IMF urges action

05 April 1996

The IME's annual article IV report dated September 1995 paints a stark picture of financial trends in the kingdom for the rest of the decade. However, it is based on the assumption that no new government initiatives will be taken to correct these trends. It also contains a number of recommendations. The report was drawn up in July 1995, when oil prices dipped to their lowest level for the year. Its predictions for the 1995 budget are consequently overly pessimistic. Nevertheless, the IMF view underlines the need for new measures to set the kingdom's economy on a sustainable course. Its main predictions are:

private sector gross domestic product will pick up substantially in 1997, compensating for lower state sector growth the kingdom will run a current account deficit of $8,000 million-10,000 million a year to 2000 the budget deficit will rise to SR 52,000 million in 2000 from SR 23,000 million in 1995 domestic debt will rise to 110 per cent of gross domestic product (GDP) in 2000 from 77 per cent in 1994.

In order to correct these trends, the report recommends:

a consumption tax of 5 per cent excise duty of 10 per cent on selected goods, including jewellery, clothes and vehicles a 2 per cent turnover tax for local and foreign companies a 20 per cent increase in gasoline and diesel fuel prices in 1996 and subsequent rises in line with inflation to 2000 an annual cut of 1 per cent in the government's wages bill in 1996 and 1997, followed by a 2 per cent cut each year from 1998-2000 further reductions in subsidies 'to the minimum level corresponding to the social safety net' keeping expenditure, excluding interest payments, constant in real terms until 2000 The report concludes that, if the momentum of the 1995 budget reforms are maintained and the above recommendations applied, both the budget and current account deficits could be eliminated, in line with the targets set by the government's sixth development plan.

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