Saudi Arabia’s determination to reform its economy through fiscal and structural reforms is expected to see rapid post-Covid recovery. Image Credit: Bloomberg

Dubai: Saudi Arabia’s determination to reform its economy through fiscal and structural reforms is expected to see rapid post-Covid recovery, according to the Institute of International Finance (IIF).

Saudi Arabia has experienced a limited public health impact from the pandemic thanks to its relatively young population, low shares of services in GDP, and a range of containment measures which have curbed the spread of the virus and the number of deaths.

The IIF has forecast the Kingdom’s GDP growth to accelerate from 1.9 per cent in 2021 to 4.8 per cent in 2022, supported by significant increase in oil production. Latest forecast in the International Monetary Fund’s (IMF) World Economic Outlook report confirms the sustained growth outlook for Saudi Arabia, with projected GDP growth of 2.8 per cent in 2021 and 4.8 per cent in 2022.

Saudi economic indicators
Saudi economic indicators Image Credit: The IIF

“Growth in credit to the private sector is accelerating, the PMI [purchasing managers’ index] continues to rise to 57 in September, and the consumer sentiment index has improved. Saudi national unemployment rate declined from around 12 per cent at end-2020 to 11.3 per cent in June 2021 indicating an overall revival in key economic indicators,” said Garbis Iradian, Chief Economist of IIF, MENA.

Modest inflation

The IIF expects inflationary pressures to remain modest while monetary policy remains accommodative as the Saudi Central Bank tracks the monetary policy of the US in the context of the peg to the dollar. Banks remain adequately capitalised with high Tier 1 capital (18.7 per cent) and low non-performing loans (2.2 per cent) ratios.

Fiscal strength

“We expect the current account to shift from a small deficit in 2020 to large surpluses in 2021 and 2022, supported by higher oil exports," said Iradian. "Nonresident inflows will surge in 2021 to $62 billion on the back of the jump in foreign direct investment (FDI) from $5.4 billion in 2020 to $19.5 billion in 2021.”

The fiscal deficit is forecast to narrow from 11.2 per cent of GDP in 2020 to 1.6 per cent and may balance by 2022. The tripling of the VAT to 15 per cent, termination of the cost-of-living allowances, and reduction in capital spending included in the budget have significantly strengthened the medium-term fiscal position.

The latest budget plans show commitment for further spending cuts in 2022-23. The authorities expect the Public Investment Fund (PIF) to pick up the slack with additional spending on mega projects, raising investment spending by the PIF into the economy to $40 billion each year in 2021 and 2022.

Structural reforms

According to the IIF, the kingdom has made major progress in structural reforms, including improvement in the business environment and acceleration on digital transformation.

“Policies that broaden digital penetration among low-skilled individuals have high potential to increase knowledge diffusion and productivity and mitigate skill shortages," said Iradian. "Digitalization is expected to make a greater impact on the economy. The SMEs have made digital technology an integral part of their business, thanks to the rapid growth of the e-commerce sector.”