By Staff writer
Vision 2030 plan welcomed by International Monetary Fund; says continued labour market and education reforms are needed
Continued labour market and education reforms are needed in Saudi Arabia to encourage private sector employment of Saudi nationals and increase labour force participation of women, according to a new report by the International Monetary Fund (IMF).
Its Executive Board urged further reforms as it welcomed the ambitious reform goals announced by the authorities in Vision 2030 and the National Transformation Program.
It said it supported the plan to increase the role of the private sector in the economy by focusing on privatisation and public-private partnerships, improve the business environment, develop local capital markets, encourage FDI, and support small and medium enterprises.
In the report, the IMF said real GDP growth is expected to slow to 1.2 percent in 2016, but recover to 2 percent in 2017 as the pace of fiscal consolidation eases and to settle around 2.25-2.5 percent over the medium-term.
It added that inflation, which has risen in recent months to over 4 percent as energy and water prices have been increased, is expected to ease to 2 percent in 2017.
"Bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, non-performing loans low, and banks are well provisioned against loan losses," the Executive Directors noted, adding that, based on current policies, the fiscal deficit is projected to narrow to 13 percent of GDP in 2016.
"Non-oil revenues are expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure. The fiscal deficit is expected to be financed through a mix of deposit drawdown and domestic and international borrowing," it said.
Saudi Arabia has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030 and the National Transformation Program.
Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation to reach budget balance in 5 years are key policy priorities.
Executive Directors noted that Saudi Arabia faces important challenges stemming from the decline in oil prices. They welcomed the authorities’ "timely response", which, supported by sizeable fiscal buffers and a strong and resilient financial system, has maintained macroeconomic growth and stability.
Nonetheless, the IMF noted that the fiscal and current account balances have moved into deficit and growth is starting to slow. Directors highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy.
Directors said that reforms have helped strengthen the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth.
They also agreed that the exchange rate peg to the US dollar is the best option for Saudi Arabia given the current structure of its economy, and emphasized that a continued fiscal adjustment is needed to support the peg.