IMF says Saudi Arabia should aim to balance budget in 2022

08 October 2017
Riyadh has set a 2019 target for balancing its budget

The IMF has said that Saudi Arabia should aim to balance its budget by 2022 rather than the 2019 target date set out in Riyadh’s Fiscal balance Programme.

“Fiscal adjustment needs to continue but it is important to get the pace of this adjustment right. Too quick will unnecessarily hurt growth, but too slow an adjustment will see an undesirably large build up in debt,” said Timothy Callen, mission chief for Saudi Arabia, IMF during a press briefing broadcast online on 5 October.

“In our view, the fiscal consolidation set out in the fiscal consolidation set out in the Fiscal Balance Programme is certainly in the right direction, but it is possibly too rapid. Our advice to the authorities as they prepare their 2018 budget and review medium term fiscal frameworks is that the planned fiscal consolidation should proceed more slowly. Aiming to balance the budget in 2022 rather than in 2019 seems a reasonable objective to us.”

The IMF projects that the fiscal deficit will narrow substantially in the coming years. It is expected to decline from 17.2 per cent of GDP in 2016 to 9.3 per cent of GDP in 2017 and to just under 1 per cent of GDP by 2022.

It says these projections assume that major non-oil revenue reforms and energy price increases outlined in the Fiscal Balance Programme are introduced on schedule and that operational and expenditure savings identified so far by the Bureau of Spending Rationalisations are realised.

The deficit is expected to continue to be financed by a combination of asset drawdowns and domestic and international borrowing. In September, Riyadh closed the third local currency sukuk (Islamic bond) raising SR7bn ($1.87bn). That issuance followed earlier local currency sukuks that raised a total of SR30bn. Previously, Saudi Arabia secured $10bn through a conventional loan and more than $17bn when it sold a record-breaking debt bond in October 2016. Riyadh also raised $9bn through a dollar-denominated dual sukuk deal earlier this year.

The IMF’s comments came as it released a report on the Saudi economy following its Article IV consultation in July. The report forecasts that non-oil growth is projected to pick up to 1.7 per cent in 2017, while overall real GDP growth is expected to be close to zero as oil GDP declines in line with Saudi Arabia’s commitments under the OPEC+ agreement.

After increasing in early 2016 due to higher energy and water prices, CPI inflation has turned negative in recent months. It is, however, expected to increase over the next year due to the recently introduced excises taxes, further energy price reforms, and the introduction of the VAT at the beginning of 2018.

Employment continues to be a major challenge for policymakers in the kingdom. According to the IMF, Employment growth has weakened, and the unemployment rate among Saudi nationals has increased to 12.3 per cent.

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