Saudi Arabia sees 'unprecedented' progress in economic transformation: IMF

The International Monetary Fund (IMF) concluded on July 31 the 2023 Article IV consultations with Saudi Arabia.

“Saudi Arabia’s unprecedented economic transformation is progressing well as it advanced in its modernization and diversification efforts under Vision 2030,” the fund wrote in its press release. “The recent fiscal space exercise has facilitated the recalibration of investment spending planned under Vision 2030 by reprioritizing projects and through sectoral strategies.”

The Saudi economy has remained largely unaffected by the ongoing geopolitical events, according to the IMF.

However, the recent oil production cuts caused a 0.8% overall growth contraction for 2023. This came despite the non-oil gross domestic product (GDP) seeing a robust hike of 3.8%, mainly driven by private consumption and non-oil investments.

Further, the Kingdom’s unemployment rate fell to a record low, with female participation exceeding the Saudi Vision 2030’s 30% target.

Headline inflation, which peaked at 3.4% year-on-year (YoY) in January 2023, slowed to 1.6% YoY in May, aided by a stronger nominal exchange rate.

Rental prices, on the other hand, rose by roughly 10%, “amid inflows of expatriate workers and large redevelopment plans in Riyadh and Jeddah,” IMF underlined.

Wholesale prices have also increased in the recent period due to higher input costs and rising wages for skilled workers.

Moreover, Saudi Arabia’s current account surplus fell to 3.2% of GDP in 2023. This came amid lower oil exports and rising investment-related imports.

This drop, however, was partly offset by a record surplus in the services balance, including a 38% leap in net tourism income, the fund further stated.

It added, “Reserves remain ample, covering 15.8 months of imports and 208 percent of the IMF’s reserve adequacy metric by end-2023.”

According to the IMF, stress tests, performed by the Financial Sector Assessment Program (FSAP), show that banks and non-financial companies are resilient to turmoil, even in severe adverse scenarios. Despite the recent moderation, bank credit growth (especially to corporates) still exceeds deposit growth. Increased balance sheet interlinkages between financial institutions and sovereign entities may heighten systemic risks such as through oil price volatility.

The Saudi non-oil growth is forecasted to hit 4.4% in the medium term after a 2024 slowdown, lifted by strong domestic demand and faster project execution.

The gradual rollback of oil cuts is expected to push overall growth to 4.7% in 2025, with an average annual growth of 3.7% thereafter.

Inflation is likely to remain contained, supported by the credibility of the US dollar peg and consistent domestic policies.

Meanwhile, “the current account would shift to a deficit, mainly reflecting declining oil prices and strong investment-related imports,” the fund stated.

It continued, “Risks to the outlook remain broadly balanced amidst high global uncertainty.” The accelerated implementation of reforms and increased investments could boost growth, while continued investment momentum could risk overheating.

Downside risks include slippages in the reform agenda, subdued global activity, financial market volatility, geopolitics, and non-OPEC+ supply growth. “Over the longer term, a quicker shift in the demand away from fossil fuel could hamper growth,” according to the IMF.

Executive Board Assessment:

The Executive Directors agreed with the staff appraisal and commended Saudi Arabia's economic transformation, highlighting robust non-oil activity, stable inflation, record-low unemployment, and ample fiscal and external buffers. They underscored the importance for fiscal prudence, financial stability, and continued structural reforms for inclusive growth.

The directors agreed that the exchange rate peg to the US dollar continues to serve the Saudi economy well and the policy rate should continue to move in line with the Fed’s policy rate. They also welcomed the continued use of market-based monetary policy instruments and noted the importance of completing the Emergency Liquidity Assistance Framework.

Directors backed the recalibration of investment spending, as it helped reduce the risks of overheating. They suggested highlighting the impact of Vision 2030 objectives to clarify government priorities and support investors’ confidence.

Directors recommended additional fiscal adjustment to maintain strong buffers and meet intergenerational needs, including through additional efforts to mobilize non-oil revenue, phase out remaining fuel subsidies complemented by targeted social programs, and contain the wage bill.

They also emphasized the need to continue to strengthen fiscal institutions by advancing the ongoing rollout of the medium-term fiscal framework; operationalizing the fiscal rule to help delink spending decisions from oil price fluctuations; developing an effective sovereign asset liability management framework; and enhancing monitoring and disclosure of contingent liabilities.

Directors welcomed the findings of the Financial System Stability Assessment that the banking system is on a strong footing and resilient to shocks. They called for further efforts to strengthen the supervisory framework, including swift adoption of the new Banking Law in line with best international practices and improvements in the anti-money laundering and counter-terrorist financing (AML/CFT) framework.

Most directors supported the introduction of a positive neutral countercyclical capital buffer, while a few other Directors called for an assessment before its introduction. They urged continued vigilance through improved systemic risk monitoring of financial sector exposures to giga projects and by addressing data gaps.

The directors commended the authorities for their strong efforts to enhance the business environment, including by accelerating digitalization and enhancing governance. They looked forward to continued efforts to increase investment efficiency and deepen labor market reforms to further boost female labor force participation and reduce any potential wage gaps.

They recommended that industrial policies remain complementary to the structural reform agenda while avoiding discriminatory practices, noting that Saudi Arabia remains WTO compliant. They acknowledged Saudi Arabia’s commitment to achieving net zero emissions by 2060, highlighting the progress made in renewable energy and energy efficiency. 

The directors welcomed improvements in economic data reporting and ongoing reforms to close data gaps.

They commended Saudi Arabia for its leadership in multilateral fora, including as Chair of the International Monetary and Financial Committee, and looked forward to its continued contributions to addressing global challenges.