Saudi economy to soar by 6.5%

Strong oil prices and high public spending will boost Saudi Arabia’s real GDP by nearly 6.5 per cent in 2011, its highest growth rate in many years, according to the International Monetary Fund (IMF).

In a report on its Article IV consultation concluded with Saudi Arabia on July 18, the IMF also hailed King Abdullah’s financial handout for citizens, involving spending nearly $134 billion on the construction of 500,000 houses and a monthly wage for unemployed Saudis for one year.

The Washington-based Fund said it expected a sharp rise in the Gulf Kingdom’s oil income this year as a result of higher prices and increased production by Saudi Arabia to offset supply disruptions in conflict-battered Libya.

It said the rise would further expand the country’s fiscal and external balances while the private sector will gain momentum this year.

“Indicators point to an acceleration in private sector activity in early 2011, with overall real GDP growth now expected at 6.5 percent,” it said.

It said inflation in Saudi Arabia, the largest Arab economy, has been subdued but the combination of continued pressure from imported food prices, rents, increased government spending and high domestic liquidity is likely to result in inflation rising to an average of about six percent for the year as a whole.

The forecast growth this year will be the highest in nearly 10 years and is sharply above the 4.1 per cent growth recorded in 2011 and 0.1 per cent in 2009.

Besides higher oil prices and output, Saudi growth is expected to be fuelled by a surge in public spending in line with King Abdullah’s financial initiative for Saudis.

Riyadh has budgeted expenditure at SR548 billion ($154 billion) for 2011 but according to the Riyadh-based Jadwa Investments, actual spending could leap by nearly 42 per cent to SR821 billion ($219 billion).

The report still expected the budget to end the year in a surplus due to a sharp increase in revenue, which it expected to soar by 75 per cent to nearly SR948 billion ($253 billion) as a result of higher crude prices and output.

“The near-term outlook for the Saudi economy is favorable. Over the medium term, policy priorities should focus on maintaining fiscal sustainability, securing broad-based growth and fostering job creation,” the IMF said.

The report said IMF directors commended the Saudi authorities for their continued stabilizing role in the oil markets. They noted the significant positive spillover effects of Saudi policies on the regional and global economies, including the provision of generous official development assistance.

“Directors supported the authorities’ actions to use the higher oil revenues to accelerate initiatives to address important social issues, notably in housing, unemployment, and extending the social safety net,” it said.

“At the same time, they highlighted the need to carefully monitor possible inflationary pressures and encouraged the proactive use of fiscal policy, supported by available monetary policy instruments, if needed.”

But the report warned that the recent initiatives have increased spending entitlements over the medium term and raised vulnerabilities to a sustained decline in the oil price. “Directors considered that spending programmes that would complement private sector activity would enhance the economic impact of higher spending. The establishment of a formal medium-term expenditure framework, supported by a macro-fiscal unit, would help strengthen the implementation of fiscal policy over time.”
 

Follow Emirates 24|7 on Google News.