A. Fiscal Policy

19. The fiscal stance—measured by the change in the non-oil primary deficit—is expected to tighten consistently over the medium term despite a wider central government fiscal deficit than originally envisaged. Q1 2024 data suggests a wider fiscal deficit on account of higher capital expenditures and lower oil revenues. The new medium-term spending path would exceed the 2023 Article IV consultation forecast by an average of 5.4 percent of non-oil GDP per year to reflect the finalization of the fiscal space exercise. Nonetheless, current policies—which assume no new non-oil revenue measures—would still result in an 8.4 percent of non-oil GDP narrowing in the non-oil primary deficit through 2029 relative to its level in 2023, supported by a reduction in spending, mostly through wages (see below) and lower spending on goods and services, including because of savings from one-off social programs introduced during the pandemic. Progress on consolidation would be offset by a decline in oil revenue due to the projected decrease in international oil prices. As a result, the budget balance would register an average deficit of 3.0 percent of GDP per year between 2024 and 2029.

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Contribution to Primary Deficit Reduction 2023-29

(Percent of non-oiI GDP)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: Country authorities and IMF staff calculations.

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20. Additional fiscal consolidation is needed to stabilize the net government financial asset ratio and achieve intergenerational equity. The authorities’ current policy stance is delivering some fiscal adjustment but is not consistent with intergenerational equity as defined under the standard PIH, thus some additional adjustment would be needed to deliver on this objective. Assuming a transition period of 15 years to avoid an excessive adjustment in the near term (Saudi Arabia: Selected Issues (imf.org)), this would require additional savings of about 5 percent of non-oil GDP through 2029—mostly through non-oil revenue mobilization—in addition to those envisaged by the authorities, followed by fiscal consolidation of about 13 percent of nonoil GDP until 2054 (Box 2).

^{Box 2.}

Saudi Arabia: Fiscal Anchor under the Permanent Income Hypothesis (PIH)

In resource-rich countries, one of the key pillars of economic policy is to ensure that future generations benefit from resource wealth as well as the generation(s) living during the period of extraction. Under the PIH, the total financial wealth (current wealth and the net present value of future oil revenue) is used to finance a constant flow of revenue in real terms (preferred in the case of Saudi Arabia to the real per capita one). If the current fiscal stance differs significantly from that implied by the long-term fiscal anchor, the gap will need to be closed with a fiscal adjustment.

Baseline. Uncertainty regarding PIH requires basing it on prudent assumptions. For this analysis, staff looked at the oil revenues under the baseline scenario combined with a demand-side shock and a combined demand/supply shock scenario.

Implications. Overall, Saudi Arabia’s longer-term fiscal trajectory appears more expansionary than implied by the intergenerational equity benchmarks. Staff’s illustrative calculations show that stabilizing the net wealth position after a transition period of 15 years would entail additional fiscal adjustment of about 18 percent of non-resource GDP during 2024-2054. A longer transition period to allow higher deficits in the medium term is also possible but that could imply larger adjustment in later years. The adjustment needed would be higher under the demand-side scenario and much lower under the 50-50 demand/supply shock scenario.

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21. Non-oil revenue mobilization remains the cornerstone of the fiscal consolidation strategy. Saudi Arabia has made important strides in enhancing domestic revenue mobilization (DRM), with the tax revenue-to-nonoil GDP (NOGDP) ratio averaging 12.8 percent over the last three years, more than double its average of less than 6 percent over the previous decade. This progress reflects a combination of tax policy reforms, including the VAT introduction along with tax administration reforms to strengthen compliance. Despite these achievements, Saudi Arabia’s tax revenue still falls below its estimated potential of 25 percent of GDP based on staff’s latest analysis. Efforts made in previous years need to be accelerated through the development of a full-fledged medium-term revenue strategy as non-oil revenue collection is crucial to close the identified policy gaps and achieve diversification objectives. This can be achieved through a two-pronged strategy:

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• Tax policy. The ongoing construction boom is an opportune time to put in place a property tax (2 percent of GDP in G20 and even higher in some advanced economies). It will also be important to introduce a personal income tax, reform expat levies and excises, increase corporate taxation, and tackle remaining VAT policy gaps (e.g., exemptions on first home purchases and real estate transactions). The coming into effect of the global minimum tax Pillar II calls for a thorough review of existing incentives—including in Special Economic Zones (SEZs) and as part of a proper tax expenditure analysis—to avoid tax leakages to other jurisdictions. Ongoing efforts to amend the zakat and tax procedure laws could help realign the legislative framework with international best standards, facilitate compliance, and improve the business environment. Tax expenditures—including recently granted ones for exempting industrial inputs such as machinery and equipment from taxes—should be systematically costed and reported. Investing in tax policy models to simulate decisions would help guide these decisions, including in the preferential treatment in SEZs.

• Tax administration reform. Digitalization, electronic invoicing, and the realignment of customs procedures with international best practices have helped enhance revenue collection. Implementation of a full revenue administration strategy—clearly detailing the number of registered taxpayers, arrears collection, audits—would help raise revenue. The internally conducted Tax Administration Diagnostic Assessment Tool (TADAT) self-assessment could be complemented by a third-party assessment to help identify priority reforms in this area. The temporary tax penalty waiver introduced repeatedly since Covid and recently extended to end-2024, fuels moral hazard and undermines compliance, and should be phased out.

22. Spending rationalization—which is also part of the Vision 2030 reform plans—should also support fiscal consolidation, mainly through:

• Subsidy reform. At about 5 percent of GDP in 2023, direct fuel subsidies—measured as compensatory payments to Aramco—still represent a significant burden for the budget despite a slight decrease in 2023 in the wake of lower international oil prices. Recent steps taken to reduce them—chiefly the 53 percent increase in diesel prices (the most subsidized fuel product) last January—are welcome and should be stepped up, including by removing the existing cap on gasoline prices, which could be increased gradually along with other fuel prices. To limit the impact on the most vulnerable, scaling up targeted social programs, such as the Damaan program, and the creation of a single household registry would help improve the targeting of the Citizen Account Program.

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Saudi Arabia: Energy Subsidies and Price Reforms

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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• Rationalizing spending. Plans to rationalize the wage bill—which represents 21.2 percent of NOGDP and 41.5 percent of total spending in 2023—through civil service reform and natural attrition is the main driver of spending restraint over the medium term (Annex VIII). Ongoing spending reviews could help identify areas for potential savings or efficiency gains—including in purchases of goods and services, and from social programs now that a unique social registry has been introduced. Amid a ramp-up in spending on large-scale projects, strengthening the public investment management framework would reinforce cost controls and maximize the growth return on priority projects. The IMF’s Public Investment Management Assessment (PIMA) would help the authorities design an action plan to bolster infrastructure governance and enhance public investment effectiveness.

23. Strengthening fiscal institutions will be essential to ensure steady progress towards fiscal objectives and enable fiscal policy to contribute effectively to macroeconomic stabilization. Despite some progress in recent years, budget spending continues to exhibit some degree of synchronicity with oil price fluctuations, while budget spending targets are regularly revised. Mitigating the risk of procyclicality would require accelerating efforts to develop strong fiscal institutions by:

• Further strengthening the budget preparation and execution processes. Staff welcomes the establishment of spending ceilings as part of the fiscal space assessment and encourages the authorities to keep spending within these ceilings and meet any additional needs through budget reallocations. It is important to include all decisions on spending appropriations within the annual budget process, with intra-year reallocations included in supplementary budgets. Realistic (even if prudent) revenue forecasts and adequate classification distinguishing between current and investment spending (e.g., for regional and sectoral strategies) are important to inform economic policies and improve transparency. It is also important to reinforce budget execution monitoring—including through the Etimad platform—and controls over multiyear commitments.

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Saudi Arabia: Budgeted vs Actual Expenditures and Revenues

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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• Implementing a medium-term fiscal framework (MTFF). The authorities’ efforts to establish a 3-year MTFF are welcome, particularly given the planned large-scale projects and ongoing transformational reforms. In view of the recent fiscal space assessment, the mission recommends that the authorities go further by moving to a 5-year MTFF, which would clearly lay out multi-year revenue initiatives, forward looking spending priorities as well as deficit objectives based on a fiscal anchor. This would help set the stage for a medium-term-budgeting framework and a move towards performance budgeting.

• Establishing a complete picture of the fiscal position. The increased involvement of multiple government funds and extra-budgetary entities, including the PIF and NDF (National Development Fund), in the execution of capital spending complicates the assessment of the fiscal stance and the monitoring of spending plans. Broadening the coverage of fiscal data to include the operations of extra-budgetary entities by producing budget accounts on a consolidated basis would help inform policymaking, strengthen monitoring, and enhance transparency.

• Deepening fiscal risk analysis and management. The authorities have made good progress on developing a fiscal risk framework and risk assessment methodology. Efforts to establish a robust framework for fiscal risk monitoring and analysis combining a qualitative assessment and quantitative tools are expected to accelerate. The internal fiscal risk report—which is prepared annually and quarterly—includes a discussion of risks to public finances arising from the global outlook and domestic shocks. It should be broadened to ensure that it covers the large state-owned sector, sizable direct and indirect asset holding, and a growing portfolio of liabilities linked to public-private partnerships (PPP). Publishing this detailed statement would also improve fiscal transparency.

• Enhancing cash management, through the establishment of the Treasury Single Account (TSA). One hundred and eighty-eight government entities are now enrolled in the TSA and the number of government accounts with commercial banks has been reduced to 4,251 in 2023 from about 16,000 in 2018, albeit public sector deposits in the banking system remain large. Looking forward, a policy is needed to define the cash buffer level the authorities intend to maintain in liquid assets. The increased and regular coordination with SAMA is welcome and should be strengthened through codified processes that would help enhance liquidity management effectiveness.

24. Operationalizing the fiscal rule based on a fiscal anchor derived from the PIH would best help Saudi Arabia’s fiscal and growth objectives. Staff acknowledges the authorities’ use of a structural fiscal rule based on a multi-year smoothing of oil prices in real terms. So far, this rule does not appear to constrain spending or reduce the still significant procyclicality of fiscal policy, as the ceilings are reset annually and lack a link to the previous MTFF targets. In line with our previous analyses, we would recommend an expenditure rule that integrates a dual mechanism comprising a ceiling on expenditure growth and a target for the Central Government Net Financial Assets (CGNFA), whose design should help preempt a deeper adjustment in the future. Mandating an independent institutional body (a la fiscal council) to monitor and report on the application of the fiscal rule could also enhance compliance and transparency.

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Saudi Arabia: Fiscal Policy Procyclicality

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Note: The procyclicality coefficient is obtained from country-specific regressions of real expenditure growth rates on commodity price changes for a sample of 60 resource-rich countries. Positive numbers indicate procyclicality. Only statistically significant coefficients are shown.

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25. Prudent debt and contingent liability management is important. At 35.3 percent of GDP by end-2029, public debt is expected to remain comfortably below the authorities’ 40 percent of GDP threshold and with fiscal space assessed as substantial and sovereign debt risk low (Annex IX). The current debt management strategy should include a thorough cost-benefit analysis and appropriate consideration of risks and contingent liabilities, such as those related to unmet financing needs for Giga Projects or to the potential termination regimes of PPPs that would fall on the fiscal authorities if not properly managed. For instance, staff understands that government guarantees may be higher than the 0.3 percent of GDP from the Saudi Real Estate Company (20 billion SAR) estimated in 2023, considering an estimated additional SAR 77 billion issued by Dhamanat for housing loans extended to low-income households. This reinforces the need to properly estimate the cost and scope of guarantees and to incorporate them into public sector debt and publicly guaranteed debt.

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26. The development of a Sovereign Asset-Liability Management (SALM) framework—a longstanding IMF recommendation—would enhance fiscal policy efficiency and enable cost-effective decision-making regarding debt management and investment strategies. A public balance sheet incorporating the PIF and other government-related entities that are involved in Saudi Arabia’s investment strategy has been developed and covers financial assets and liabilities. An Oversight Committee has been formed and the MoF has assigned a dedicated centralized technical team to work on the SALM project, with a first phase (including financial assets) already concluded, and the teams working on the second phase to include non-financial assets. This preliminary balance sheet has however not been shared with the IMF. The establishment of a comprehensive public balance sheet is only the first step towards an effective SALM framework, which also requires mechanisms for regular updates, accurate valuations, processes to monitor balance sheet exposures and funding commitments.

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Saudi Arabia: Government Savings and Net Financial Wealth

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: IMF staff calculations.

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27. Authorities’ Views. The authorities reiterated that promoting fiscal sustainability

remains their top priority. They however noted that the ample fiscal space allows them to remain comfortable with the deficit, provided it is driven by growth-generating expenditures. They also find the current consolidation path to be appropriate. They emphasized that any new revenue measures or energy subsidy reduction efforts should be carefully assessed and would require careful consideration of the economic and social implications. They highlighted that wage bill containment relies on a prudent and comprehensive approach to headcount and salary scale. The authorities underscored the unprecedented progress in improving PFM frameworks, fiscal transparency, and institutional communication, with further progress expected through quarterly budget reports. They also noted that contingent liabilities are closely monitored and appropriately provisioned for in the budget.

B. Monetary and Exchange Rate Policies

28. Monetary expansion moderated. The tight policy stance was appropriate as SAMA raised its policy rate from 1 percent in early-2022 to 6 percent as of Q1 2024, aligning with the U.S. monetary tightening cycle, with the risk premium ensuring an interest rate differential consistent, and in support of the exchange rate regime. Liquidity conditions have eased and remain adequate, with the volatility in spreads seen in the past avoided while higher interest rates drove a notable shift in the composition of money supply towards time and savings deposits, which peaked at 34.9 percent of total deposits in 2023 (up from 26 percent in 2022), before stabilizing more recently. In line with staff’s advice, the placement of public deposits with commercial banks is now conducted through an auction mechanism introduced in 2023, with the central bank acting as a fiscal agent of the government. This mechanism has enhanced the efficiency of public deposit placements, ensuring market-based returns on government funds and strengthened the use of market-based instruments (e.g., repos and other monetary policy instruments) for liquidity management.

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Saudi Arabia: Policy Rate and Liquidity Indicators

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: April 2023 MCD REO; Haver Analytics; Bloomberg and IMF staff calculations.

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29. Liquidity management policies are being enhanced. Steps have been taken to further strengthen SAMA’s liquidity management framework, including by improving existing liquidity forecasting models, strengthening SAMA’s institutional arrangements with the government, and enhancing the reserve requirement framework. Staff welcomes SAMA’s commitment to continue using its market-based methods (issuance of SAMA bills and repos/reverse repos) as needed to manage liquidity and ensure effective transmission of its monetary policy. The formation of a market-based risk-free yield curve—including through government debt issuance at various maturities—will enhance liquidity management, promote financial stability, and ensure that monetary policy actions are effectively transmitted to the broader economy.

30. Good progress has been made in developing an Emergency Liquidity Assistance (ELA) framework. As the Central Bank Law has provided only a very general legal basis for the ELA framework, a dedicated ELA regulation—specifying eligibility for emergency support and its terms and conditions—will help reinforce SAMA’s crisis management toolkit. The authorities have recently drafted such a regulation and are encouraged to adopt it, together with the associated internal procedures. This should be followed by operationalization of the ELA framework through regular simulations and internal procedures covering collateral policies and internal organization.

31. The currency peg to the U.S. dollar remains appropriate given the structure of the economy. The exchange rate regime has provided a credible anchor for monetary policy and is backed by ample external buffers. Over the medium term, additional fiscal consolidation and competitiveness-enhancing reforms are expected to bring the external position closer to the norm. With an open capital account and more synchronized business cycles with the U.S., it is important that SAMA’s policy rates continue to move in line with the Fed’s policy rate, with the risk premium ensuring an interest rate differential consistent with the peg. The peg should be reviewed regularly to ensure it remains appropriate, and ongoing reforms to deepen money and capital markets and further strengthen the monetary policy framework continue to support a more independent monetary policy in the future if it becomes appropriate.

32. SAMA is exploring the application of a Central Bank Digital Currency (CBDC). It has joined project Aber with the UAE in 2019 to explore digital ledger technology and more recently, the cross-border CBDC project known as M-bridge. SAMA has also been conducting a costbenefit analysis of CBDCs, in consultation with local banks and a team of IMF experts. Considerations have so far focused on wholesale transactions. Staff supports SAMA’s cautious approach as it explores the complex requirements and risks to monetary and financial stability relating to the regulatory, technological, or other aspects of CBDCs.

33. Authorities’ Views. The authorities agreed that monetary policy should continue to support the peg by maintaining the interbank rate in line with the policy rate. They reiterated that auctioning government deposits is not a monetary policy tool but a method to recycle and manage excess funds in the government accounts, with SAMA only acting as a fiscal agent for the Ministry of Finance. They agreed that market-based methods (e.g., open market operations) remain the primary tool for liquidity management. They welcomed the recent Fund TA on liquidity forecasting and concurred that establishing a formal ELA framework is important.

C. Financial Sector Policies

34. The banking sector is on a strong footing. With total assets equal to 99 percent of GDP at end-2023—up from 88 percent in 2017—the banking sector is dynamic and competitive (Box 3). The 2024 Financial Sector Assessment Program (FSAP)’s solvency stress tests—which incorporated the impact of a global recession, commodity price volatility, delays in investment and higher interest rates—have shown that Saudi banks are resilient to severe macroeconomic shocks:

• In the adverse scenario, the solvency ratio declines by 2.6 percentage points relative to the baseline—mostly because of higher credit losses—with all banks remaining above the regulatory minimum (Text Figure 15). Sensitivity exercises indicate banks’ resilience to lower housing prices, sectoral corporate shocks, and marking-to-market the whole securities portfolio.

• The banking system, on aggregate, remains resilient in an extreme scenario with higher interest rates and further increased cost of funding due to a continued shift from non-remunerated to remunerated deposits, while three non-systemic banks would fall below the hurdle rate (by only 0.15 percent of GDP on aggregate).

• Liquidity stress tests show that banks have enough counter-balancing capacity to manage liquidity stress although some banks could face stress under severe deposit runoffs, which indicates the need to diversity funding sources to better support long-term lending. The FSAP’s analysis of large deposit runoffs also indicates significant funding concentration.

• Publicly listed non-financial corporates are also on average resilient to earnings and borrowing costs shocks, with the median interest coverage ratio remaining above 1 under severe combined shocks (Text Figure 15).

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Saudi Arabia: Bank and Non-Bank Resilience to Shocks

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Note: Baseline scenario: based on IMF’s January 2024 WEO; Adverse scenario: global recession with 50 percent oil price drop and 14 percent of real investment decline from the baseline; Add-on exercise: considers adverse scenario with additional higher interest rates (210 bps increase in 2024). Results are subject to data constraints.

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^{Box 3.}

Saudi Arabia: Competition in the Banking Sector

Overall, Saudi Arabia has a fairly competitive banking sector. Measured by various profitability, structural, and contestability indicators, efficiency of banking intermediation looks good. In particular, the spread between lending and deposit interest rates of Saudi banks has been on a declining trend in recent years and banks’ operating costs have also been declining (Table 6).

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Noninterest Expenses to Total Income and Average

Lending Rate

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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Also, Saudi banks are making significant investments in fintech developments, which helps them effectively compete in their business activities. A dynamic fintech ecosystem is supported by the regulatory sandboxes of SAMA and CMA. Three digital banks have been recently licensed, which should contribute to financial inclusion and foster healthy competition as digital banks are typically agile and innovative.

The structural indicators suggest that the banking sector is moderately concentrated. There are 11 locally incorporated banks and 17 foreign bank branches licensed in Saudi Arabia, in addition to three digital banks. The Herfindahl-Hirschman Index (HHI) calculated using data on bank deposits was 1,502 as of end-2023 (the HHI calculated using data on bank loans was 1,569).*

An important dimension of competition in the Saudi banking sector relates to the role of government. The government has direct or indirect ownership stakes in local banks, and there are large government funds that perform some activities like those of banks. The very nature of ownership structure differentiates these institutions from private companies, as they may not necessarily pursue the goal of profit maximization while the backing from government may give a unique position in the market. In this regard, ensuring robust governance arrangements is very important. In addition, the large and increasing reliance of banks on deposits of government-related entities may also raise concerns of fair and competitive allocation of these resources. The recent launch of an auction mechanism to place public deposits in banks should alleviate these concerns.

*In some countries (e.g., U.S.), the regulators consider three ranges for HHI values: (i) less than 1,000—not concentrated; (ii) 1,000 to 1,800—moderately concentrated; and (iii) greater than 1,800—highly concentrated. The Saudi General Authority for Competition uses HHI along with other quantitative and qualitative criteria in assessing competition without specifying any thresholds for HHI.

35. Systemic macro-financial risks in Saudi Arabia remain low, albeit solid credit growth and an amplified sovereign-bank nexus call for continued vigilance. Bank credit growth has moderated to about 11 percent and is expected to remain at that level during 2024, mainly reflecting lending under large projects and funding from wholesale sources. On the asset side, bank claims on the public sector have been steady at about 17 percent of total bank assets since 2019. At the same time, financial linkages between banks and the government sector have deepened significantly, with deposits of government-related entities representing 31.5 percent of total deposits as of Q1 2024. The increased balance sheet interlinkages between financial institutions and the government could amplify systemic shocks, including through fluctuations in oil prices. Systemic risks from the non-bank financial system are low, given their small size in total financial sector assets (e.g., 2 percent for insurance and finance companies), and as the NDF (7 percent of total assets) is exclusively funded by the government and its own funds.

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Saudi Arabia: Credit Developments and Sovereign-Bank Nexus

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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36. The 2024 FSAP underscores the good progress made in enhancing Saudi Arabia’s banking regulatory and supervisory framework, which will be further strengthened through ongoing reforms (Annex X). The draft Banking Law is expected to be submitted soon for approval to the legislative authority—which should help further align the framework with the Basel Core Principles, including by enhancing SAMA’s operational independence and powers. SAMA should continue to actively engage with banks and move to more qualitative on-site assessments, while the existing gaps in regulatory coverage (such as transfer and country risk, operational risk, risk management, and complete coverage of related party exposures) should be addressed. SAMA has made good progress in developing the legal framework for bank resolution and should complete the implementing regulations. SAMA should ensure effective implementation of the recently issued regulations on Islamic banking, particularly those relating to liquidity risk management by Islamic windows.

37. Safeguarding financial stability remains important, including through addressing existing data gaps. SAMA, in its role as secretariat of the National Financial Stability Committee, is upgrading the methodology for calculating a National Financial Stability Index by aligning its structure with the interconnectedness map. In this regard, it is important to continue work on addressing the existing data gaps, including by improving data collection on households and corporate sectors and establishing a monitoring framework for the financial sector’s exposure to large infrastructure projects. This information should then be incorporated into SAMA’s risk monitoring and stress-testing framework, which will corroborate the ongoing efforts to develop scenario-based stress testing framework aligned with IFRS9 for credit staging and provisioning. Monitoring funding concentration is also important.

38. Macroprudential tools should be used to forestall possible risks of a lending boom amid large infrastructure projects and measures to increase the homeownership rate. Well-capitalized banks, various government subsidies, full recourse mortgages, loan repayments through direct salary deductions of public sector employees, and existing loan-to-value (LTV) and debt-service-to-income (DSTI) limits help contain risks from the rapid growth of mortgage lending. To further reduce risks going forward, there is now a good opportunity to introduce a positive neutral countercyclical capital buffer (CCyB). If elevated credit growth persists or rises further as Vision 2030 project implementation picks up, the authorities should consider tightening the existing macroprudential tools, such as LTV and DSTI limits (which are relatively high in international comparison), the guideline on the loan-to-deposit ratio (which has a reduced weight for wholesale funding) and/or reducing reliance on non-deposit sources of funding. Addressing the existing gaps in housing prices and developing a reliable house price index will also be important for accurately capturing signs of overheating or market deterioration.

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Saudi Arabia: Market Valuation and Borrower-Based Macroprudential Measures

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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39. Financial inclusion has substantially increased over the last decade, although some gaps remain (Table 6). In 2021, an estimated 74 percent of adults had an account with financial institutions (including mobile money accounts), up from 46 percent in 2011. In addition, 63 percent of females had an account compared to 82 percent of males, an important improvement in addressing the gender gap since 2011 when the same numbers stood at 15 percent and 73 percent, respectively. While progress is remarkable, the quick adoption and implementation of SAMA’s National Strategy under the Financial Sector Development Program would be important for further fostering financial inclusion and literacy, particularly for underserved segments.

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Financial Institution Account Ownership by Gender

(Percent)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: Global Findex Database.

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40. SAMA should maintain efforts to strengthen the effectiveness of AML/CFT supervision. Improvements were recently made to automate the AML/CFT risk assessment matrix and enhance the accuracy, validation, and analysis of the data on risk that is collected from reporting entities, including Fintech companies. As the financial sector expands and diversifies, the ML/TF risk assessment should continue to capture the evolving risks and give adequate weight to potentially higher-risk financial activities. Conducting targeted inspections on key due diligence measures (which have already increased in 2023) and levying sanctions for non-compliance, should further enhance the effectiveness of implementation.

41. Authorities’ Views. The authorities noted the strength of the banking sector, as acknowledged by the FSAP stress tests and by performance well above Basel requirements (solvency, provisioning, liquidity). They agreed with the importance of adopting the new Banking Law without delay and the need to complete the ongoing reform efforts to strengthen financial safety nets. The authorities emphasized that some recommendations will be addressed when the updated Banking Law becomes effective, including the recommendations to improve the licensing process or to enhance the regulations on significant ownership transfer, as well as explicitly articulate all the powers required for effective banking supervision. The authorities appreciated several recommendations to improve the regulations on related parties but regretted that the FSAP did not sufficiently acknowledge the significant progress in developing this framework since the previous FSAP in 2017. The authorities noted they are monitoring the developments in the sovereign-bank nexus, including through PIF activities and giga projects. They stressed that they approach banking supervision through the Basel Core principles, with Islamic financial regulation being complementary.

42. Authorities’ Views. The authorities highlighted that risks from real estate lending are appropriately appraised, with valuation by accredited valuers. Through GASTAT, they are also working on a new housing price index that would help address some of the existing data gaps. The authorities agreed that tighter macroprudential tools—including LTV and DSTI limits—could be considered if credit (including mortgages) were to increase rapidly. They highlighted that an assessment would first be needed before introducing a positive neutral CCyB.

D. Structural Reforms

43. Reforms to enhance Saudi Arabia’s attractiveness for foreign investment are progressing. Saudi Arabia climbed 16 notches in the IMD’s World Competitiveness ranking in three years, reaching the 16th position globally in 2024, while the AT Kearney survey indicated that 50 percent of survey respondents were “more optimistic” about investing in the Kingdom. The number of foreign investment licenses issued reached a record high, nearly doubling from its 2022 level. The Regional Headquarters Program is now being implemented, leading 330 firms to apply for licenses to establish their regional headquarters in the country. However, gross FDI inflows—which were historically linked to oil price fluctuations and now increasingly coming from strategic sectors, non-energy, and Asia—only averaged 2.1 percent of GDP (about 1.2 percent of GDP after excluding Aramco’s infrastructure transactions), lower than inflows into peer economies and significantly lower than the 2030 target even after the upwards revision following the new methodological framework (Box 4). In line with the trend of regional peers, total factor productivity growth has also been declining since the mid-1970s.

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Correlation between IMD Scores and GDP per Capita

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: IMD World Competitiveness Ranking and IMF staff calculations

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Saudi Arabia: Foreign Direct Investment (FDI)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Note: The FDI predicted values are extracted from an OLS model using the explanatory variables: Real GDP growth (t), Oil (t), VIX (t), U.S. 10-Year (t), Debt/GDP (t-1), Fiscal Balance/GDP (t-1), and Current Account/GDP (t-1). The only significant variable is oil prices.

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^{Box 4.}

Saudi Arabia: New Methodology of FDI Statistics in Saudi Arabia

Prior to 2024, inward FDI statistics were published by SAMA based on historical data provided by SAGIA (MISA since 2020) and various assumptions. With the collaboration of MISA, GASTAT, and SAMA and with support from IMF technical assistance, a detailed FDI dataset based on an enhanced methodology was released in January 2024 by GASTAT and MISA.

• Expanded Data Sources: The new inward FDI statistics are based on analysis of firm-level financial statements obtained from multiple sources: (i) MISA database covering all firms with foreign licenses; (ii) Saudi Stock Exchange (Tadawul) for financial statements of listed companies; (iii) Real estate investments owned by non-residents (Ministry of Justice); (iv) Ministry of Commerce database that covers details of Gulf companies; and (v) International database and company websites. To avoid double counting of subsidiary companies, only stand-alone companies’ financial statements have been used, not those of consolidated companies.

• Enhanced Methodology: IMF staff fully endorses the new methodology, which is aligned with best international practices and the IMF’s BOP manual, such as reverse investment cases, types of foreign investment (e.g., direct, portfolio, other investment), residency criteria, etc. FDI data of listed companies are estimated based on their market price traded in Tadawul, while FDI data of non-listed companies are calculated based on their own fund at book value. The revised FDI series led to some revisions in the BOP data for 2006-2022.

• Comparison of old and new FDI statistics: The new gross FDI inflows are 62 percent higher than the old statistics for the total of 2020-2022, including an uptick in 2021-22 that reflects a large Aramco infrastructure deal. On the other hand, FDI stocks have been revised lower. The new series provide a higher level of granularity in terms of flows by sectoral activities, country of residence, and administrative regions.* It is anticipated that the new series will provide more informed guidance for policy formulation and decision-making.

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Flows of Direct Investment Abroad

(USD Million)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: GASTAT and IMF staff calculations.

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Flows of Direct Investment in Saudi Arabia

(USD Million)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: GASTAT and IMF staff calculations.

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Note: * FDI statistics published by GASTAT do not contain regional breakdown, but FDI data published by MISA do.

44. The success of Vision 2030 hinges on continued diversification efforts, effective implementation of reforms, and the ability to adapt to global economic shifts. Enhancing private sector development will require providing more clarity to investors and removing remaining bottlenecks identified, including those in the regulatory and business environment. Reducing costs and increasing investment efficiency, facilitating foreign entry, reforming a segmented labor market, enhancing digitalization, and strengthening governance are important reform priorities necessary to enhance diversification efforts and growth. Developing a framework for regulatory impact assessment will also be important to inform reform plans. Continuing to sustain the reform momentum—irrespective of international oil price movements—will be essential.

45. The impressive efforts taken to overhaul the business environment and eliminate regulatory barriers are welcome and should be accelerated. Key priorities include:

• Legislation and its effective execution. The implementation of the new law on civil transactions adopted in January 2024 is expected to provide greater certainty, predictability, and reliability in contract enforcement (including in construction and employment), financial transactions, property rights, and dispute resolution. This predictability for investors will be enhanced by the forthcoming adoption of the investment code, which will provide a level playing field for Saudi and non-Saudi investors by protecting investors’ rights. The ongoing work on the commercial transactions and the consumer protection laws are also expected to strengthen the legal framework and improve market functioning. Ensuring proper application of these laws—including through proper training of the judiciary and by issuing implementing decrees—would be essential.

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• The procurement code has been improved, and in line with the Etimad platform, payment delays—a significant constraint to doing business in the past—have been significantly reduced, with 83 percent of the payments now processed within 15 days. Private sector contractors can also now follow the status of their claims directly in the Etimad platform.

• Finalizing the exercise on streamlining existing fees and levies—which are currently costed through the National Competitiveness Center—would remove an important constraint for operating SMEs in Saudi Arabia.

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• Ongoing work to open land access (including industrial) and further facilitate entry of foreigners—including through new residency programs—would help stimulate FDI.

• Sectoral thresholds on employment Saudization continue to be implemented, but a reassessment of requirements is needed to reduce pressure on certain expanding sectors that are being constrained.

46. Labor market reforms are advancing well to respond to the market need for skilled workers, but more is needed to increase labor force participation and reduce wage gaps. The implementation of the Human Capability Development Program is steadily progressing through skill planning and integration of labor market demand. Such programs-which are also necessary to reduce the skills mismatch and wage gaps in the workforce—would also be essential to further move up the labor force participation rate. Ongoing initiatives—including greater childcare assistance, remote work options, training and scholarship, greater representation of women in leadership positions, and full use of the authorities’ gender budgeting program—should be accelerated to further expand female labor force participation and reach the newly set 40 percent target for 2030. While labor productivity in the public sector has improved relative to the private sector, the shift of more entities from civil service to the more flexible labor code, as well as ongoing work to provide unified By-Laws for salary scales in government and other government-related entities, should help close the wage gap with the private sector. Greater Saudization in the private sector—along with more training programs—should help narrow the expatriate/Saudi wage gap.

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Labor Productivity by Sector

(Gross value added/# of employees) 0.40

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: GASTAT and IMF staff calculations.

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Saudi Arabia: Wage Premiums

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: GASTAT and IMF staff calculations

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47. Saudi Arabia has made significant strides in digital transformation. It has closed the gaps with Advanced Economies (AEs) with respect to the average on infrastructure, internet usage, and quality, while outperforming the AEs on knowledge. Efforts to enhance the Fintech ecosystem further through financial regulation compliance, sustained funding, and talent development—including through regulatory sandboxes and partnerships with international fintech companies—should be continued. Regarding Artificial Intelligence (AI), Saudi Arabia is making significant investments in AI technologies, with a strong emphasis on enhancing productivity and economic diversification through AI infrastructure and talent development, positioning it favorably in AI readiness comparable to high-income countries. While uncertainty remains regarding the full impact of AI, these initiatives are expected to improve labor productivity, thereby driving efficiency up and fostering growth across various sectors.

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Labor Productivity by Al Scenarios

(Gross value added/# of employ ess., 4-year moving average)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Sources: IMF staff calculations.Note: Our analysis encompasses four scenarios where (i) Estimated Productivity Boost=∑ (Sectoral Employment Share x Global Al Productivity Impact) and (ii) Global Al Productivity Impact is the estimated impact of Al on labor productivity by sector, based on a meta-analysis from recent research on Al (and market analysts' estimates. Please see SIP,, Saudi Arabia's Productivity Growth: Drivers and Strategies

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Saudi Arabia: Digitalization

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Source: IMF Staff Calculations.Note: Enhanced Digital Access Index (EDAI) is a composite index constructed by IMF staff to measure progress of digital transformation, covering five key aspects shown in the above Figure. See Fareed et al. (forthcoming).

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48. The industrial policy agenda should remain complementary and supportive of the structural reform program. PIF interventions in various sectors of the economy, local content rules set for procurement contracts by both government and PIF, the implementation of the Regional Headquarters Initiative, and the establishment of SEZs (with tax incentives, exemption from local content or Saudization requirements) are some of the industrial policy initiatives actively pursued as part of Saudi Arabia’s diversification strategy. The multiplication of incentives calls for a strict monitoring mechanism. The authorities’ introduction of claw-back mechanisms, strict exit criteria and time-bound measures should help minimize risks from IPs, which should only target market failures. The operations within the SEZs should be regularly assessed to ensure effective linkages with the broader economy, including through technology upgrading and skills training and consistency with WTO and global taxation rules (e.g., OECD). While staff recognizes the authorities’ commitment to remain WTO compliant, discriminatory provisions (e.g., on local content) should be avoided as they could create distortions in production allocation and elicit retaliatory actions by trade partners. These industrial policies, while significant, should not overshadow progress made in the structural reform agenda through horizontal policies, which remain crucial for economic diversification.

49. Steps to increase investment efficiency are important. Proper project design and appraisal are essential to limit cost overruns and ensure high returns on projects, including through proper costbenefit analysis of giga projects and use of public-private partnerships, which has been facilitated by the updated regulation on private sector participation, defining risk sharing between the government and private parties. Measures needed to reduce the efficiency gap could include ensuring transparency, accountability, and the adoption of best practices in project implementation. Utilizing the PIF—which has an increasing share of its asset portfolio exposed to the domestic economy—to increase returns on private investment without crowding out private sector activity would entail coordination with private entities to align risk assessment, commercial goals, and development-related outcomes, as well as a clear communication of the PIF’s exit strategy and judicious use of PPPs. The crowding-in effect of the private sector showing higher returns from the PIF should continue to be regularly assessed and reviewed.

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Incremental Capital Output Ratio / ICOR

(Percent)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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Investment Distribution of Top SWFs

(Share as of September 2023)

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

Source: Global SWF.

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50. Strengthening governance remains an important priority. Progress is being made to strengthen the overall anti-corruption framework, including to enhance enforcement and strengthen the transparency of public procurement. In February 2024, Saudi Arabia has approved a law providing legal protection for whistleblowers. Though progress is also being made towards an enhanced framework for prosecuting illegal enrichment, the establishment of an asset declaration framework has been delayed, notably as by-laws of the anti-corruption agency Nazaha still need to be adopted. Further progress in establishing accurate and up-to-date beneficial ownership information and effective due diligence on politically exposed persons will help ensure a more effective prevention and disruption of corruption. The authorities have taken additional measures to address transnational aspects of corruption and are encouraged to continue these efforts (Box 5).

51. Saudi Arabia is advancing its climate policy agenda. The Kingdom has reiterated its ambition to achieve net zero emissions by 2060 in the recent COP28. Under current policies, staff’s analysis shows that emissions will remain relatively constant by 2030. However, they are expected to grow subsequently further, in line with the economy’s expansion by 2060 (text chart). Achieving the 2030 NDC target¹ would require doubling down on impressive steps taken to increase renewable energy, and energy efficiency (Box 6). It would also require eliminating energy subsidies—which according to staff’s previous analysis would help Saudi Arabia achieve a third of its 2030 emission reduction target—as well as deploying Circular Carbon Economy (CCE) technologies (Text Figure 21).

Augmenting the active green finance portfolio—including through an inaugural sovereign green bond issuance planned this year—would help mobilize private capital for investments in clean energies and adaptation to climate change. Consistency of the various initiatives and objectives set for 2030, 2050 (net zero emissions target for Aramco and PIF) and the 2060 net zero target should be evaluated, while a clear costing and detailing of specific initiatives linked to each target will help assess the progress and adjustment necessary to reduce emissions in line with the Kingdom’s plans.

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Source: KAPSARC.Note: (1) No policy scenario is a counter-factual scenario assuming no specific climate mitigation (i.e., no NDC). (2) Current policy scenario considers gains of various energy efficiency measures and of energy price reforms. It also assumes equal electricity generation capacity of renewable and gas-based plants. (3) NDCs Continued includes policies from current policy scenario + emissions constraints to reach the NDC reduction target of 278 MtCo2 eq by 2030 relative to the No Policy Scenario. After 2030, assumes same rate of declining GHG intensity that was needed to meet target during 2020-30. (4) NZ 2060 scenario assumes meeting the NDC target by 2030 and a linear decline to net zero GHG emissions from 2030 to 2060.

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Saudi Arabia: Projected GHG Emissions and Climate Policy Scenarios

Citation: IMF Staff Country Reports 2024, 280; 10.5089/9798400288043.002.A001

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52. Data provision remains broadly adequate for Surveillance (Annex XI). Recent improvements in statistics include broader coverage of sectoral activities in national accounts, adoption of a new chain-linked methodology, and new FDI and digital economy statistics. Several initiatives are underway to further improve statistics, including the publication of regional GDP, enhancing the quality of the CPI and the real estate price index, and developing a producer price index and climate-related statistics (all by end-2024). Publication of a new household survey data is expected for October 2024. Data improvements are also ongoing regarding fiscal, BOP/IIP, and coverage of monetary and financial sector data.

53. Authorities’ Views. The authorities expressed optimism about the rapid pace of reforms and advancements across various sectors. They highlighted the swift removal of legal barriers, the push towards digitalization, education curriculum reforms and improvements in labor markets. These efforts, they highlighted, will significantly boost the private sector, drive productivity growth, and attract even more foreign direct investment, which continues to grow robustly. They noted the positive trend of Saudis joining the private sector, which is helping narrow the wage gap with expatriates. They highlight that they are actively ensuring that the increasing role of the Public Investment Fund (PIF) encourages private investment and aligns with the strategy to diversify the economy.

54. Authorities’ Views. The authorities pointed out that Special Economic Zones (SEZs) and industrial policies are being meticulously crafted to avoid common pitfalls and remain committed to a rules-based global trade order, ensuring new policies comply with WTO standards. On climate change policies, the authorities reiterated that the implementation of the Saudi and Middle East Green Initiatives—as shown by the rapid scaling up in renewable energy—will help them achieve their NDC target. The authorities highlighted their unwavering commitment to continue improving statistical standards, highlighting that the Data Adequacy Assessment exercise should take into account ongoing reforms to reduce data gaps.