Saudi Arabia’s real GDP is expected to grow by 6 per cent this year on the back of higher oil revenues and prudent economic management, the International Monetary Fund (IMF) said in a report on Tuesday.
The pace of economic expansion accelerated in 2011 taking the Kingdom’s overall real GDP growth to 7.1 per cent. The Saudi non-oil economy grew by 8 per cent during the year, the highest since 1981, the IMF report stated.
Despite increased economic activity, inflation stabilized at 5 per cent as food inflation subsided and imports of capital goods and labor helped prevent bottlenecks from emerging, it added.
The IMF commended Saudi Arabia for providing important support to the global economy in 2011 by raising oil production to help stabilize global oil markets.
The commitment to provide $15 billion in additional resources for the IMF has also contributed to global stability, it said.
‘Adverse spillovers from unrest in the region and the euro area crisis have been limited so far. Higher oil revenues have been used to accelerate domestic developmental objectives as well as to support other economies in the region and beyond,’ the report added.
The Saudi real oil GDP was likely to grow by 4.5 per cent this year, while the real non-oil GDP was poised to hit 6.5 per cent, said the IMF executive board report which was concluded on July 2 in consultation with Saudi Arabia.
New initiatives to address pressing social issues such as unemployment, availability of affordable housing, and SME financing, translated into an increase in real government spending of 20 per cent, it said.
‘Nevertheless, despite increased spending and strong import growth, fiscal and external surpluses strengthened further in 2011 as oil revenues rose. Monetary aggregates grew strongly in 2011 and credit growth reached double digits as the economic expansion translated into increased demand for credit,’ said the top financial body.
Consistent with the peg to the US dollar, monetary policy remained accommodative and policy rates remained unchanged. The banking system remained highly capitalized and liquid with improved profitability, it added.
The IMF in its report welcomed the Saudi authorities’ efforts to stabilize oil markets and noted the positive spillover to the region from the Kingdom’s higher growth, public spending, and expanded financial assistance.
Higher oil revenues, said the report, have strengthened fiscal and external balances and have boosted social spending and savings for future generations.
However, the IMF cautioned that the authorities needed to forestall any inflation pressures engendered by robust growth through a proactive use of liquidity and macroprudential policy tools.
‘While the government has built significant policy buffers, fiscal spending is above the level consistent with an intergenerationally equitable drawdown of oil wealth,’ the report stated.
Hence there was a need to preserve flexibility in entitlements, ensure efficiency in spending and broadening the tax base, the report added.
The global organisation welcomed the Saudi authorities’ efforts to strengthen budget institutions and further delink fiscal spending from oil price developments.
They encouraged the authorities to continue to improve the budgetary process, including by carefully screening supplementary budgetary expenditures, establishing a macro fiscal unit, and anchoring spending decisions in a multiyear framework.
The IMF lauded the Saudi government for ‘the recent initiatives to boost employment of Saudi nationals in the private sector and the complementary supply side efforts to boost their skills.’
Adjusting domestic energy prices would enhance the efficiency of resource use and could also have beneficial employment effects, while facilitating economic diversification, it stated.
According to IMF, the fixed exchange rate continues to serve Saudi well. ‘Since the peg limits the scope for monetary policy conduct, the use of macroprudential and liquidity management tools remains key to effective policymaking.’
Saudi authorities’ efforts to strengthen financial supervision and risk management, as well as their progress toward adopting Basel III standards are commendable, it added.
IMF said the near term economic outlook was broadly favorable, although geopolitical risks and oil prices remain sources of volatility.