IMF expects Saudi fiscal deficit to reach 7 per cent of GDP this year

Higher public spending will push Saudi Arabia’s budget deficit to 7 per cent of gross domestic product (GDP) this year, the International Monetary Fund (IMF) said, a forecast well above the government’s own projection.

The IMF’s forecast assumes that Saudi oil output will average 10.2 million barrels a day and oil prices will average $65.5 a barrel in 2019, it said in a statement after a staff visit to the kingdom. The IMF said the fiscal deficit was 5.9 per cent in 2018.

The Saudi government has forecast a budget deficit of 4.2 per cent of GDP this year.

Saudi Minister of Finance Mohammed al-Jadaan said in a statement the IMF view shows Saudi government’s progress in implementing economic and structural reforms, as first-quarter budget data showed.

The Kingdom of Saudi Arabia (KSA) recorded a budget surplus of 27.8 billion riyals ($7.4 billion) in the January-March period, its first surplus since 2014.

The IMF said the introduction of a value-added tax has been successful, but the Saudi government should consider raising it from 5%, which is low by global standards, in consultation with other Gulf governments.

A reduction in the government wage bill, a more measured increase in capital spending, and better targeting of social benefits will all yield savings, it said.

Last month, Jihad Azour, director of the IMF’s Middle East and Central Asia Department, told Reuters the budget deficit this year might be 7.9%, but also said that estimate was likely to be revised after the IMF delegation’s visit.

“Higher government spending has supported growth and the implementation of reforms but has increased medium-term fiscal vulnerabilities,” the IMF said.

“Despite the budget surplus in the first quarter, the team projects that the fiscal deficit will rise to 7% of GDP in 2019.”

Al-Jadaan, the finance minister, said last month the kingdom recorded a budget surplus of 27.8 billion riyals ($7.4 billion) in the January-March quarter, its first surplus since oil prices plunged in 2014.

The IMF said real non-oil growth is expected to strengthen to 2.9% in 2019, boosting overall economic growth to 1.9%, higher than its earlier projection of 1.8%.

It said an increase in oil prices since the turn of the year is boosting confidence, but it was difficult to assess future developments in the oil market given uncertainties about production in some countries.

Brent crude futures were trading at $71.60 a barrel on Wednesday.

Saudi central bank Governor Ahmed al-Kholifey told Reuters last month that Saudi economic growth in 2019 would be “no less than 2 per cent”.

The Saudi economy grew by 2.2 per cent last year, after shrinking in 2017.

Meanwhile the Saudi Arabia’s non-oil private sector saw strong growth in both output and new orders at the start of the second quarter. Despite the improved demand environment and increased optimism among firms towards the outlook, employment showed little change. Competitive pressures meanwhile intensified, leading businesses to cut output prices to the greatest extent for over a year.

The headline seasonally adjusted Emirates NBD Saudi Arabia Purchasing Managers’ Index (PMI) – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – registered a reading of 56.8 for the second consecutive month in April, remaining at its highest level since the end of 2017.

April saw a robust increase in business activity across Saudi Arabia’s non-oil private sector, with the rate of growth quickening for the fourth month in a row to the fastest since December 2017. Firms that reported higher output in April often linked this to stronger underlying demand and an associated rise in new business.

Growth of new work eased slightly from March’s near four-year high, but nonetheless remained sharp overall and stronger than that of output. New export orders meanwhile rose modestly in April compared with total new business.

Higher output requirements among Saudi Arabia’s non-oil private sector firms in April were reflected in a further rise in purchasing activity during the month. The survey also found evidence of stock levels being bolstered in anticipation of higher inflows of new orders in the months ahead. Business confidence towards future output rebounded strongly from a six-month low in March to show one of the highest degrees of optimism over the past five years.

However, the non-oil private sector jobs market remained lacklustre at the start of the second quarter. After falling slightly in March, the level of employment posted only a fractional increase in April, to continue the worst sequence of jobs data for five years.

Agencies