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29 March 2024

Saudi needs high non-oil growth

Published
By Staff

Saudi Arabia needs to achieve growth of more than seven per cent in its non-hydrocarbon sector to slash its unemployment rate in the next five years and such high growth level poses challenges to the world’s dominant oil power, the International Monetary fund (IMF) has said.

The IMF also expected the Gulf Kingdom, one of the largest 20 economies in the world, to net higher revenue from its oil exports this year due to an expected rise in its production and a sharp increase in crude prices.

Completing its 2011 Article IV consultation with Saudi Arabia, the Washington-based Fund also supported Riyadh’s plan to keep its currency the riyal pegged to the US dollar, saying it has provided a long-term anchor to the Saudi economy.

The IMF described Saudi Arabia’s attempts to generate jobs for its fast-growing population as a key policy challenge, with its figures showing the number of Saudi nationals growing at an annual rate of 2.5 per cent over the past decade. It said the rate is almost twice the average rate for emerging and developing economies and nearly four times that in advanced economies.

The report showed recorded unemployment rates in Saudi Arabia, which controls over a fifth of the world’s oil, are highest among the youth (15–29 year olds), with joblessness rates dropping sharply for those above age 30.

Labor force participation rates—just 36 percent in 2009, in large part a reflection of a female participation rate of only12 percent—are unusually low and their evolution in the coming years will have important impacts on labor market outcomes, the report noted.

“Addressing the unemployment problem will require a sustained acceleration in growth and an increase in the share of new jobs filled by nationals,” it said.

“Given existing population dynamics and based on recent labor market behavior, staff estimate that to reduce unemployment by five percentage points over the next five years would require acceleration in non-oil growth to about 7.5 percent a year, a significant increase relative to historical trends.”

The IMF said this estimate is highly dependent on the evolution of the labor market participation rate, and the proportion of new jobs that are filled by Saudi nationals versus expatriates, who are estimated at eight million.

“Between 2004 and 2009, the economy generated an average of almost 200,000

jobs a year, almost twice the recent pace of increase in the labor force of Saudi

nationals, but this had limited impact on unemployment rates as more than half of

new jobs have typically gone to foreign nationals.”

Saudi Arabia has just announced an ambitious job nationalization programme, dubbed “Nitaqat” (ranges) to gradually replace its expatriate workers with Saudis. Companies which employ more Saudis will be rewarded while those which fail to comply with the new rules would be punished and could quit the market.

The Kingdom has estimated it has nearly 500,000 unemployed Saudis but it hopes the number will sharply decline in the coming years.

Under a new social package, King Abdullah of Saudi Arabia announced early this year the allocation of nearly $135 billion for the construction of 500,000 houses for citizens, monthly salaries for the jobless for one year and other benefits.

Experts said the package, which means a sharp rise in public spending, would be easily funded by the Kingdom’s massive foreign assets and high oil prices that will also allow it to record fiscal surpluses.

According to the IMR, surging crude export revenues are likely to improve fiscal and external balances in the Kingdom in the near term, despite fiscal expansion and heightened uncertainties in the oil market.

It expected oil revenues to increase relative to 2010 from both price and volume effects as Saudi oil production is expected to increase to help stabilize global oil markets by filling the void left by supply shortfalls elsewhere in the region.

“The volatility seen in oil prices combined with the uncertainty of both demand and supply conditions in the global market create an unusually large range of forecasts for oil revenues,” the IMF said.

“However, even in low price/production scenarios, fiscal and external balances are expected to remain in surplus in 2011 despite the substantial fiscal spending packages announced in February and March.”

The report said that given the dominant position of oil in the economy—which would remain even with progress on diversification—economic prospects remain linked to the global oil price.

In this regard, the Saudi authorities considered the break-even oil price for 2011 to be much less than estimated by IMF staff and that the continuing strong demand for oil, especially from emerging market economies, points to upside risks on the oil price forecast, it said.

“Higher fiscal spending involved initiatives to strengthen social outcomes—including addressing the housing shortfall and introducing an unemployment benefit as part of an expanded social safety net—that had important welfare implications for current and future generations.”

In its report, the IMF staff said they support the maintenance of the Saudi exchange rate peg to the U.S dollar.

It noted that the U.S and Saudi business cycles are currently not well-aligned—the Saudi business cycle remains driven by oil, which in turn is increasingly linked to the business cycle in emerging Asia—contributing to inflationary pressures. “However, the peg has provided a long-term anchor for the economy in terms of facilitating the development of financial markets and providing clarity for investors. The staff’s assessment of the level of the exchange rate

suggests that the exchange rate is broadly in line with fundamentals—this is also supported by currency forward markets, which point to no evidence of misalignment of the exchange rate.”