IMF urges Saudi jobs, spending reforms

The International Monetary Fund (IMF) has urged Saudi Arabia to embark on reforms to create jobs for its citizens away from volatile oil prices following deterioration in joblessness over the past few years.

Concluding its 2010 article consultation with Saudi Arabia, the Washington-based fund also called on the Gulf Kingdom to draw up medium term public spending plans and welcomed Riyadh’s plan to gradually exit its counter-crisis fiscal measures that have involved a massive rise in state expenditure.

The fund said it saw positive prospects for Saudi Arabia’s economy, the largest in the Arab world, and expected real GDP to rebound by 3.7 per cent in 2010 after growth plunged to one of its lowest levels of 0.6 per cent in 2009.

IMF Executive Directors noted that Saudi Arabia was well prepared to confront the global crisis owing to the adoption of good supervisory and regulatory frameworks and the pursuit of prudent macroeconomic and financial policies.

They commended the authorities for the “strong and timely” policy measures, particularly the large and well-targeted fiscal stimulus and the skillful conduct of monetary policy which they said limited the impact of the crisis, supported solid growth of the non oil sector, and contributed to reviving global demand.

“The outlook for the economy is positive although vulnerabilities remain, especially from the volatility of oil prices. Directors supported the authorities’ plans to unwind the fiscal stimulus and return spending growth to sustainable levels once economic growth becomes self-sustaining. They welcomed efforts to modernize revenue collections,” the IMF said in a report on its website on Friday.

“Directors recommended reviewing periodically the efficiency of spending and implementing reforms aimed at casting spending in a medium term framework.”

The IMF said it considered that Saudi Arabia’s monetary policy should continue to carefully balance supporting economic activity and controlling inflation.

While the current monetary stance is appropriate, excess liquidity will need to be mopped up in case inflationary pressures emerge, it said.

“Directors acknowledged that providing jobs for a fast growing population through high and sustainable growth in the non-oil sector is the main medium-term challenge. Achieving this goal will involve a multifaceted approach with structural reforms in various sectors of the economy, including the labor market, progress with education reform, training, and improving the business climate,” It said.

Directors supported the authorities’ decision to maintain the dollar peg which has provided a credible and stable nominal anchor and contributed to macroeconomic stability,” the report said, in a reference to the long-standing peg between the Saudi rial and the US currency.

It said Directors encouraged the authorities to continue developing their technical and operational capacity to conduct a more effective monetary policy, which could be valuable in the context of the GCC monetary union.

“Directors noted the staff assessment that the level of the exchange rate is broadly aligned with its fundamentals, while recognizing the methodological limitations of such assessment in the case of oil exporters.”

The IMF said the Kingdom’s banking sector is fundamentally sound and called for “continued improvements” in credit appraisal by banks and more transparency and disclosures, especially by large conglomerates.

It said that while public specialized credit institutions played a key role during the crisis, their activities should be reviewed “post-crisis.”

The IMF Directors welcomed the recent improvement in the credit outlook, which is critical for future economic growth, the report said.

“They viewed the development of a local bond market as important for diversifying the economy’s sources of funding and enhancing its resilience.”

The IMF said it expected the non-oil sector to lead growth in Saudi Arabia this year, expecting the sector to expand by around 4.3 per cent. It projected real oil GDP at around 2.3 per cent, apparently expecting a mild rise in its crude output.

It forecast inflation at around 5.2 per cent in 2010, slightly higher than the 2009 rate of 5.1 per cent and sharply below the 2008 peak of 9.9 per cent.

“Saudi Arabia was well prepared in confronting the global crisis, reflecting lessons learnt from the mid-1980s when oil prices collapsed and the country experienced a severe banking crisis. Prudent fiscal policy provided the fiscal space to respond forcefully to the global crisis,” the IMF said.

“Good supervisory and regulatory frameworks also enhanced significantly the financial sector’s resilience. In particular, countercyclical macro-prudential policy became a standard feature of the central bank’s approach to risk management.”

According to the report, the country’s sizeable fiscal stimulus supported economic activity and had positive spillovers as remittances increased by 20 per cent to $25 billion. Non-oil growth held up remarkably well at 3.8 per cent in 2009, only 0.5 percentage points lower than in 2008 despite global headwinds.

The report noted that lower oil prices and high spending resulted in the overall fiscal balance turning from a surplus of 32.5 per cent of GDP in 2008 to a deficit of 6.1 per cent in 2009 for the first time since 2002.

Also reflecting lower oil revenues, the external current account surplus declined from 28 per cent of GDP in 2008 to about six per cent in 2009, it said.

“The outlook remains broadly positive. Although unlikely, the key risk is a sharp decline in oil prices. Non-oil GDP is projected to increase to 4.3 percent in 2010, with continued support from an expansionary fiscal stance and a pick-up in credit….. both the fiscal and external accounts are projected to improve, reflecting an improvement in oil revenues.”

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