Dubai: A large decline in oil prices is expected to dampen economic growth in Saudi Arabia for the next five years with the gross domestic product to average around 3 per cent, according to the International Monetary Fund (IMF).

The executive board of the IMF which concluded its Article IV Consultation Paper with Saudi Authorities recently said the impact of lower oil prices will be deep on export and fiscal revenues reflecting on all aspects of Saudi Economy.

“About 85 per cent of Saudi Arabia’s export revenues are derived from oil while it accounts for more than 90 per cent of the government revenue and the oil sector contributes more than 40 per cent of the GDP and the fact that the government spending that drives the non-oil sector of the economy will be impacted by lower oil prices will have significant growth implications,” said Tim Callen, Mission Chief of IMF for Saudi Arabia said in video conference on Wednesday.

The IMF expects government spending in 2015 to remain elevated despite a sharp decline in oil prices which could put pressure on government finances, resulting in a surge in fiscal deficit. Saudi Arabia’s government is projected to run a fiscal deficit of about 20 per cent of GDP in 2015 according to the International Monetary Fund (IMF).

“Government spending in 2015 is expected to remain strong, partly due to a number of one-off factors, while oil revenues have declined.” said Callen.

Real GDP growth is projected to slow to 2.8 per cent this year, and then further to 2.4 per cent in

2016 as government spending begins to adjust to the lower oil price environment. Over the

medium-term, growth is expected to be around 3 per cent. Inflation is likely to remain subdued.

The IMF directors have noted in their report that the sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade. Against this background, they called for a gradual, but sizeable multi-year fiscal adjustment based on a mix of expenditure and revenue measures.

“The absence of material fiscal adjustment is likely to imply a need for a sharper adjustment down the line if oil prices remain low for long,” said Jean-Michel Saliba, Mena Economist at Bank of America Merrill Lynch.

Greater efficiency

The IMF said the fiscal adjustment measures should include comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment, and an expansion of non-oil revenues, including by introducing a VAT and a land tax.

The IMF also calls for a longer term fiscal consolidation plan for the kingdom. “Improving the efficiency of government spending, comprehensive energy efficiency and price reforms, and expanding non-oil revenues will need to form central elements of the fiscal consolidation strategy,” said Callen.

As part of funding reforms, the IMF has recommended issuing debt to finance part of the deficit is appropriate and would help promote the development of private capital markets. In the fiscal reforms recommendations, the IMF has called for a medium-term fiscal framework that clearly establishes the authorities’ policy intentions, fully integrates the expenditure priorities from the national development plan, and delinks expenditures from short-term volatility in oil revenues while ensuring that spending adjusts to longer-term oil price trends.