IMF praises Saudi Arabia’s economic transformation

A preliminary statement issued on June 14, 2024 by the International Monetary Fund under Article IV, affirmed that Saudi Arabia’s unprecedented economic transformation is progressing well.

The statement praised the Kingdom’s wise macroeconomic policies and its transformative changes, including the financial reforms and the regulatory business environment.

Headline inflation has decelerated rapidly despite some pressure pockets. After peaking at 3.4 percent in January 2023, year-on-year inflation receded to 1.6 percent in April 2024.

The preliminary statement affirmed that the efforts to diversify the economy have started to bear fruit and that building on these successes will be important to sustain the non-oil growth momentum.

Additionally, it will maintain financial sector stability, continue to mitigate the risk of overheating, reverse declining total factor productivity and ensure inter-generational equity.

The IMF pointed out that the Kingdom’s economic activities will remain robust and that real non-oil growth decelerated from 5.3 percent in 2022 to a still robust 3.8 percent in 2023. This is driven mostly by private consumption and non-oil investment, with the latter tapering off to 11.5 percent (down from an exceptional 32 percent growth in 2022).

Oil GDP contracted by 9 percent in 2023 due primarily to Saudi Arabia’s OPEC+ and voluntary oil production cuts, leading to a 0.8 percent contraction in overall GDP.

Conversely, the non-oil growth for the first quarter this year indicates some moderation in economic activity and the IMF estimates that the output gap remains in positive territory, close to 2 percent of the non-oil potential GDP.

The preliminary statement affirmed that the efforts to diversify the economy have started to bear fruit.

The statement touched favorably on unemployment in the Kingdom after it reached historic lows of 7.7 percent in 2023, inching closer to the 2030 Vision objective of 7 percent. Additionally, the Saudi economy added over one million jobs by 2023, primarily in the private sector and the women’s rate still comfortably exceeding the Vision 2030 goal of 30 percent.

The IMF projected non-oil GDP to grow to about 3.5 percent in 2024 and that overall GDP growth will accelerate to about 4.5 percent in 2025 before stabilizing at 3.5 percent per year over the medium term.

The Saudi Central Bank’s holding of net foreign assets reached $423.7 billion in April 2024, which was slightly above the end-2023 level. Reserves remain ample, representing 15.6 months of imports and 208 percent of the IMF’s reserve adequacy metric by end-2023.

Despite the positive opinion of the Kingdom’s economy and the reforms since the launch of Saudi Vision 2030 in 2016, the IMF statement draws attention to an expected current account shifting to a deficit in 2024, averaging about 2.3 percent of GDP between 2026 and 2029 due to lower oil export proceeds and increased investment-linked imports.

External buffers, however, are ample despite a weaker current account and international reserves will remain ample, averaging 13 months import cover over the medium term. Also, foreign assets held by the Public Investment Fund and other government-related entities offer strong additional buffers.

It is worth mentioning that Article IV falls within the IMF’s Articles of Agreement under which it holds bilateral discussions with its 190 member countries, usually every year. During these consultations, a staff team visits the country, collects economic and financial information, and discusses the country’s economic development and policies.

I believe that the IMF has succeeded in showcasing the strength of the Kingdom’s economy and the effectiveness of its economic reforms. I also believe that despite the moderate risks cited in the IMF statement, the Kingdom’s economy is capable of dealing with such risks through the determination and devotion to the economic transformation strategy guided by the ambitious Saudi Vision 2030.

• Talat Zaki Hafiz is an economist and financial analyst. X: @TalatHafiz.