Saudi Economy: IMF Consultation Issues

Published: October 24, 2015

Editor’s Note:

The Saudi economy is the subject of an annual consultation from the International Monetary Fund (IMF). The process is described in the 2015 report, recently released by the IMF and shared by SUSRIS on September 12, 2015.

  • Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
  • At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

In June we provided comments from the staff mission to Saudi Arabia, the first phase of the process, at the completion of the team visit to the Kingdom. [Here] The Key Issues mentioned in the staff report were:

  • Context. The global oil market environment has changed substantially over the past year with oil prices dropping by close to 50 percent. Based on historical experience, the large oil price decline is expected to affect the macroeconomy and the financial sector. Meanwhile, demographic pressures to provide jobs and housing for a rapidly growing and young population continue.
  • Outlook and risks. Real GDP growth is projected to slow in 2015 and 2016. Downside risks to the growth outlook stem mainly from lower oil prices, any slowing of the domestic reform agenda, and an escalation of regional tensions.
  • Macroeconomic policies. The fiscal deficit is expected to reach 191⁄2 percent of GDP in 2015, and while it will decline in 2016 as one-off spending ends, it will remain high over the medium-term. A gradual but sizeable and sustained fiscal consolidation needs to begin, underpinned by a stronger fiscal framework. Monetary policy settings and the peg to the U.S. dollar remain appropriate for the Saudi economy.
  • Financial Sector. The banking system is in a strong position to weather lower oil prices and weaker growth. SAMA’s regulation and supervision is being strengthened further through a number of reforms. Formalizing the macroprudential framework to clearly establish responsibilities and the way countercyclical policy tools will be used would further enhance policy implementation.
  • Managing demographic pressures. The decline in oil prices has increased the importance of structural reforms to switch the locus of growth away from the public sector and toward the private sector. The government is making considerable efforts to diversify the economy and raise the private sector employment of nationals. More needs to be done to realign incentives for firms to export and workers to seek private sector jobs. Measures to provide affordable housing need to be implemented cost effectively.

The September 2014 report [Here] noted the performance of the Saudi economy in recent years:

Saudi Arabia’s economy has grown very strongly in recent years, benefitting from high oil prices and output, strong private sector activity, and government spending. It has played a systemic and stabilizing role in the global oil market. The economy has not been affected by the recent global financial market volatility. The Saudi population is young, growing, and increasingly well educated.

Today we are pleased to share a supplemental report from the IMF that provides selected articles that were based on the Saudi Arabia Consultations of the IMF. You can find the article overview and introduction below and the complete PDF at this link. [Here]

  • Assessing the Importance of Oil and Interest Rate Spillovers for Saudi Arabia
  • Assessing the Resilience of Saudi Banks to Weaker Economic Conditions
  • Countercyclical Macroprudential Policies in Saudi Arabia
  • Energy Price Reform in Saudi Arabia
  • Macroeconomic Implications of Labor Reforms in Saudi Arabia
Places Buildings Future Economy Riyadh Cities KAFD


Oil prices have fallen by over 40 percent since mid-2014 while the Fed is expected in the coming months to begin raising its policy rate at the beginning of a gradual tightening cycle. Given the importance of oil to the economy and the peg of the riyal to the U.S. dollar, these are two key developments for Saudi Arabia. This paper assesses the importance of these shocks to the economy and banking system through a number of methodologies. The main takeaway is that oil prices have typically played a bigger role than interest rates in affecting economic and financial outcomes in Saudi Arabia. While a temporary drop in oil prices would likely have little effect on the economy and banks given the financial cushions that have been built-up, a longer-lasting period of low oil prices would have a more significant impact.

..more here




Banks in Saudi Arabia are profitable, liquid, and well-capitalized. Nevertheless, the recent sharp decline in oil prices is likely to impact the banking system, particularly if it is sustained. Scenario analyses relying on publicly available bank-by-bank data suggest that: (i) banks are well positioned to weather the impact of an increase in nonperforming loans (NPLs), lower profits, and weaker deposit inflows that may come with an extended period of lower oil prices and weaker nonoil GDP growth; and (ii) bank capital and liquidity would only be put under significant pressure in the event of a very sharp economic downturn, sustained very low oil prices, and substantial deposit withdrawals.

..more here




Oil prices drive asset prices and government spending in Saudi Arabia, which in turn, are transmitted to credit and non-oil GDP. With oil prices having declined sharply in recent months and growth risks to the downside, the environment in which the financial sector is operating may become more difficult. Saudi Arabia has implemented a wide range of macroprudential policies, including some in a countercyclical way, to strengthen capital and liquidity buffers in the banking system. In addition, expanding the use of countercyclical macroprudential policies within the context of the establishment of a formal macroprudential framework, while respecting microprudential norms, may help in mitigating adverse feedback loops between real and financial activity.

..more here

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Saudi Arabia has low energy prices by global standards. This is a key reason behind the strong growth in domestic energy consumption. Low energy prices disproportionately benefit higher-income groups and energy-intensive industries in many countries. A comprehensive energy price reform plan is needed, which gradually phases out low energy prices and puts in place mitigating measures to protect the vulnerable sections of the population and helps industry adjust to the higher energy cost environment. Higher energy prices could help in retaining priority investment and social spending during a fiscal adjustment process over the medium term.

..more here

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The recent intensified effort to increase employment of nationals in the private sector through education and training reform and the implementation of a quota scheme (Nitaqat) will have implications for the macroeconomy. Staff’s empirical assessment suggests that replacing low-skilled, low-wage expatriates with nationals will increase wage levels and inflation, but if the skill composition of the national work force improves, productivity could rise and may offset any adverse impact on competiveness. Controlling public employment size and compensation and gradually implementing the quota system will be key to avoid higher costs and disruption to private sector activity.

..more here

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