Abu Dhabi, UAEThursday 24 October 2019

Saudi Arabia's non-oil sector to grow 2.9% in 2019 on government spending, IMF says

The country is enacting a series of economic and social reforms heralded by Crown Prince Mohammed bin Salman

Malaysia, Saudi Arabia, UAE dominate the sukuk market in 2018. Reuters
Malaysia, Saudi Arabia, UAE dominate the sukuk market in 2018. Reuters

Saudi Arabia’s non-oil sector is projected to grow 2.9 per cent this year, boosted by government spending and reforms. The overall economic output will also accelerate in 2020 after a dip this year due to oil production cuts, according to the International Monetary Fund.

The Arab world’s largest economy’s growth is estimated to expand by 3 per cent in 2020, up from a projected 1.9 per cent growth this year, as the country presses on with its reform agenda, the IMF said in a report after its executive board completed an Article IV Consultation with Saudi Arabia.

The IMF directors said ongoing efforts to strengthen the business environment and careful implementation of industrial policies could encourage the development of new sectors of the non-oil economy.

Saudi Arabia has been working on developing its nascent local manufacturing industry in a range of sectors, from military production to making aircraft parts.

“Growth is expected to pick up over the medium-term as ongoing reforms take hold,” the fund said. “The authorities are continuing to implement their reform agenda.”

Saudi Arabia is enacting a series of economic and social reforms heralded by Crown Prince Mohammed bin Salman under his Vision 2030 blueprint for less dependence on oil.

The kingdom has implemented fiscal measures aimed at reducing its budget deficit, introduced a 5 per cent VAT levy in January last year, as well as energy price reforms. It has also introduced reforms to its capital markets, laws to encourage investment, improve its business environment and support the small-and-medium enterprises.

Saudi Arabia’s fiscal deficit is projected to decline to 5.1 per cent of gross domestic product in 2020, from 6.5 per cent of GDP in 2019, the IMF said.

Fiscal consolidation is still key with actions to contain government wage bill and a “more measured increase in capital spending” helping the government generate fiscal savings, the IMF said.

The fund urged Saudi Arabian authorities to continue improving and managing expenditure, saying that despite important reforms, spending has increased.

Last week, Saudi Arabia approved a law on government tendering and procurement procedures aimed to improve transparency, competition and fairness in order to streamline its budget, according to the finance ministry.

The law is meant to help the government balance its fiscal position through efficient financial planning and resource management.

The IMF praised the government’s reforms to strengthen public procurement, which will make government spending more efficient and reduce the risks of corruption and boost fiscal transparency.

The IMF also added that policies to develop new economic sectors will be successful if “Saudi workers have the needed skills for the private sector and the incentives to offer them at competitive wages”.

There is a need to make sure that wages and productivity are “well aligned”, that labour market policies focus on setting clear expectations about limited employment opportunities in the public sector and that female employment is increased, the Washington-based lender said.

The unemployment rate among Saudi Arabian nationals declined to 12.7 per cent last year and is projected to drop to 12.5 per cent, according to the report.

The IMF said, considering the resilience of the financial sector and capital market reforms in the kingdom, developing FinTech could help broaden the channels of financial access.

Executive board directors at the IMF agreed that given the current structure of the economy, the exchange rate peg to the US dollar “continues to serve the economy well”.

Updated: July 21, 2019 08:35 AM

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