Dubai: The International Monetary Fund (IMF) has urged Saudi Arabia, which derives 90 per cent of its revenues from oil and gas, to undertake a “multi-year fiscal adjustment” to fight another round of correction in crude oil prices.

Brent crude has shed more than half of its value in the past one year, making the budgets of the GCC states more vulnerable, and the IMF feels this has increased the importance of structural reforms to switch the focus of growth to the private sector.

Over the medium term, due to continued expenditure growth, Saudi Arabia could witness a very large fiscal deficit this year and over the medium term, eroding the country’s fiscal buffers.

“Against this background, they [the IMF directors] underscored the need for a gradual, but sizeable multi-year fiscal adjustment based on a mix of expenditure and revenue measures,” the IMF said in a statement.

The IMF has urged the world’s biggest exporter of oil to undertake 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 (Value Added Tax) and a land tax.

Saudi Arabia’s 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.

A central government fiscal deficit of 19.5 per cent of GDP is projected in 2015, and while the deficit will decline in 2016 and beyond as one-off spending ends and large investment projects are completed, it will remain high over the medium-term.

The government debt is very low and was 1.6 per cent of GDP at end-2014. The current account surplus declined to 10.9 per cent of GDP in 2014. It is expected to move into a small deficit in 2015 but return to surplus during 2016-20.

Right time:

“Our view is that regional government should take advantage of lower prices environment. This is a right time to do all these reforms, as oil prices are down and the difference between subsidised prices and international prices are miminal compared to when prices were at $100 (per barrel) level,” said Rami Sidani, head of investments in the Middle East, Schroders.

Last month, the United Arab Emirates undertook a structural reform, which was even lauded by the IMF, of removing subsidies on petrol and diesel.

Saudi should also set the annual budget within 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 price trends, the IMF said.

“Our view is that there will be a lot of efficiencies from these reforms as various subsidies has resulted in inefficiencies,” said Sidani said.