Saudi economic reforms, policy cushioned impact of pandemic: IMF

Saudi Arabia’s economy proved resilient and managed to cushion the negative impacts of the COVID-19 pandemic with strong policy buffers and reform momentum, the International Monetary Fund (IMF) said in its Staff Report for 2021.

The report indicated that Saudi authorities responded quickly and decisively to the crisis with a range of fiscal, financial, and employment support programs that helped cushion the impact of the pandemic on the private sector.

The measures were gradually eased in the second half of 2020, however, Saudi Central Bank (SAMA) maintained its borrower support policy.

Accordingly, the non-oil recovery that started in the second half of 2020 is expected to continue with non-oil growth projected at 4.3% in 2021, according to the IMF. On the other hand, real oil GDP growth is forecasted at -0.4% in 2021, if production remained in line with the OPEC+ output agreement.

The overall economy is projected to grow by 2.4% in 2021, and to rise to 4.8% in 2022, over the medium-term, growth is expected to accelerate as the economic reform agenda begins to pay dividends.

The IMF report indicates that average annual inflation is forecasted to hover around 3.2% in 2021, while credit to the private sector will remain strong, boosted by programs to encourage mortgage and SME lending.

The decline in oil revenues by around 30% led to an increase in fiscal deficit widened in 2020 to 11.3% of GDP, however, the impact was offset by an increase in non-oil revenues.

Saudi expenditures witnessed a limited increase, as the removal of cost of living allowances in June 2020 and lower capital spending largely offset COVID-19 related spending and another one-off spending.

IMF report applauded the Saudi reform momentum, citing the rapid increase in labor market participation of Saudi females and reforms to the Kafala sponsorship system for expatriate workers, which positively impacted growth, productivity, and household incomes.

Moreover, the Kingdom launched a program to codify legal practices and the privatization program which deepened the domestic capital markets. Also, the reforms for e-government and to harness the potential of digitalization, and the support to SMEs and entrepreneurs are all important to support a more diversified and inclusive recovery.

In their assessment, IMF Executive Directors commended the authorities for their quick and decisive policy response, stressing that the remaining pandemic-related policy support should be carefully withdrawn to continue supporting the ongoing recovery.

They added that the Saudi Vision 2030 reform agenda should continue to be implemented to promote strong, sustained, diversified, inclusive, and greener growth.

Regarding fiscal consolidation, the IMF directors recommended that it should go in parallel with continued enhancing the social safety net in the near term to support low-income households.

They encouraged the authorities to maintain the fiscal reforms introduced last year, press ahead with planned energy and water price reforms, and consider ways to rationalize the government’s wage bill.

Directors encouraged the authorities to continue developing the Fiscal Sustainability Program to reduce fiscal policy procyclicality. They underscored the importance of monitoring fiscal risks and developing a robust sovereign asset-liability management framework given the growing role of the Public Investment Fund and public-private partnerships (PPP) in the economy.

IMF Directors recommended further strengthening expenditure management, publicprocurement, and fiscal transparency.

Furthermore, they welcomed the continued resilience of the financial sector and the strong supervision by SAMA.

“Structural reforms should continue to be implemented to diversify the economy and promote sustainable, inclusive growth. In this context, they supported recent reforms to increase female employment and to enhance the job mobility of expatriate workers,” the report said.

Balancing between easing financial access and financial stability

According to the IMF, the borrower support program launched by the central bank has shielded SMEs from the pandemic. Through the program, the Saudi Central Bank assesses if an SME requires payment deferral based on its financial situation.

The report welcomed SAMA’s policy, indicating that announcements of any changes in the program should continue to be made well in advance to allow businesses time to adjust.

As Saudi non-oil economic activities rebounded to the pre-pandemic levels, broad-based support to SMEs is becoming less needed, however, with continued uncertainty about the outlook for hard-hit

priority sectors such as tourism and hospitality, more targeted support focused on viable SMEs in

these sectors may still be required.

Despite the payments program, Saudi banks remain in strong positions, with low levels of non-performing loans (NPLs). Also, bank liquidity remained at very good levels during the pandemic.

Furthermore, mortgage lending witnessed huge growth as government programs have

supported housing demand and supply. Similarly, retail mortgage lending has more than

doubled over the past two years to around 18% of total bank credit.

SAMA and the IMF staff agreed that risks to banks still appear limited given debt service limits on borrowers, the low average loan-to-value ratio, and the fact that most repayments are made by salary assignment from borrowers employed in the public sector.

However, the IMF said that risks need to be carefully monitored and SAMA stressed that they carefully monitor banks and have surveillance systems in place to identify any build-up of vulnerabilities to inform macroprudential policy.

IMF forecast Saudi real estate market will continue to grow

One of the key Realization Programs of the Saudi Vision 2030 is the Housing Program, which aims to offer solutions to enable Saudi households to own or benefit from housing according to their needs and finances.

It targets to raise housing supplies, especially for lower and middle-income families, develop financing options through banks and finance companies, and improve regulation of the housing market including by reducing the time needed to acquire building permits.

The aim under Vision 2030 was to raise the home ownership rate from 47% in 2016 to 60% by 2020 and further to 70% by 2030.

The program surpassed that target as the Saudi home ownership rate recorded 62% in 2020.

The IMF report indicates that Saudi real estate supply has grown, as around 344,000 new housing units were added in 2020, marking an increase of 4.1% compared to 2019.

Around 30% of these units were supplied through the partnership with the private sector program (Shrakat) and the developers’ platform Etmam.

These initiatives ensure access of qualified developers to interest-free financing, provide subsidized or free land for construction, and facilitate licensing and legal permits.

Moreover, real estate financing programs in the Kingdom have increased.

One of these programs, dubbed Sakani provided around 266,000 residential loans and free land packages in 2020. Under this program, beneficiaries can obtain subsidized mortgage loans up to SAR 500,000—they receive a subsidy on the interest (“profit”) payment to the lender not on the principal payment according to income level and family size.

Low-income households can obtain a mortgage guarantee and subsidized loan up to SAR 500,000 or free land parcels.

Accordingly, the value of new residential mortgage contracts increased by 84% in 2020 to reach SAR 136 billion, of which 96% were government-subsidized loans.

Meanwhile, Saudi real estate prices have stabilized in 2020 after falling sharply during 2015-19.

Another important aspect of the Saudi real estate market is taxation, under the Real Estate Transactions Tax (REET), the first home purchases up to SAR 1 million are exempt.

REET, which stands at 5%, has replaced the VAT on real estate transactions in October 2020.

The IMF report indicates that Saudi authorities introduced other initiatives to enhance market regulation and efficiency. Digital solutions for homebuyers have speeded eligibility checks and applications and allow easier access to financial products for homebuyers. The Ijar initiative provides digital solutions for the rental market to increase transparency and efficiency, through standardizing electronic rental contracts, establishing the regulatory framework for real estate brokerage firms and providing a digital matching platform.

Towards a sustainable future, green growth

Saudi Arabia has embarked on ambitious efforts and plans to reduce greenhouse gas emissions (GHG) and support greener growth.

The IMF applauded the decline in GHG emissions, indicating that more work remains.

The Saudi authorities climate actions have accelerated since 2018, leading to lower carbon emissions. These actions have targeted the energy (renewables, Carbon Capture, Utilization and Storage by Aramco), industry, transportation, building, and water and agriculture sectors. Further, energy price reforms, which were started in 2016, have continued. Emissions from fuel combustion, which accounts for the bulk of GHG emissions in Saudi Arabia, declined by 3% during 2015-19 against an increase of 2% in the G20 countries.

This was driven by a faster decline in emissions in the transportation and building sectors. Carbon emissions in these sectors dropped by 25% and 12%, respectively, while increasing by 6% and 2% in the G20 countries.

However, GHG emissions in Saudi Arabia remain above the G-20 and OECD averages.

Saudi Arabia announced a third renewable energy procurement round in 2020, accordingly, investments in renewable energy are expected to reach $50 billion by 2023 and meet 49% of domestically needed electricity in 2030. This is up from a mere 0.2% in 2019.

This comes under the Saudi Vision 2030 Liquid Displacement Program that aims to shift the energy mix towards renewables by phasing out 1 million barrels per day of domestic oil consumption by 2030, which will help reduce GHG emissions and meet the increasing domestic demand for electricity in a more climate-friendly way.

Nevertheless, the Saudi Industrial Development Fund (SIDF) launched a credit facility program of $28 billion (1.4% of non -oil GDP) in September 2019 to support Saudi companies investing in renewable energy.

The Saudi Climate Strategy has recently been launched which aims to reduce carbon emissions through clean hydrocarbon technologies. This complements the government’s efforts to reduce fossil fuels subsidies which declined by 60% since 2012 to reach $28.7 billion in 2019.

IMF recommends further actions to improve energy efficiency in residential buildings and industry, develop water protection and conservation regulations, increase the resilience of infrastructure to extreme weather events, and upgrade the regulatory framework for green financing and renewable energy.

The Kingdom will need to boost the efficiency of water desalination plants through investment in the latest technology, expand their capacity, and restart water price reforms to reduce consumption.

The Saudi government launched the Qatrah program to rationalize water usage with the target of reducing daily per capita consumption by 43% by 2030 and aims to add around 30 new seawater plants by 2030.

Female labor participation continues to improve

The Saudi female labor force participation rate is estimated to have increased by 13% points to over 33% over the past two years, according to the IMF report.

This comes after the social reforms introduced by King Salman and Crown Prince Mohammed bin Salman, as formal restrictions were removed and legislation establishing the equality of women in the workplace implemented.

Accordingly, more women are expected to get senior public and private sector positions, which will continue to build momentum for increased female labor force participation.

Saudi Arabia’s mandatory maternity leave benefits (10 weeks of paid leave at present) could be raised and programs offering subsidized transportation and childcare to lower-income women expanded as needed.

Another important aspect was the reform of the Kafala sponsorship system for expatriate workers in the private sector. The report explained that with strong enforcement, the new regulations will give foreign workers greater freedom of movement which will benefit their wages and productivity, attract higher-skilled expatriates and reduce incentives for firms to employ expatriates over nationals.

Regarding the competitiveness of Saudi workers, the IMF report recommends that government should clearly communicate that public sector jobs will be limited in the future to reduce the reservation wage for nationals to take private-sector jobs.

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