Economic growth in Saudi Arabia is set to slow this year and next as the government is forced to reduce spending to compensate for lower oil prices, the International Monetary Fund said.
Saudi Arabia’s gross domestic product will grow by 2.8 percent this year and 2.4 percent in 2016, the IMF said in e-mailed statement on Monday at the conclusion of its regular country consultation. That compares with 3.5 percent growth last year. Annual growth may expand to 3 percent in the “medium term,” it said.
The world’s largest oil producer turned to the bond market this year for the first time since 2007 after crude prices fell by more than 50 percent. The resulting budget deficit, which the IMF projects at 19.5 percent of GDP, may force Saudi rulers to abandon the kingdom’s traditional largess.
Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”
The government should also introduce value-added and land taxes, the IMF said.
Oil makes up about 90 percent of the Kingdom’s revenues. Brent Crude fell to below $50 per barrel in August after a brief recovery in June. It traded 0.7 percent lower at $48.39 a barrel at 8:37 a.m. in London.
Saudi Arabia opened its stock market to international investors in June as part of broader plans to diversify the economy away from oil. The benchmark Tadawul All Share Index has dropped more than 20 percent this year.
The kingdom sold 20 billion riyals ($5.3 billion) of bonds to local banks and public institutions in August to cover the deficit. Government debt was equivalent to 1.6 percent of the country’s GDP at the end of 2014, the IMF said.
The drop in oil revenues combined with a war in Yemen and a boost in domestic spending led the country’s net foreign assets to fall for a fifth consecutive month in June. Reserves stood at $664.4 billion, down from $724.5 in January.