Saudi Arabia considers easing pace of reforms, says IMF

Saudi Arabia is considering easing the pace of its austerity measures as the Kingdom grapples with an economy in recession and high rates of unemployment, the International Monetary Fund (IMF) said in a report on Thursday.

Saudi authorities have “indicated that they were considering the appropriate pace of fiscal adjustment given the weak growth,” the Fund said.

“They saw merit in pushing ahead quickly with the fiscal reforms...but agreed that it is very important to monitor growth and employment and adjust the timing of reforms if needed,” the report added.

Saudi Arabia has slashed public spending and introduced various economic diversification measures and fiscal reforms in recent years, in order to narrow the budget shortfall caused by the crash in oil prices.

However, this has had an impact on economic growth: the Kingdom’s real gross domestic product (GDP) contracted for the second quarter in a row in Q2, falling 1.03 percent to SAR 628.2 billion. Employment growth has weakened, and the unemployment rate among Saudi nationals reached 12.8 percent in the second quarter of 2017, from 12.7 percent in Q1.

While a large and sustained fiscal adjustment is needed in coming years to adjust to lower oil prices, “a key question is how quickly this adjustment should take place,” the IMF noted.

“In staff’s view, the strong fiscal buffers, the availability of financing, and the current cyclical position of the economy mean that rapid fiscal consolidation is neither necessary nor desirable.”

Saudi Arabia is in a position to opt for more gradual fiscal consolidation that balances the budget by 2022, rather than in 2019 as originally set out in the Fiscal Balance Program, the Fund added.

In its report, the IMF praised Saudi Arabia’s progress in implementing reforms so far, noting that revenue reforms should aim to introduce an efficient tax system that raises revenues while limiting the impact on growth.

Saudi Arabia introduced excises on tobacco and carbonated/energy drinks in June, and plans to implement value-added tax (VAT) at the beginning of 2018.

While the IMF cautioned that the timetable for VAT was “very challenging,” given the administrative and legal preparations that are still needed, Saudi authorities said they were confident that they could meet the announced start date.

The Kingdom has been hiring and training additional staff at the General Authority of Zakat and Tax (GAZT), reaching out to businesses to help their preparations, and has recently published a draft VAT law for public consultation.

The IMF recommended that VAT exemptions and zero-rated items be kept to the minimum possible, and that once the tax is introduced, the rate should be raised from its 5 percent level.

Meanwhile, although the Fund welcomed the Kingdom’s plan for further energy price hikes, it noted that there is scope for “a more gradual phasing of the price increases to allow households and businesses more time to adjust.”

Write to Jerusha Sequeira at jerusha.s@argaamnews.com