Saudi Arabia: IMF Executive Board concludes 2022 Article IV consultation

August 17, 2022

Washington, DC: On July 27, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation [1] with Saudi Arabia.

Saudi Arabia is recovering strongly following a deep pandemic-induced recession. Liquidity and fiscal support, reform momentum under Vision 2030, and high oil prices and production helped the economy recover with a robust growth, contained inflation and a resilient financial sector. The receding effects of the pandemic, rising oil production/prices and a strengthening economy have improved the fiscal and external positions.

Overall growth was robust at 3.2 percent in 2021, in particular driven by a rebounding non-oil sector—supported by higher employment for Saudi nationals, particularly women—and is expected to increase significantly to 7.6 percent in 2022 despite monetary policy tightening and fiscal consolidation, and a, thus far, limited fall-out from the war in Ukraine. Over the medium term, growth is expected to accelerate as continued implementation of the reform agenda and the National Investment Strategy, supported by Public Investment Fund interventions, yields dividends .

Inflation remained contained at 3.1 percent in 2021 as the base effect of the mid-2020 VAT hike dissipated coupled with a low passthrough of international food and commodity prices. The low passthrough is expected to help contain inflation at 2.8 percent in 2022, despite some inflationary pressures expected from double-digit wholesale price inflation and increasing shipping costs.

Banks remain liquid, well-capitalized, and their profitability—which declined during the COVID-19 pandemic—rebounded strongly in 2021 as net interest margins recovered. Credit to the private sector expanded by 15.4 percent in 2021, mainly driven by mortgages and SME lending. Saudi financial markets surged earlier this year, albeit most of this surge was reversed over the past two months in line with recent global developments.

The overall fiscal balance increased by almost 9 percentage points of GDP to a 2.3 percent of GDP deficit in 2021, mainly reflecting oil revenues and non-oil tax revenues supported by a rebounding economy and the full-year effect of the tripling of the VAT rate to 15 percent in mid-2020.

Higher oil prices and stepped-up oil production improved the current account by 8.5 percentage points in 2021, registering a surplus of 5.3 percent of GDP as strong oil-driven exports surpassed growing imports and large remittance outflows. While reserves increased, net foreign assets declined, although remaining at very comfortable levels at 22 months of imports in 2021 and are expected in increase significantly in the wake of rising oil export revenues over the medium term.

Risks to the outlook are balanced. On the upside, a successful implementation of the National Investment Strategy and labor market reforms, or further increases in oil production could further improve the outlook. On the downside, key risks stem from pressures to spend oil windfalls and deviate from the reform agenda, inflationary pressures, another COVID surge (domestic or abroad), lower oil prices due to lower global activity if the war in Ukraine has lasting effects, and an abrupt slowdown in China.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Saudi Arabia’s substantial growth rebound, contained inflation, and strengthened external position, supported by the authorities’ swift pandemic policy response, strong reform momentum, and higher oil prices and production. Against the backdrop of the positive economic outlook, with balanced risks, they underscored the need to continue implementing the Vision 2030 reform agenda, which will serve to diversify the economy and promote strong, inclusive, and greener growth.

Directors welcomed the authorities’ fiscal discipline and their adherence to the 2022 budget ceilings despite higher oil prices. To support fiscal consolidation and transition to a greener economy, Directors underscored the need to sustain energy price reforms, including reconsideration of the cap on gasoline prices, and welcomed the authorities’ commitment to reach market energy prices by 2030. They called for further efforts to strengthen non-oil revenue mobilization through tax policy measures—including by maintaining the current VAT rate—and enhancing revenue administration. Directors commended the authorities for ongoing reforms to strengthen social safety nets through targeted schemes, which should help sustain energy price reforms.

Directors welcomed the continued improvements in public financial management and encouraged further efforts to increase fiscal transparency. Given the increasing role of the Public Investment Fund, they encouraged quick completion of the ongoing work to establish a sovereign-asset liability management framework. Directors welcomed the authorities’ efforts to develop a fiscal rule, based on a long-term fiscal anchor and encouraged broader coverage of the public sector, to help reinforce their commitment to fiscal sustainability.

Directors welcomed the continued resilience of the financial sector and central bank’s strong supervision. They welcomed the progress in line with the internationally agreed timeline toward implementing the Basel III standards and encouraged further enhancing supervisory scrutiny of credit risks, as warranted, including from rising mortgage lending, and continued strengthening of the AML/CFT framework. Directors agreed that the exchange rate peg to the U.S. dollar continues to serve Saudi Arabia’s economy well given the current economic structure.

Directors commended the authorities for the significant progress in implementing their ambitious structural reform agenda. They welcomed the impressive pace of labor market reforms, particularly the doubling of female labor force participation, and encouraged continued actions in this area. Directors advised continued efforts to improve the regulatory and business environment, promote private investment, boost productivity, and address corruption. They welcomed the authorities’ ambitious climate commitments outlined in the Green Initiative and looked forward to the specific steps to achieve its goals. Directors also reiterated the importance of continuing to improve data quality and availability.

It is expected that the next Article IV consultation with Saudi Arabia will be held on the standard 12-month cycle.

IMF Data on Saudi Arabia:

[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.