Saudi economy booming; surplus at decade-high: IMF

The Saudi economy is booming, spurred by high oil prices, a strong pick up in private investment and reform implementation, says a finding by IMF staff. 


The current account surplus has reached a decade-high and inflation is contained. Uncertainty in the global economy -- both impacting financial conditions and oil prices -- requires continued efforts to further build buffers and diversify the economy, the report said following an official IMF staff visit to Saudi Arabia.


Going forward, continued fiscal reforms, coupled with careful calibration of investment programs, will help strengthen fiscal and external sustainability while implementation of the impressive structural reform agenda will help generate a strong, inclusive and more sustainable growth, it said.



Saudi Arabia was the fastest growing G20 economy in 2022. Overall growth reached 8.7 per cent, reflecting both strong oil production and a 4.8 per cent non-oil GDP growth driven by robust private consumption and non-oil private investment, including giga projects. Wholesale, retail trade, construction, and transport were the main drivers of non-oil growth. 


The output gap is estimated to have closed during 2022 and the momentum is continuing in 2023, with nowcasting estimates suggesting non-oil growth above 5 per cent in H1 2023.


The Saudi unemployment rate is at a historical low. Amid an increase in labour force participation, total unemployment dropped to 4.8 percent by end-2022 -- from 9 per cent during Covid -- reflecting both an increase in Saudi workers in the private sector and expatriate workers (mostly in the construction and agricultural sector) rising back above pre-Covid levels.


Youth unemployment was halved to 16 per cent in 2022 over the past two years while female participation in the labour force reached 36 per cent in 2022, exceeding the 30 per cent target under Vision 2030, the IMF mission said.


Despite a booming economic activity, inflation remains low and appears to be easing. Average CPI grew by 2.5 percent y-o-y in 2022, in part contained by domestic subsidies/price cap and a strong US dollar. Despite an uptick in early 2023 to 3.4 percent y-o-y, headline inflation is back at 2.7 percent y-o-y in April 2023, as declining contributions from transport and food prices offset the substantial increase in rent. Some wage pressure was observed for low skilled workers and highly specialized workers, but average wages remain flat.


Higher oil prices and stepped-up oil production improved the current account to a 10-year high surplus in 2022. However, the 13.6 percent of GDP surplus did not lead to a corresponding increase in official reserves in view of the large accumulation of assets abroad.


Reserves fell by $30 billion in April 2023 relative to 2022 -- but remain at comfortable levels (about 20-month import cover).



Non-oil growth momentum is expected to remain strong. While the April 2023 Opec+ production cuts would reduce overall real growth to 2.1 percent in 2023, non-oil growth is expected to average 5 per cent in 2023 and remain above potential as strong consumption spending and accelerated project implementation boost demand.


Headline inflation will be contained in 2023. At 2.8 percent, the average CPI will be slightly higher than in 2022, even though a strong currency, subsidies, and gasoline price cap offset inflationary pressures from diminishing labor market slack and a booming non-oil economy.


The significant improvement in the current account is expected to abate as oil prices stabilise and imports pick up, supported by a sizable investment programme. Reserves are expected to stabilise at slightly lower levels of import coverage over the medium term, albeit remaining well above standard reserve adequacy metrics.


Risks to the outlook are balanced. On the upside, higher oil prices -- as expectations of strong oil demand for the rest of the year persist -- possible change in Opec+ oil production cuts and accelerated structural reforms and investment could spur growth. Conversely, too rapid a rise in non-oil investment could further raise domestic demand, thereby adding pressure on prices and external accounts. 


On the downside, lower oil prices due to subdued global activity represent a key short-term risk while a quicker shift in demand for fossil fuel could hamper growth in the medium to long term, the report said.



Favourable oil market dynamics strengthened the fiscal position, creating space for additional spending that was not initially budgeted for. The fiscal surplus in 2022 -- the first since 2013 -- was halved relative to staff’s initial projection of 5.5 percent of GDP. This mostly reflect increases in goods and services and capital spending. About 2.5 per cent of GDP of additional expenditures were estimated to be one-off non-recurrent spending (about half in goods and services), the mission report said. 


At 23 per cent of GDP public debt is low and sustainable, with fiscal space available to address potential headwinds.


In 2023, lower oil revenue would shift the fiscal surplus back to deficit. Robust non-oil revenue and lower spending -- mostly because of one-off expenditure cuts -- would improve the non-oil deficit, which would however remain considerably higher than budgeted. Potential additional dividends from Aramco could improve the fiscal position, the report said.


Sustaining medium-term fiscal consolidation would be necessary to ensure intergenerational equity. IMF staff’s analysis shows that the higher-than-initially planned increase in spending (until 2030) would prolong the transition phase to achieve the medium-term fiscal stance consistent with stabilising the Central Government Net Financial Asset (CGNFA) ratio. 


The mission supports the authorities’ plans for continued fiscal prudence and medium-term fiscal consolidation. To mitigate risks from oil price volatility, it recommends additional fiscal adjustment, building on the impressive reforms already initiated:

• Non-oil revenue collection should continue to be prioritised. Tax reforms should build on strong efforts made to close the tax gap with the G20 average, including through a broader reform that at least maintains the VAT rate at 15 percent and rationalizes tax expenditures. Such reforms should be accompanied by strengthened tax administration.

• Energy price reforms. The welcome measures taken in 2021-22 -- such as increasing prices for heavily subsidized diesel and asphalt—were not enough to prevent a rise in energy subsidies (as measured by the government compensation to the national oil company, Aramco) in 2022. In addition to the sizable diesel price increase implemented already in 2023, the mission recommends going further by lifting the cap on gasoline prices and adjusting the current formula to allow faster increases for electricity and other fuel prices.

• Strengthening the safety net. The mission welcomes the elaboration of a new social protection strategy and move to a single social registry. To accompany the higher pace of energy subsidy removal, the mission recommends scaling up well-targeted social programmes -- such as the needs-based Damaan program -- which could also be supported through savings from a narrower coverage of the existing Citizens’ account programme.

• Expenditure rationalisation. Main priorities are to continue rationalising the public sector wage bill, including through the ongoing strategic workforce planning and review, greater efficiency in public investment including through the ongoing work of the Spending Efficiency and Governmental Projects Authority, and full utilization of the expenditure chain (ETIMAD). -TradeArabia News Service






Share this page Share on FacebookShare on TwitterShare on Linkedin

Read our latest publication

'Bahrain-France Investor Guide' -
is YOUR guide to invest in Bahrain and in France. Click here to view the online guide