x Abu Dhabi, UAEWednesday 17 January 2018

Saudi Arabia rejects IMF's 'doomsday scenario' for Kingdom's economy

Saudi Arabia's finance minister rejected an International Monetary Fund scenario that the country that the country would be running a slight deficit beginning in 2017.

Saudi Arabia's finance minister Ibrahim Al Assaf who says the IMF is working on a 'doomsday scenario'.
Saudi Arabia's finance minister Ibrahim Al Assaf who says the IMF is working on a 'doomsday scenario'.

An economic forecast has become the subject of a public disagreement between Saudi Arabia and the International Monetary Fund.

During the weekend, Saudi Arabia's finance minister rejected an IMF prediction that his country's budget would turn a minor deficit beginning in 2017.

"They have been working on scenarios assuming, I would say, a doomsday scenario which I don't agree with," finance minister Ibrahim Al Assaf said, speaking after the IMF chief Christine Lagarde joined a meeting of Gulf finance ministers in Riyadh. "But we appreciate they are raising these issues in order to be ready."

The September 28 IMF report forecast that Saudi Arabia's budget surplus would "turn into a small deficit by 2017" as oil prices fell and government spending continued to surge.

The IMF's technical country reports rarely make waves outside the closed doors of policymaking. But the public dispute comes as the footprint of Saudi Arabia's increased government spending in 2011 has become apparent.

Government spending rose between 20 and 25 per cent last year on social programmes and pledges to ailing regional economies buried by turmoil.

Saudi Arabia has pledged US$17.86 billion (Dh65.55 bn) to help struggling economies in Bahrain, Oman, Egypt, Jordan, Morocco, Yemen, Tunisia, Sudan, Djibouti, the West Bank, and Gaza.

At home, the government plans to construct half a million affordable housing units. The state has also hired 299,000 civil servants in 2012, the country's cabinet revealed last month. The government is already Saudi Arabia's largest employer. In the medium term economists expect government budgets to continue growing by an average of about 7 per cent annually.

The IMF and some analysts have cautioned that if oil prices fall, growing government budgets could push the country out of its current surplus within several years.

"We forecast that the surpluses could shrink quite substantially, and that reflects a number of factors, including the high level of expenditure of the government in recent years, both social and infrastructure spending," said Patrick Dennis, who monitors Saudi Arabia at Oxford Economics. "Fiscal balances are very vulnerable, most obviously to a fall in the oil price."

But Mr Al Assaf rejected the concerns, arguing that Riyadh - backed by more than half a trillion dollars in foreign assets - is prepared for any fall in energy prices.

"We are ready for that, for these circumstances, through building the appropriate reserves in order to be ready for any adverse developments in the oil market."

The apparent disagreement comes at a particularly inopportune time, as the IMF has accepted unprecedented donations from Gulf countries to maintain its growing loan portfolio since the euro zone crisis erupted. This year, Saudi Arabia pledged US$15 billion to the IMF's coffers.

"It is no secret that Saudi Arabia in particular has played a key role in the IMF at critical times," Ms Lagarde said at the meeting this weekend.

Saudi Arabia has sought to increase its voice in the IMF along with its contributions, and Ms Lagarde was quoted by the Saudi Embassy in Washington saying that the IMF was hiring more Saudi nationals.

Despite the IMF's deficit prediction, its broader forecast for Saudi Arabia remains strikingly upbeat - particularly in contrast to a global economy battered by the euro zone crisis and slowing growth in China.

The report also notes that the benefits of Saudi spending don't stay at home: a 1 per cent increase in Saudi GDP growth is estimated to translate into increases of between .2 and .4 per cent GDP growth in regional economies such as Bahrain, Oman, Jordan, and Lebanon.

"The fiscal position may start deteriorating, but I wouldn't get too concerned about that," said Pratibha Thaker, regional director for the Middle East and Africa at the Economist Intelligence Unit. "Saudi Arabia can sustain the spending; they've got the money."