IMF calls on Saudi Arabia to depend less on oil
As dropping oil prices and high public spending erode Saudi Arabia’s reserves, the International Monetary Fund on Monday called on the kingdom to undertake a spate of fiscal changes and diversify away from its reliance on the commodity to boost growth and create jobs.
The Middle East’s biggest economy should consider a “sizable multiyear fiscal adjustment” by taking such measures as revising energy subsidies, controlling public sector wages, and expanding revenues not stemming from oil, the IMF said, while also proposing a value-added tax, or VAT, and a land tax.
Saudi Arabia and the other oil-exporting Gulf economies are grappling with the fallout from lower oil prices that roughly halved since last year. Revenue from oil makes up for most of the income of these nations.
Saudi Arabia’s real GDP growth is expected to slow to 2.8% this year, and further to 2.4% in 2016 as government spending begins to adjust to the lower oil income, the IMF said. The fund forecasts a fiscal deficit of 19.5% of GDP in the kingdom this year.
Saudi Arabia earlier this month issued bonds worth 20 billion riyals ($5.33 billion) to plug its budget shortfall, and said it plans to raise billions more to maintain its spending plans. The kingdom issued development bonds worth 15 billion riyals in June as well, its first sovereign issuance since 2007.
The IMF, whose directors concluded their consultation with Saudi Arabia at the end of July, said the debt issuance to finance part of the deficit was “appropriate,” noting that the step would help promote the development of private capital markets in the country.
The Saudi banking system is in a strong position to weather lower oil prices and weaker growth, the IMF said.
Saudi Arabia and most of the other Gulf nations peg their currencies to the U.S. dollar, in which oil is priced. The IMF said this fixed rate of exchange remains suitable, emphasizing the need for fiscal consolidation to support the peg over the long term. It also saw merit in periodically reviewing the peg in coordination with other Gulf countries to assess the impact of labor market changes and other structural reforms.
With unemployment of Saudis still high and the working-age population growing strongly, the IMF supported the government’s ongoing policies to increase the employment of nationals in the private sector, especially creating opportunities for women.
Some Gulf countries are taking steps to change their economies as they could face a long period of weaker energy prices.
Neighboring United Arab Emirates this month began tying local fuel prices to the global market, a move to curb domestic energy subsidies. The country is also planning to introduce both a VAT and a corporation tax, according to local media reports.
Source: MarketWatch
