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IMF Advises Saudis to Cut Energy Subsidies More Gradually

Saudi Arabia, May 17, 2017

Saudi Arabia can reduce energy subsidies more gradually to limit the short-term impact of austerity measures on economic growth, even if it means not meeting a self-imposed target of balancing the budget by 2019, the International Monetary Fund said.

The world’s biggest oil exporter also has room to increase spending on measures that could create jobs overall and boost employment among Saudi women, according to Tim Callen, the IMF Saudi mission chief.

A balanced budget is central to the kingdom’s long-term plan to wean the economy off oil, after the plunge in crude prices caused the shortfall to reach more than 15 percent of gross domestic product. But the government’s austerity drive, which included slashing spending and curtailing state subsidies, has weighed on growth, with non-oil GDP barely expanding last year.

In the “baseline” scenario in its Fiscal Balance Program announced in December, the government expects a budget surplus of 19 billion riyals ($5.1 billion) in 2019. A conservative projection would delay that by a year.

Given its “strong financial asset position and its low debt,” Saudi Arabia doesn’t need to balance its finances by 2019, the Washington-based lender said Wednesday after completing its Article IV mission.

While the policy of raising domestic energy prices is “the right one, you could probably do it over a more gradual period, which would then enable you to make sure that the household compensation is working correctly and then to put in place a plan to at least temporarily help industries affected by the price rises as well,” Callen said in a phone interview.

Read More: Next Steps in the Saudi Overhaul Plan Put More Focus on Growth

The government could also spend on structural reforms that “may require fiscal support,” including making it easier for private companies to hire Saudi nationals, he said. One example would be helping with transportation and childcare costs for women, he said.

Women aren’t allowed to drive in the kingdom.

Finance Minister Mohammed Al-Jadaan said in an interview in Jeddah on Tuesday that next year’s budget will be “expansionary but not significantly,” and would be in line with balancing state finances by 2020.

“Where the expansion will come is from the efficiency,” Al-Jadaan said. “So we are working on that -- reducing a lot of the fat that is not necessary and then utilizing that in more productive investments.”

The government started preparing the 2018 budget in January and a first draft should be ready in two months, he said.

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