Washington — The International Monetary Fund (IMF) recently concluded its 2023 Article IV consultation with Saudi Arabia, acknowledging the country’s impressive economic performance and ongoing transformation under the Vision 2030 agenda.
The consultation highlighted Saudi Arabia’s high growth, record-low unemployment, contained inflation, and strong fiscal and external buffers.
Saudi Arabia experienced robust economic growth in 2022, making it the fastest growing economy among G20 nations. The country’s overall growth reached 8.7 percent, driven by strong oil production and a 4.8 percent growth in non-oil GDP.
Non-oil growth was fueled by robust private consumption and non-oil private investment, including giga projects. Key sectors such as wholesale and retail trade, construction, and transport were the main contributors to non-oil growth. The output gap closed in 2022, and the momentum in non-oil growth has continued into 2023.
The unemployment rate in Saudi Arabia has reached a historical low, dropping to 4.8 percent by the end of 2022, compared to 9 percent during the COVID-19 pandemic. This decline can be attributed to increased labor force participation, with more Saudi workers joining the private sector and expatriate workers returning to pre-pandemic levels, particularly in the construction and agricultural sectors.
Additionally, youth unemployment was halved over the past two years, and female labor force participation surpassed the 30 percent target set under Vision 2030, reaching 36 percent in 2022.
Inflation in Saudi Arabia remains low and appears to be easing. The average Consumer Price Index (CPI) grew by 2.5 percent year-on-year in 2022, partially contained by domestic subsidies and a strong US dollar. Although there was a slight uptick in early 2023, with headline inflation reaching 3.4 percent year-on-year, it has since settled at 2.8 percent year-on-year in May 2023. The decline in transport and food prices offset the increase in rent, contributing to the overall stability of inflation.
The country’s banking system remains strong, with a high profitability driven by net interest margins. The aggregate capital adequacy ratio is robust, and the non-performing loan ratio is low and declining. While growth in mortgages has moderated recently, the demand for project-related and consumer loans remains strong, offsetting the impact of rising funding costs linked to higher interest rates.
Saudi Arabia’s fiscal position strengthened due to favorable oil market dynamics, resulting in a surplus of 2.5 percent of GDP—the first surplus since 2013. However, additional spending that was not initially budgeted for, primarily in goods and services and capital spending, prevented a higher surplus.
Public debt stands at 23 percent of GDP, indicating a low and sustainable level, with sufficient fiscal space available to address potential challenges.
The current account improved significantly in 2022, with a surplus reaching a 10-year high of 13.6 percent of GDP. However, this surplus did not translate into a corresponding increase in official reserves due to the accumulation of assets abroad. Nevertheless, the reserves remain at comfortable levels, providing almost 20 months of import cover.
The outlook for Saudi Arabia’s economy is balanced, with both upside and downside risks. Higher oil prices, potential changes in OPEC+ oil production cuts, and accelerated structural reforms and investment could further spur growth. On the other hand, lower oil prices resulting from subdued global activity present a short-term risk.
Additionally, a rapid rise in non-oil investment could exert pressure on prices and external accounts, while a faster shift in global demand away from fossil fuels could hinder long-term growth.
The Executive Directors of the IMF commended Saudi Arabia’s economic transformation and supported the ongoing reforms under the Vision 2030 agenda. They emphasized the need for additional fiscal adjustment over the medium term to maintain stronger buffers, meet future needs, and mitigate risks from oil price volatility.
The Directors recommended further efforts to mobilize non-oil revenues, including maintaining the value-added tax rate and gradually increasing energy prices to reduce subsidies.
They also emphasized the importance of targeted social programs to protect vulnerable groups during energy subsidy reforms. The Directors welcomed the progress made in implementing structural reforms, particularly improvements in the business environment and female labor force participation.
They encouraged continued efforts to strengthen governance and accelerate the rollout of the Medium-Term Fiscal Framework and a Sovereign Asset Liability Management Framework.
The next Article IV Consultation with Saudi Arabia is expected to be held on the standard 12-month cycle.
