Reforms will boost Saudi Arabia's fiscal strength, IMF says

Although the Arab world's largest economy is booming, it requires continued efforts to strengthen its buffers

Saudi Arabia's Vision 2030 economic reform agenda aims to cut the kingdom's reliance on oil revenue. Reuters

Continued reforms and the calibration of investment programmes in Saudi Arabia will help the kingdom to strengthen its fiscal base and make it more resilient to external shocks, the International Monetary Fund has said.

Although the Saudi economy is booming, spurred on by high oil prices and a strong pick up in private investment, uncertainty in the global economy – affecting financial conditions and crude prices – requires continued efforts to further build buffers and diversify, the fund said on Monday.

With inflation contained, the current account surplus hit its highest in a decade, bolstering the kingdom's structural reform agenda that aims to generate “strong, inclusive and more sustainable growth” in the Arab world’s largest economy.

“The implementation of [the] Vision 2030 reform agenda is continuing unimpeded towards a productive and green economy,” the Washington-based lender said at the conclusion of its Article IV discussions with Saudi authorities.

“Careful calibration of the various investment programmes would be needed to ensure catalytic effects are in place. Improvements in government project selection, appraisal and feasibility would help improve public investment efficiency in Saudi Arabia.”

Saudi Arabia, Opec’s top oil producer, has long relied on hydrocarbon revenue to drive economic growth, much in the same way as its peers in the GCC.

However, over the past decade, the kingdom has embarked on Vision 2030 programme, an overarching economic and fiscal reform agenda that aims to diversify its economy and cut its reliance on oil.

Saudi Arabia has been spending heavily on expanding its industrial and manufacturing base.

It has also launched multibillion-dollar tourism, hospitality, industrial and mining projects to spur non-oil economic growth, boost local consumption and create jobs.

Last year, Saudi Arabia had the highest annual growth rate among the world’s 20 biggest economies after its gross domestic product expanded 8.7 per cent on higher oil revenue and a robust non-oil private sector.

The IMF expects the kingdom's overall real GDP growth to slow to 2.1 per cent in 2023, pulled back by the April Opec+ decision to cap crude production. The World Bank estimates growth at 2.2 per cent.

Last week, the 23-member alliance of oil producers extended its output cuts until the end of 2024 as concerns about economic growth weigh on the outlook for fuel demand.

Saudi Arabia is expected to make an output cut of a million barrels per day in July, which could be extended if required, it said at the time.

The country has carried over the growth momentum into this year as its economy expanded by 3.9 per cent in the first quarter, on an annual basis.

The non-oil sector continued to record strong growth, according to the latest data from the General Authority for Statistics.

The IMF expects Saudi Arabia's non-oil GDP growth, which stood at 4.8 per cent in 2022, to average 5 per cent in 2023 and “remain above potential as strong consumption spending and accelerated project implementation boost demand”.

Headline inflation this year will also be contained. Despite a sharp increase in early 2023, when it reached 3.4 per cent on an annual basis, headline inflation was back at 2.7 per cent, year on year, in April as declining contributions from transport and food prices offset the substantial increase in rent, the fund said.

“Despite a booming economic activity, inflation remains low and appears to be easing,” it said.

Higher oil prices last year and stepped-up oil production improved the kingdom’s current account surplus to a 10-year high in 2022.

However, that significant improvement is expected to ease as oil prices stabilise. In 2023, lower oil revenue is expected to shift the fiscal surplus back to a deficit, the IMF said.

Sustaining medium-term fiscal consolidation would be necessary to ensure “intergenerational equity”.

“The [IMF] mission supports the authorities’ plans for continued fiscal prudence and medium-term fiscal consolidation,” the fund said.

“To mitigate risks from oil price volatility, it recommends additional fiscal adjustment, building on the impressive reforms already initiated.”

The fund expects the kingdom's reserves to “stabilise at slightly lower levels of import coverage over the medium term, albeit remaining well above standard reserve adequacy metrics”.

Saudi Arabia’s economy would be positively affected by the rise in oil prices amid expectations of strong crude demand for the rest of the year, according to the IMF.

Possible changes in Opec+ oil production cuts and accelerated structural reforms and investment would also spur growth.

“Risks to the outlook are balanced,” the fund said.

However, too rapid a rise in non-oil investment may further raise domestic demand and pile pressure on prices and external accounts, it said.