IMF writes message of fiscal Saudi transparency and reforms
The latest International Monetary Fund’s (IMF) “Article IV consultations on Saudi Arabia” should
make sober reading indeed for the powers that be in the Kingdom. Between the praise for some of the Kingdom’s
recent economic reforms such as opening the country to foreign investment and the introduction of a comprehensive
privatisation strategy, and the urgings for greater clarity and urgency in pushing through these reforms and removing
further barriers to entry, is a stark message of fiscal transparency and reforms.
This will inevitably reverberate throughout the Gulf Cooperation Council (GCC) states, all still largely dependent on the oil and gas sectors for revenues. Paying no income tax has been a way of life in the Gulf states, and until recently governments have strongly resisted any notion of even contemplating considering such a measure.
Even though Gulf economies have been plagued with near persistent budget deficits over the last few years, due mainly
to the impact of volatile oil prices and non-transparent fiscal and budgetary structures, which encouraged
inefficiency and wastage. But even oil and gas cannot insulate countries from economic reality forever. In fact,
creeping taxation through indirect measures is on the increase in the GCC.
In Saudi Arabia, for instance, compulsory medical health insurance and motor car insurance are now required by law. The IMF in its Article IV Consultations, published at end October 2002, wants the Kingdom to go much further by introducing personal income tax. However, the fund recommends an interim solution through the introduction of a sales tax, which would be the precursor to the introduction of a fully-fledged value-added tax (VAT).
The reaction of the Saudi government has been muted. But there is a clear acknowledgement by Riyadh that dependence
on oil and gas for revenues is no longer a sustainable economic strategy. Saudi Finance & National Economy
Minister Ibrahim Al-Assaf, speaking at the symposium in Riyadh organized by the Ministry of Planning and the World
Bank in October, concurred that “dependence on oil revenues and consequently public spending as the main
driving force for economic activity has made our economy vulnerable to changes in international oil
“Heavy dependence on a main source of revenue linked to the developments in the world economy and conditions in oil markets constitutes a major challenge to the fiscal policy of the Kingdom.”
Is this a hint of things to come in fiscal reforms, including the possibility of tax reforms? The fact that there was
some real plain-speaking at the symposium, opened by Crown Prince Abdullah, deputy premier and commander of the
National Guard, suggests that economic reality is dawning home much quicker.
Delegates acknowledged the problems facing the Saudi economy, gaps in policy making, and the urgency to respond to the challenges of a rapidly-growing and young population. They urged pushing back the role of government, greater promotion of the private sector, economic and political liberalization, greater transparency, and opening up more to international involvement in the Saudi economy and to foreign direct investment (FDI).
However, the fickleness of the world oil market and the sluggish performance of the non-oil sector in the Kingdom do
have serious implications for the Saudi economy. In 2001, according to the IMF, the Saudi budget showed a deficit of
4 % of GDP because of falling oil prices and revenues, sluggish non-oil sector, and increased public spending. With
the result that the Saudi government’s domestic debt (the money which the government borrows from local
markets) increased to a staggering 92 % of GDP in mid 2001.
This compared with a debt to GDP in 2001 for the United Kingdom of only 31 %; for the United States of 41 %; for Germany of 45 %; and France of 43 %. Even Japan, with its dire economic woes, had a debt to GDP of 68 %. In 2002, firmer oil prices will no doubt improve the fiscal situation.
The IMF also projects the Kingdom to achieve non-oil GDP growth of 4 % in 2002. The Saudi British Bank, however, in a
study published, projects that the Kingdom’s non-oil sector GDP growth in 2003 will fall to around 3.5 %. This
on the condition that economic fundamentals such as inflation, trade balance, buoyant oil revenues and good domestic
liquidity, remain strong.
The IMF recommends a more efficient use of temporary unanticipated windfall rises in the oil price. This could be invested in a special Saudi Arabia fund or investment structure to smooth out any budgetary shortfalls on a permanent roll-over basis. The tension in the Middle East and the Iraq crisis are factors which directly affect the oil market in terms of the price and access roots to oil exports. The impact is normally to send oil prices rising.
OPEC agreed to cut excess oil production and to restore its system of quota limits to help support crude prices. OPEC
agreed to increase quotas by 1.3 mm bpd, from 21.7 mm bpd to 23 mm bpd, effective Jan. 1, 2003. The aim is to
stabilize oil prices of between $ 22 per barrel and $ 28 per barrel, and to cut actual production by 1.7 mm bpd in
first quarter 2003.
In mid-December, Brent blend crude in London was priced at $ 26.35 a barrel and US light crude at $ 27.84 a barrel. These prices are high compared to the conservative benchmark pricing for the Saudi budget 2002 of $ 16 per barrel, and $ 21 per barrel anticipated for the Saudi budget for 2003. This is realistic because of anticipated growth in global oil demand for oil in 2003 and the political necessity of keeping oil prices high to sustain government revenues.
Although these external factors are important, the long-term restructuring of the Saudi economy away from oil and gas
is squarely in the hands of the government. The ringing call from Washington is for an acceleration of economic
reforms and new thinking in fiscal policy, both in the ability to raise revenues from non-oil sources and to keep
public spending in check.
The fund is urging a clearer timetable forimplementation of reforms; the use of privatisation proceeds such as those from the 30 % sell-off of Saudi Telecom Company (STC) to reduce the burgeoning public debt; the reform (or abolition) of the negative list of sectors in which FDI is prohibited; and the early implementation of the insurance law and capital markets law to promote the development of the financial sector, especially a secondary market.