2021
eISBN:
9781513587424
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English
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IMF Country Report No. 21/149

Abstract

IMF Country Report No. 21/149

Copyright Page

IMF Country Report No. 21/149

SAUDI ARABIA

2021 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT

July 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Saudi Arabia, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its June 30, 2021 consideration of the staff report that concluded the Article IV consultation with Saudi Arabia.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 30, 2021, following discussions that ended on April 22, 2021, with the officials of Saudi Arabia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 24, 2021.

  • An Informational Annex prepared by the IMF staff.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2021 International Monetary Fund

Press Release

PR21/210

IMF Executive Board Concludes 2021 Article IV Consultation with Saudi Arabia

FOR IMMEDIATE RELEASE

Washington, DC-July 8, 2021: On June 30, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation1 with Saudi Arabia.

The Saudi economy entered the COVID-19 pandemic with strong policy buffers and reform momentum. The authorities responded quickly and decisively to the crisis with a range of fiscal, financial, and employment support programs that helped cushion the impact of the pandemic on the private sector. As the lockdown eased and the economy recovered in the second half of 2020, the government withdrew or increasingly targeted the temporary fiscal and employment support. SAMA’s borrower support has been retained.

The economy is recovering well. The non-oil recovery that started in the second half of 2020 is expected to continue with non-oil growth projected at 4.3 percent this year. While central government fiscal consolidation will be a drag on growth, it is expected to be offset by higher Public Investment Fund investment and strong private demand. Real oil GDP growth is projected at -0.4 percent in 2021 as production is assumed to remain in line with the OPEC+ agreement and overall real GDP is expected to grow by 2.4 percent. Over the medium-term, growth is expected to accelerate as the economic reform agenda begins to pay dividends.

Inflation is expected at 3.2 percent in 2021 (annual average). Credit to the private sector has been very strong, boosted by programs to encourage mortgage and SME lending. Banks remain liquid, well capitalized, and well-regulated and supervised.

The fiscal deficit widened in 2020 to 11.3 percent of GDP mostly driven by a 30 percent decline in oil revenues. Non-oil revenues increased, including because of the VAT rate increase from 5 to 15 percent in July 2020. Expenditures increased modestly as the removal of cost of living allowances in June 2020 and lower capital spending largely offset COVID-19 related spending and other one-off spending.

Strong reform momentum is continuing. The rapid increase in labor market participation of Saudi females and reforms to the Kafala sponsorship system for expatriate workers are very important to boost growth, productivity, and household incomes. Further, the program to codify legal practices, the PPP/asset sales program, the deepening of the domestic capital markets, reforms for e-government and to harness the potential of digitalization, and the support to SMEs and entrepreneurs are all important to support a more diversified and inclusive recovery.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They highlighted that Saudi Arabia entered the COVID-19 pandemic with strong policy buffers and a positive reform momentum and commended the authorities for their quick and decisive policy response, which helped cushion the pandemic’s impact. Noting the economic rebound in the non-oil sector, they stressed that the remaining pandemic-related policy support should be carefully withdrawn to continue supporting the ongoing recovery, while the Vision 2030 reform agenda should continue to be implemented to promote strong, sustained, diversified, inclusive, and greener growth.

Directors supported the authorities’ planned medium-term fiscal consolidation but emphasized the need to continue enhancing the social safety net in the near term to support low-income households. They encouraged the authorities to maintain the fiscal reforms introduced last year, press ahead with planned energy and water price reforms, and consider ways to rationalize the government’s wage bill.

Directors encouraged the authorities to continue developing the Fiscal Sustainability Program to reduce fiscal policy procyclicality. They underscored the importance of monitoring fiscal risks and developing a robust sovereign asset-liability management framework given the growing role of the Public Investment Fund and public-private partnerships (PPP) in the economy. Directors recommended further strengthening expenditure management, public procurement, and fiscal transparency.

Directors welcomed the continued resilience of the financial sector and the strong supervision by the Saudi Central Bank. They recommended carefully monitoring mortgage lending as well as regularly assessing the appropriateness of the deferred payments program and ensuring that banks assess borrowers’ creditworthiness under this program. Directors welcomed efforts to strengthen the financial sector’s legal and regulatory framework, the impressive capital market reforms, and the enhancement of the AML/CFT framework.

Directors underscored that structural reforms should continue to be implemented to diversify the economy and promote sustainable, inclusive growth. In this context, they supported recent reforms to increase female employment and to enhance the job mobility of expatriate workers. Directors welcomed the ongoing efforts to strengthen the legal framework, accelerate privatization and PPP programs, strengthen governance, and accelerate digitalization. Noting the ambitious National Investment Strategy, Directors recommended fully assessing its macroeconomic impact and the potential risks of crowding out private investment. Directors also welcomed Saudi Arabia’s subscription to the SDDS and reiterated the importance of further improving data quality and availability.

Directors commended the announcement of the Saudi Climate Strategy and the commitment to reducing greenhouse gas emissions. They looked forward to more details on the authorities’ plans to meet their climate commitments.

Directors agreed that the exchange rate peg to the U.S. dollar continues to serve the economy well given the current economic structure. While fully agreeing with this, many Directors also encouraged the authorities to review the peg over the medium term to ensure that it remains appropriate given the plans for economic diversification.

Table 1.

Saudi Arabia: Selected Economic Indicators, 2019–22

article image

Imports of goods and services.

For 2021, data is latest available.

Title page

SAUDI ARABIA

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION

June 24, 2021

KEY ISSUES

Context. The authorities responded quickly and decisively to the COVID-19 crisis and the economy is recovering. COVID-19 cases are well below the 2020 peak and vaccination is progressing. The exit from the remaining COVID-related policy support needs to be carefully managed and the Vision 2030 reform agenda continued.

Outlook and risks. GDP growth is expected to strengthen this year and over the medium term. Risks to the outlook are broadly balanced.

Fiscal policy. Fiscal consolidation is needed, but a slower pace of adjustment could be considered this year. Spending on the social safety net should be increased and there is scope to increase health spending and slow the pace of adjustment in capital spending if needed. A sovereign asset-liability management framework should continue to be developed and fiscal transparency increased.

Financial sector. The private sector financial support measures should be withdrawn carefully. The banking sector is well-capitalized and liquid. Continued close monitoring of borrowers including through regular stress-tests are essential as the support program may have masked emerging vulnerabilities. Loan-loss provisions should be increased further if necessary.

External sector. The peg to the U.S. dollar continues to serve Saudi Arabia well given the structure of the economy.

Supporting growth. Structural reforms need to be implemented to ensure there are no longer-term output losses from the COVID crisis and to diversify the economy. The rapid increase in labor market participation of Saudi females and recent reforms to the Kafala sponsorship system for expatriate workers are welcome. Public sector interventions to spur the development of new sectors need to be carefully implemented and not crowd out the private sector.

Approved By

Zeine Zeidane and Delia Velculescu

Discussions were held virtually during April 4- April 22, 2021. The team comprised Tim Callen (head), Imen Benmohamed, Erik Lundback, and Yang Yang (all MCD). Boele Bonthuis (FAD) and Arz Murr(LEG) participated in some of the meetings. Jihad Azour and Zeine Zeidane (MCD) attended the concluding meeting. Executive Director for Saudi Arabia, Mr. Maher Mouminah, Alternate Executive Director for Saudi Arabia Mr. Bandr Alhomaly, and Advisor to the Executive Director Ms. Jwaher Al Saud accompanied the mission. The team met with Minister of Finance Aljadaan, Governor of the Saudi Central Bank (SAMA) Almubarak, Advisor to the Saudi Royal Court and the Secretary General of the Vision 2030 Strategic Management Office Toonsi, Chairman of the Capital Market Authority Elkuwaiz, President of the General Authority for Statistics Pesendorfer, Governor of the National Development Fund Groff, and other senior officials, as well as representatives of the private sector and academics. Esther George and Tian Zhang (both MCD) provided support from headquarters and contributed to the report.

Contents

  • THE COVID-19 CRISIS, THE RECOVERY, AND RISKS TO THE OUTLOOK

  • POLICIES FOR GROWTH AND STABILITY IN THE POST-COVID WORLD

  • A. Fiscal Policy—Balancing Short-Term Support and Medium-Term Consolidation

  • B. Maintaining Financial Stability While Increasing Financial Access

  • C. The Exchange Rate and External Adjustment

  • D. Reforms for Strong, Sustained, Inclusive, and Green Growth Post-COVID

  • E. Statistical Issues

  • STAFF APPRAISAL

  • BOXES

  • 1. COVID-Related Policy Support Measures

  • 2. The Real Estate Market

  • 3. Capital Market Reform

  • 4. Climate Actions and Green Growth

  • FIGURES

  • 1. Economic and Health Impact of COVID-19

  • 2. Corporate Sector Indicators

  • 3. Money and Credit Developments

  • 4. External Sector Developments

  • 5. HowCOVID Affected GDP

  • 6. Growth, Fiscal, and Current Account Outcomes in Saudi Arabia and the G20

  • 7. Inflation and Financial Market Developments

  • 8. Upside/Downside Oil Price Scenarios

  • 9. Housing Market Developments

  • 10. Trends in Carbon Emissions and Energy Sector Subsidies

  • TABLES

  • 1. Selected Economic Indicators, 2019–26

  • 2. Budgetary Central Government Operations, 2019–26

  • 3. Fiscal Operations of the Budgetary Central Government and AGIs, 2015–20

  • 4. Balance of Payments, 2019–26

  • 5. Financial Soundness Indicators, 2015–2020

  • 6. Monetary Survey, 2019–26

  • APPENDICES

  • I. External Sector Assessment

  • 11. Risk Assessment Matrix

  • III. Public Debt Sustainability Analysis

  • IV. Public Sector Balance Sheet

  • V. Progress in Implementing the Key 2017 FSSA Recommendations

  • VI. Potential Output Post-COVID

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Saudi Arabia: 2021 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2021: Issue 149
Publisher:
International Monetary Fund
ISBN:
9781513587424
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9781513587424.002