IMF Executive Board Concludes 2021 Article IV Consultation with Saudi Arabia

Washington, DC: On June 30, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation ^[1] 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 Assessment ^[2]

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.