Dubai: Saudi Arabia’s economy is bouncing back from the slump last year, thanks to the quick and decisive response by the authorities, the International Monetary Fund (IMF) said in the concluding statement of its 2021 Article IV consultation.
“The authorities responded quickly and decisively to the COVID-19 crisis and the economic recovery that is underway is expected to continue. The government’s policies should deliver needed fiscal consolidation over the medium-term, although a slower pace of adjustment could be considered this year to provide further support to the recovery,” the IMF said in a statement.
Strict early containment and health mitigation measures limited cases and fatalities and the vaccination programme has advanced well in recent months.
Fiscal, financial, and employment support programmes introduced by the government and SAMA [the central bank] helped cushion the impact of the pandemic on businesses and Saudi workers. As the economy reopened, some of the support programs have been ended and others adjusted to target only those sectors where the effects of the crisis are longer-lasting, the IMF noted.
Reforms lift GDP outlook
Additionally, the IMF said that reforms under Vision 2030 have played a key role in helping the economy navigate the pandemic.
“Efforts to establish a robust structure of interagency coordination and governance, the growing digitalisation of government and financial services, reforms to increase labor market mobility, and strong fiscal and financial policy buffers all equipped the economy to manage the crisis,” said the IMF.
Real GDP growth is projected by IMF staff at 2.1 per cent this year and 4.8 per cent in 2022 in contrast to -4.1 per cent in 2020.
Real non-oil GDP growth rebounded in the second half of 2020 and high-frequency indicators suggest the recovery has continued in 2021. Non-oil growth is projected at 3.9 per cent in 2021 and 3.6 per cent in 2022 compared to a contraction of 2.3 per cent in 2020. Real oil GDP growth is projected at -0.5 per cent in 2021 (-6.7 percent in 2020) given production levels agreed by OPEC+ and 6.8 percent in 2022 as the OPEC+ agreement is assumed to end as announced.
The IMF noted that fiscal consolidation is needed but should be carefully calibrated in the short-term to ensure the recovery continues to be well supported.
The budget deficit widened in 2020 to 11.3 per cent of GDP (4.5 per cent of GDP in 2019) as oil revenues fell and spending needs increased, and it was comfortably financed by new borrowing and the drawdown of government deposits. IMF staff projects the fiscal deficit to decline to 4.2 per cent of GDP this year, slightly lower than the budget forecast, and over the medium-term (by 2026) to move to broad balance given the outlook for the global oil market and the fiscal policy plans of the government.
The VAT rate increase, the removal of the Cost-of-Living Allowances (COLA), the increased focus on the efficiency of capital spending, and planned further domestic energy price reforms are all important contributors to the planned fiscal adjustment and should not be reversed or delayed.
The IMF recommends increased spending on the social safety net to support low-income households and help offset the loss of purchasing power they experienced after the increase in the VAT rate and the removal of the COLA last year. The planned reform to the social safety net that will move from a “categorial” to a “needs-based” system with a minimum guaranteed income for the less well-off is welcome.