The kingdom will achieve real non-oil gross domestic product (GDP) growth of about 4 per cent in 2002, according to the IMF's article IV consultations, concluded in Riyadh in October. However, the economy was weakened in 2001 due to falling oil production and the slowdown in the world economy.
The fund said that in 2001 the government budget shifted to a deficit of about 4 per cent of GDP as oil revenues fell, non-oil revenues remained sluggish and spending increased - leading the government to raise its level of domestic debt to 92 per cent of GDP by mid-2001.
In 2002, firmer oil prices are expected to improve the macroeconomic position, reducing the fiscal deficit. In addition, non-oil GDP growth is to rise to 4 per cent, increasing domestic liquidity and credit to the private sector.
The consultations addressed the kingdom's programme of economic reform, aimed at strengthening the non-oil economy and reducing government debt. The fund's executive board assessment called for an acceleration of the programme and proposed fresh measures to strengthen fiscal policy.
'Directors commended the authorities' articulation of a comprehensive privatisation strategy, and were encouraged by the recent cabinet approval to divest 30 per cent of government ownership in the telecoms company,' said the IMF note, issued on 25 October. 'They urged the authorities to underpin the strategy by establishing a clearer timetable of steps required to execute it, as this would contribute to foreign direct investment. Directors supported the authorities' decision to use part of the proceeds from privatisation to reduce the public debt.'
In addition, the note urged the authorities to 'reduce the barriers to the inflow of foreign direct investment', and emphasised that 'early approval and implementation of the capital market and insurance laws will be crucial for clarifying the legal and regulatory framework for the growth of the financial sector and the development of secondary markets.'
In terms of fiscal policy, the board called for government expenditure to be subject to explicitly defined rules, and suggested that temporary, unanticipated increases in oil revenues should be saved or allocated according to a specific mechanism to smooth out other budgetary shortfalls. The government aims to balance the budget by 2005.
The IMF also recommended the implementation of income tax in the kingdom, and said that a sales tax would be a good interim measure pending the implementation of a fully-fledged value-added tax (VAT).
However, Finance & National Economy Minister Ibrahim al-Assaf told a local Arabic newspaper in reaction to the publication of the consultation: 'There is no plan to impose taxes on citizens and the government is not even considering this issue at the present.'
The kingdom is moving to introduce income tax for expatriates, but has not yet set a rate or threshold. In September, Abdulrahman al-Tuwaijri, the secretary-general of the Supreme Economic Council, told MEED the government was looking seriously at introducing VAT in the coming years (Saudi Arabia, MEED Special Report, 20:9:02, page 38).
You might also like...
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.