Saudi Reforms to Yield $90 Billion Boost by 2020, IMF Says

(Bloomberg) -- Saudi Arabia may get a budget boost of more than $90 billion by 2020 from new taxes and the planned reform of fuel subsidies and prices, International Monetary Fund projections show.

Additional non-oil revenue, including from a value-added tax and excises on tobacco and energy drinks, is forecast to reach 4.8 percent of gross domestic product -- estimated by the IMF to be $722 billion in 2020. Net gains from energy price reforms may total 210 billion riyals ($56 billion), including the cost of support programs to help households and industry adapt. The estimates were included in a report compiled after a staff visit in May.

The IMF sees Saudi Arabia's long-term plan for an economy less reliant on oil as a catalyst to improve the kingdom's fiscal balance, after a plunge in crude prices triggered a budget deficit of more than 16 percent of GDP last year. But the Washington-based lender has also advised the government to roll out spending cuts and austerity measures more gradually, even it if means pushing back a self-imposed target of balancing the budget by 2019.

A slower implementation “would give households and businesses more time to adjust and the authorities more time to ensure compensation mechanisms are fully operational and effective,” the IMF said in the report released Thursday. “The authorities were not convinced, believing that a relatively fast pace of price increases would minimize implementation risks, while the household allowances and industry support would minimize the impact on the economy.”

Contraction

The biggest Arab economy has contracted for two consecutive quarters as the kingdom continues to suffer from low oil prices and businesses struggle to cope with the reforms. In the past two years, authorities have cut spending, curtailed energy subsidies and imposed the taxes on tobacco and soda, as well as a levy on expatriates' families. The value-added tax is set to be introduced from January 2018.

The IMF expects Saudi Arabia's economy to expand 0.1 percent this year and 1.1 percent in 2018, while the non-oil sector -- the main engine of job creation -- is forecast to grow 1.7 percent and 1.3 percent respectively.

There are “risks on the downside” to the fund's non-oil forecast this year given the weak performance in the second quarter, Tim Callen, the IMF's mission chief to Saudi Arabia, told reporters on Thursday, though he expects growth to pick up for the rest of the year. The non-oil sector expanded less than 1 percent in the period.

In the medium term, growth will accelerate as structural reforms are implemented and the shortfall in the nation's current-account will be financed by a combination of international reserves and borrowing, the fund said in the report.

Saudi policy makers indicated that they were considering “the appropriate pace of fiscal adjustment given the weak growth,” the IMF said.

Substantial Progress

The government will be in a good position to introduce VAT next year after making “substantial” progress since the IMF's visit, Callen said. The IMF had warned in its report that a rushed introduction of the levy could lead to poor compliance and other problems that would be “difficult to correct.”

Saudi Arabia has partly compensated for the loss of oil revenue by using its foreign assets, which have fallen from a high of $737 billion in August 2014. The IMF predicts they will continue to decline to $335.1 billion in 2022 from a projected $472.6 billion this year.

The fund also said in the report:

• Policy makers plan to introduce a support program to help selected industries adjust to higher energy and water prices. An overall cost of 26 billion riyals has been estimated for the 2017–20 period, though the exact package is still being decided
• Saudi Arabia's Bureau for Spending Rationalization identified potential savings of 21 billion riyals from three ministries' expenditures over three years as part of a pilot project; another 86 billion riyals would be saved from a combined investment budget of 260 billion riyals that belong to five different ministries
• Authorities are working with the World Bank on a review of public spending; the IMF said the public wage bill -- at more than 45 percent of total government spending -- is still high

--With assistance from Ahmed Feteha

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Stuart Biggs, Mark Williams