Saudi Arabia Exhibits Impressive Resilience To Crisis: IMF

by Lorys Charalambous, Tax-News.com, Cyprus

24 August 2009

On August 18, 2009, the International Monetary Fund (IMF) release details of its Article IV consultation with Saudi Arabia, concluded by the Executive Board of the IMF on July 13, 2009.

According to the IMF, Saudi Arabia is in good stead to tackle the current global crisis. In recent years, the authorities consolidated their macroeconomic position, strengthened the financial sector, and implemented structural reforms to boost private-sector led growth. The consolidation of Saudi Arabia’s economic position has not gone unnoticed: the country was ranked first among Arab countries for four consecutive years and sixteenth globally by the latest World Bank’s Doing Business Report.

Against this backdrop, the economy delivered another strong performance in 2008 despite global headwinds. Real GDP, buoyed by a sustained broad-based expansion in the non-oil sector (4.3%) and higher oil production, grew by 4.4%. Inflation, after accelerating in the first half of the year (11.1% in July year-on-year), subsided to 5.2% y/y in April 2009 owing to weaker demand and lower import prices.

High oil prices contributed to record fiscal and external current account surpluses in 2008, despite an expansionary fiscal stance and a surge in imports. Part of the fiscal surplus was used to repay domestic debt, which fell by about five percentage points to around 13.5% of GDP. Foreign direct investment (FDI) inflows remained high at about USD23bn despite the global crisis.

The outlook remains broadly positive. Non-oil GDP growth – the appropriate measure of job-creating economic activity in oil-exporting countries – is projected to grow by 3.3% in 2009 supported by an expansionary fiscal stance. However, lower oil production would, says the IMF, lead to a contraction in overall GDP of almost 1% for the first time since 1999. Inflation is expected to retreat to about 4.5%. The fiscal and external accounts are projected to be in surplus, albeit at a much lower level, owing to a fall in oil revenues and the expansionary fiscal stance. There are some downside risks associated with the speed and depth of the global recovery and the normalization of global financial markets, according to the IMF.

The IMF board, in its recommendations, welcomed previous reforms that have left Saudi Arabia confronting the current global crisis from a position of strength. Whilst projections suggest that Saudi Arabia’s economy has been largely resilient to the crisis, the IMF underlined that in the short-term the government would need to focus on preserving financial sector stability and mitigating the domestic impact of the global recession.

The IMF commended the government’s efforts to strengthen further the financial regulatory and supervisory frameworks, including measures to improve banks’ risk management systems, implement remaining Financial Sector Assessment Program recommendations, and assess the Anti-Money Laundering/Combating the Financing of Terrorism framework.

The IMF also welcomed the authorities’ decisive fiscal response to mitigate the impact of the global recession on economic activity. The Executive Board considers that the fiscal stimulus package, which was the largest relative to GDP among G20 countries, is appropriately focused on capital spending and would contribute both to diversified domestic growth and the global recovery. Concluding, the IMF stressed that fiscal policy would need to be managed flexibly to safeguard medium-term sustainability, and that spending should be adjusted once the recovery has taken firm hold.

Recommended