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Saudi economy set to recover in 2017: IMF

WASHINGTON, July 29, 2016

Saudi Arabia's real GDP growth is expected to slow to 1.2 percent in 2016, but recover to 2 percent in 2017 as the pace of fiscal consolidation eases and to settle around 2¼ -2½ percent over the medium-term, the International Monetary Fund (IMF) has said. 
 
Inflation has risen in recent months to over 4 percent as energy and water prices have been increased, and is expected to ease to 2 percent in 2017, the IMF statement released following the conclusion of consultation with Saudi Arabia.
 
Bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, NPLs low, and banks are well provisioned against loan losses. SIBOR has moved higher in recent months and the spread to US rates has widened as liquidity has tightened, it said. SAMA relaxed the loan-to-deposit ratio in February and increased its reverse repo rate by 25bp to 0.5 percent in December.
 
Based on current policies, the fiscal deficit is projected to narrow to 13 percent of GDP in 2016. Non-oil revenues are expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure, it said.
 
The fiscal deficit is expected to be financed through a mix of deposit drawdown and domestic and international borrowing.
 
The current account deficit is projected to narrow to 6.4 percent of GDP in 2016 and then move close to balance by 2021 as oil prices partially recover. SAMA’s NFA are expected to fall further in 2016, but the pace of decline will slow over the medium term, it said.
 
Directors agreed that the exchange rate peg to the US dollar is the best option for Saudi Arabia given the current structure of its economy, and emphasized that a continued fiscal adjustment is needed to support the peg. 
 
They saw merit in reviewing the peg periodically to ensure it remains appropriate, given the desired evolution of the economy away from its current reliance on oil.
 
Saudi Arabia has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030 and the National Transformation Program. Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation to reach budget balance in five years are key policy priorities, IMF noted.
 
IMF executive directors noted that Saudi Arabia faces important challenges stemming from the decline in oil prices. They welcomed the authorities’ timely response, which, supported by sizeable fiscal buffers and a strong and resilient financial system, has maintained macroeconomic growth and stability. Nonetheless, the fiscal and current account balances have moved into deficit and growth is starting to slow. Directors highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy. In this regard, they commended the authorities’ bold reform plans.
 
Directors welcomed the ambitious reform goals announced by the authorities in Vision 2030 and the National Transformation Program, and underscored the importance of clear prioritization and sequencing of the planned reforms to reduce implementation risks and give the economy time to adjust. They supported the authorities’ plan to increase the role of the private sector in the economy by focusing on privatization and public-private partnerships, improve the business environment, develop local capital markets, encourage FDI, and support small and medium enterprises. Directors noted that continued labor market and education reforms are needed to encourage private sector employment of Saudi nationals and increase labour force participation of women.
 
IMF directors agreed that a gradual but sizable and sustained fiscal consolidation is needed, and welcomed the adjustment under way. They generally agreed that balancing the budget over the medium term is an appropriate goal and encouraged the authorities to develop a credible medium-term plan to achieve this objective. They supported expenditure and revenue reforms, including continued gradual adjustment of energy prices with compensation for lower-income households, introduction of a VAT and excise taxes, containment of the government wage bill, and improved public investment management and spending efficiency. They recommended accompanying these measures with growth-enhancing structural reforms.
 
IMF emphasized the importance of developing a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget. They encouraged the authorities to take an integrated asset-liability management approach to financing the fiscal deficit. They noted that government debt issuance would help establish a risk-free yield curve and support the development of domestic debt markets.
 
They noted that reforms have helped strengthen the financial system, and the banking sector is well 
positioned to weather lower oil prices and slower growth. They encouraged the authorities to continue to closely monitor credit quality, strengthen the macro-prudential framework, and finalise the framework for bank resolution and liquidity provision. They also recommended strengthening the liquidity forecasting and management frameworks of the central bank. - TradeArabia News Service
 
 
 



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