Saudi Arabia’s remarkable economic transformation is advancing steadily as it continues to modernize and diversify its economy under Vision 2030, according to the IMF.
On July 31, 2024, the Executive Board of the International Monetary Fund (IMF) completed the 2023 Article IV consultation with Saudi Arabia.
The report highlighted that recent fiscal strategies have enabled a reassessment of investment expenditures associated with Vision 2030 by reprioritizing projects and implementing sector-specific strategies.
The reduction in oil production has resulted in an overall growth contraction of 0.8 percent in 2023; however, non-oil GDP experienced robust growth of 3.8 percent, largely propelled by private consumption and non-oil investments. The unemployment rate has reached historic lows, with female labor force participation remaining comfortably above the 30 percent target set for 2030. So far, geopolitical events have had little impact on the Saudi economy.
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Inflation trends and housing market pressures
Headline inflation has decreased significantly. After peaking at 3.4 percent in January 2023, year-on-year inflation fell to 1.6 percent in May 2024, supported by an appreciating nominal effective exchange rate. However, rental prices are increasing at around 10 percent due to the influx of expatriate workers and extensive redevelopment initiatives in Riyadh and Jeddah. Wholesale prices have also risen recently, reflecting higher input costs and increasing wages for skilled labor.
Current account surplus and economic resilience
The current account surplus narrowed considerably to 3.2 percent of GDP in 2023, primarily due to lower oil exports and a surge in investment-related imports. This was partially offset by a record surplus in the services balance, highlighted by a 38 percent rise in net tourism income. Reserves remain substantial, covering 15.8 months of imports and 208 percent of the IMF’s reserve adequacy criterion by the end of 2023.
Banking sector stability and challenges
The banking sector is in a solid position. Stress tests conducted by the Financial Sector Assessment Program (FSAP) indicate that both banks and non-financial corporations are resilient to shocks, even under severe adverse conditions. Despite a recent slowdown, bank credit growth—mainly directed towards the corporate sector—continues to outpace deposit growth. Increased interconnections between financial institutions and the sovereign may amplify systemic risks, particularly due to fluctuations in oil prices.
Future growth projections
Non-oil growth is anticipated to reach 4.4 percent in the medium term. This follows a slowdown in 2024. The growth will be primarily driven by stronger domestic demand. Project implementation is expected to accelerate. The expected easing of oil production cuts is projected to increase overall growth to 4.7 percent in 2025. After that, growth is expected to stabilize at an average of 3.7 percent per year. Inflation is expected to remain controlled, bolstered by a credible peg to the U.S. dollar and consistent domestic policies. The current account is forecasted to transition to a deficit, reflecting declining oil prices and robust investment-related imports.
Risks and opportunities ahead
According to the IMF, risks to the outlook are generally balanced amidst significant global uncertainty. On the positive side, faster implementation of reforms and investments could yield stronger growth outcomes sooner than anticipated. Pressures to expedite investment could heighten overheating risks. Potential downside risks include delays in the reform agenda. Risks also include subdued global economic activity. Financial market volatility is another concern, and geopolitical tensions pose risks as well. Increased non-OPEC+ supply is also a factor. Over the longer term, a rapid shift away from fossil fuel demand could impede growth.
Executive board assessment
Executive Directors concurred with the staff appraisal. They praised Saudi Arabia for its ongoing economic transformation, supported by consistent efforts to diversify the economy under Vision 2030. Directors welcomed the robust non-oil economic activity, stable inflation, record-low unemployment, and strong fiscal and external buffers. They highlighted the importance of maintaining fiscal prudence. Ensuring financial stability is also crucial. Continuing structural reforms is necessary to foster sustainable and inclusive growth.
Recommendations for fiscal and structural reforms
Directors endorsed the recalibration of investment spending. They emphasized the importance of transparency regarding its impact on Vision 2030 objectives. This clarity would help define government priorities and anchor investor expectations. They generally recommended further fiscal adjustments. This would help sustain strong buffers and meet intergenerational needs. They suggested enhancing non-oil revenue. Phasing out remaining fuel subsidies with targeted social programs is also important. Additionally, managing the wage bill should be a priority.
Additionally, Directors urged the strengthening of fiscal institutions through the ongoing implementation of the Medium-Term Fiscal Framework, operationalizing fiscal rules to decouple spending from oil price fluctuations, developing an effective Sovereign Asset Liability Management Framework, and enhancing monitoring and disclosure of contingent liabilities.
Directors affirmed that the exchange rate peg to the U.S. dollar continues to benefit the Saudi economy and advised that the policy rate should align with the Federal Reserve’s policy rate. They supported the continued use of market-based monetary policy tools and underlined the need to finalize the Emergency Liquidity Assistance Framework.
Enhancing banking and financial resilience
Directors acknowledged the Financial System Stability Assessment findings that indicate the banking sector’s resilience. They called for further enhancements to the supervisory framework, including prompt adoption of the new Banking Law in line with best international practices and improvements in the AML/CFT framework. They recommended a more stringent macroprudential framework if credit growth remains high, with most Directors supporting the introduction of a positive neutral countercyclical capital buffer, while a few suggested further assessment before implementation.
Commitment to sustainable development
Directors commended the authorities for their significant efforts to improve the business environment, including advancing digitalization and governance. They anticipated ongoing initiatives to enhance investment efficiency and promote labor market reforms aimed at increasing female labor participation and addressing potential wage disparities. Directors advised that industrial policies should complement the structural reform agenda and avoid discriminatory practices, noting that Saudi Arabia remains compliant with WTO regulations. They recognized Saudi Arabia’s commitment to achieving net-zero emissions by 2060, highlighting progress in renewable energy and energy efficiency, while some Directors emphasized the necessity for additional efforts to meet these targets.
Future outlook
Directors welcomed improvements in economic data provision and ongoing reforms aimed at addressing existing data gaps. They commended Saudi Arabia for its leadership in multilateral forums, including its role as Chair of the International Monetary and Financial Committee, and looked forward to its continued contributions to tackling global challenges.
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