IMF Concludes 2024 Saudi Arabia Article IV Review

Washington, DC: On July 31, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation[1] 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 recent fiscal space exercise has facilitated the recalibration of investment spending planned under Vision 2030 by reprioritizing projects and through sectoral strategies.

Oil production cuts led to an overall contraction in growth of 0.8 percent in 2023, albeit non-oil GDP grew by a robust 3.8 percent, driven mostly by private consumption and non-oil investment. The unemployment rate reached historic lows, with women labor force participation rates remaining comfortably above the 30 percent 2030 target. Geopolitical events have not had any major impact on the Saudi economy so far.

Headline inflation has decelerated rapidly. After peaking at 3.4 percent in January 2023, year-on-year inflation receded to 1.6 percent in May 2024, underpinned by an appreciating nominal effective exchange rate. However, rents are growing at a rate of about 10 percent amid inflows of expatriate workers and large redevelopment plans in Riyadh and Jeddah. Wholesale prices have also edged up recently, reflecting higher input costs and rising wages for skilled workers.

The current account surplus narrowed significantly to 3.2 percent of GDP in 2023, mainly reflecting lower oil exports and a strong growth in investment-related imports. These were partly mitigated by a record surplus in the services balance, including a 38 percent surge in net tourism income. Reserves remain ample, covering 15.8 months of imports and 208 percent of the IMF's reserve adequacy metric by end-2023.

The banking sector is on a strong footing. Stress tests performed by the Financial Sector Assessment Program (FSAP) show that banks as well as non-financial corporates are resilient to shocks, even under severe adverse scenarios. Despite recent moderation, bank credit growth—mainly to the corporate sector—continues to surpass deposit growth. Increased balance sheet interlinkages between financial institutions and the sovereign could amplify systemic shocks, including through fluctuations in oil prices.

Non-oil growth is projected to reach 4.4 percent in the medium term after moderating in 2024, driven mostly by stronger domestic demand as project implementation picks up. The phase-out of oil production cuts is expected to boost overall growth to 4.7 percent in 2025, before averaging 3.7 percent per year thereafter. Inflation would remain contained, supported by a credible peg to the U.S. dollar and consistent domestic policies. The current account would shift to a deficit, mainly reflecting declining oil prices and strong investment-related imports.

Risks to the outlook remain broadly balanced amidst high global uncertainty. On the upside, accelerated implementation of reforms and investments could yield stronger or earlier-than-expected growth dividends. Conversely, pressures to accelerate investment further could heighten overheating risks. On the downside, potential risks include slippages in the reform agenda, subdued global activity, financial market volatility, geopolitical events, and non-OPEC+ supply growth. Over the longer term, a quicker shift in the demand away from fossil fuel could hamper growth.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Saudi Arabia for its ongoing economic transformation, underpinned by sustained efforts to diversify the economy under Vision 2030. Directors welcomed the robust non-oil economic activity, stable inflation, record-low unemployment, and ample fiscal and external buffers. They underscored the importance of maintaining fiscal prudence, safeguarding financial stability, and continuing to implement structural reforms to support sustainable and inclusive growth.

Directors supported the recalibration of investment spending as it helped mitigate overheating risks. Making public the main impact of this exercise on Vision 2030 objectives would help provide clarity on government priorities and anchor investors' expectations. Directors generally 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. Directors also emphasized the need to continue to strengthen fiscal institutions by advancing the ongoing roll-out 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 agreed that the exchange rate peg to the U.S. dollar continues to serve the Saudi economy well and the policy rate should continue to move in line with the Fed's policy rate. Directors also welcomed the continued use of market-based monetary policy instruments and noted the importance of completing the Emergency Liquidity Assistance Framework.

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 AML/CFT framework. Directors recommended a tighter macroprudential framework if credit growth remains elevated. Most Directors supported the introduction of a positive neutral countercyclical capital buffer, while a few other Directors called for an assessment before its introduction. 2 Directors urged continued vigilance through improved systemic risk monitoring of financial sector exposures to giga projects and by addressing data gaps.

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. Directors 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. A number of Directors stressed the need for additional efforts to support these targets.

Directors welcomed the improvements in the provision of economic data and the ongoing reforms to close existing data gaps.

Directors 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.

[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: https://www.imf.org/external/np/sec/misc/qualifiers.htm