Positive IMF assessment seen as vote of confidence in Saudi reform strategy

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DUBAI: Policymakers sometimes get a little nervous when the International Monetary Fund (IMF) comes to town.

The 77-year-old global financial institution is not a regulator in the strict sense of the word, but has the power to deliver a positive or negative verdict on how these policy makers – ministers, central bankers and officials – work. their economy.

In extreme circumstances, the IMF may endorse or withhold potentially vital findings from an economy in crisis. Under more normal conditions, its verdict can have a big influence on the international credit ratings that all countries use to access global financial markets.

When the IMF’s “mission” ended its visit to Saudi Arabia last month, there must have been at least a hint of apprehension among the Kingdom’s economic decision-makers as they awaited the IMF’s formal verdict on their handling of the situation. pandemic and associated economic shocks. 2020.

The oil sector has benefited from the Kingdom’s role in rebalancing world markets via OPEC +. (AFP)

There was no question of resource-rich Saudi Arabia seeking financial assistance from the IMF, but since the organization had not made its usual annual visit in 2020 ravaged by the coronavirus, there was a long way to go. to go after a year of radical policy changes to manage. the severe recession that followed the outbreak of the pandemic.

As it turned out, Saudi officials had nothing to worry about. The “final declaration”, when it came last week, was a resounding vote of confidence in the way they had handled the enormous challenges posed by the pandemic.

More than that, it was a strong endorsement of the Vision 2030 strategy aimed at diversifying the Kingdom’s economy away from dependence on oil.

Independent economists were not surprised by the positivity of the IMF. Nasser Saidi, former chief economist at the Dubai International Financial Center (DIFC), told Arab News: “The country has been proactive in rolling out a series of reforms despite the pandemic and falling oil prices. The public health system has proven to be resilient. “

IMF experts were adamant. “The authorities reacted swiftly and decisively to the COVID-19 crisis. Strict early containment and health mitigation measures have limited cases and deaths and the vaccination program has progressed well in recent months, ”they said.


The IMF report came as an endorsement of the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

Experts added, “The fiscal, financial and employment support programs put in place by the government and SAMA have helped cushion the impact of the pandemic on Saudi businesses and workers.”

One of the main reasons for this performance, IMF visitors concluded, lies in the Vision 2030 reform plan implemented since 2016, aimed at modernizing the Kingdom’s economy and creating a more dynamic and entrepreneurial private sector to replace public spending. the economic engine.

“The reforms of Vision 2030 have played a key role in helping the economy overcome the pandemic. Efforts to put in place a strong inter-agency coordination and governance structure, the increasing digitization of government and financial services, reforms to increase labor market mobility, and strong fiscal and financial policy cushions, have all equipped economy to manage the crisis, ”the IMF mentioned.

All the indicators point in the right direction. Real GDP growth is projected at 2.1% this year, which represents a dramatic turnaround from the 4.1% decline in 2020. In the critical non-oil sector – the key measure of the success of the diversification plan – real GDP growth rebounded in the second half of 2020 and the signs are that this will continue in 2021.

Non-oil growth is projected by the IMF at 3.9% this year and 3.6% next. Inflation, often a major concern for the IMF, will be a very manageable 2.8% next year, while unemployment – another key indicator of the diversification strategy – has fallen to 12.6% for Saudi nationals at the end of last year.

Additionally, Saudi Arabia’s role in OPEC + ‘s downsizing strategy to rebalance global markets will bear fruit this year and next, as oil GDP returns to 6.8 growth. % next year when oil supply returns to normal at higher crude prices.

The Kingdom’s budget decision-makers have also received a slap in the face from the IMF. “The deficit widened in 2020 to reach 11.3% of GDP (4.5% of GDP in 2019) with falling oil revenues and increasing spending needs, and it was comfortably financed by new loans and the reduction of public deposits. ” The deficit will fall to 4.2% this year, the IMF said, below official forecasts.

Some of the controversial measures introduced during the pandemic, such as the tripled VAT rate, as well as the removal of cost-of-living allowances and home energy price subsidies, “all contribute significantly to the planned fiscal adjustment and do not. should not be canceled. or delayed. “

INNUMBERS

3.9% Projected growth excluding oil this year.

2.8% Inflation rate projected for next year.

The work of the Ministry of Finance has been recognized by the IMF. “Steps to further strengthen budget transparency are needed, including publishing more detailed information in budget documents and expanding the coverage of budget data beyond central government,” they said.

Mohammed Al-Jadaan, Saudi Arabia’s finance minister, appreciated the praise from the IMF. “Such results have been achieved despite the impact of the COVID-19 pandemic, fluctuations in oil prices, sharp economic fluctuations, declining global demand, declining growth and other challenges facing the Saudi government was confronted, ”he said in response.


Saudi Minister of Finance Mohammed al-Jadaan. (AFP)

The IMF has praised the Kingdom’s financial sectors and capital markets. “The financial sector continues to be well regulated and supervised by SAMA,” he said.

“Banks are well capitalized and liquid despite declining profitability and a slight increase in NPLs (which remain low) over the past year.”

He added: “The impressive pace of debt and equity market reforms has continued under the leadership of the Capital Market Authority and the National Debt Management Center. These reforms increase the options for raising capital for companies and investment opportunities for savers. “

Saidi, former chief economist of the DIFC, said: “Saudi Arabia’s fiscal prudence must be complemented, in addition to the efficient exploitation of debt markets and the structuring of key energy infrastructure to finance deficits. . “

On a crucial topic – the gradual erosion of Saudi Arabia’s foreign exchange reserves under the impact of pandemic pressures and the need to continue investing in Vision 2030 initiatives – the IMF has been optimistic. “The exchange rate anchor continues to serve Saudi Arabia well given the current economic structure. SAMA’s foreign exchange reserves remain at very comfortable levels, ”he said.


“Budget, financial and employment support programs have helped cushion the impact of the pandemic on Saudi businesses and workers.” (AFP)

IMF assessors have made a few caveats. “To secure recovery and spur stronger growth, policymakers need to carefully manage the exit of support remaining linked to COVID and pursue the longer-term reform agenda under Vision 2030,” they said.

They also stressed the need to continue to support the “social safety net” to support low-income households who may be grappling with the effect of the economic recession made worse by higher tax rates and the withdrawal of taxes. cost of living allowances.

“If the recovery stops, the planned reduction in government capital spending could also be slowed while keeping the capital spending envelope unchanged over the medium term,” the IMF said.


The IMF report came as an endorsement of the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

Above all, it is important to maintain the momentum of economic reform. “Increasing the competitiveness of Saudi workers in the private sector is important for the success of the reform program. Developing a competitive and diverse private sector will be difficult unless the salary expectations of Saudi workers match their productivity, ”IMF assessors concluded.

According to Saidi, the pace of continued growth depends on global oil markets and the future course of the virus, but the signs are as good as the IMF findings.

“Saudi Arabia’s growth prospects with continued macroeconomic stability and a prudent fiscal stance will encourage increased domestic and foreign investment in addition to housing investment and household consumption,” he said.

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