IMF tells Saudi Ara­bia: ‘You’re well on track, no need to go so fast’

The Miracle - - Middle East - By:Frank Kane • Frank Kane is an award-win­ning busi­ness jour­nal­ist based in Dubai. Source:arab­

It is not of­ten you hear the In­ter­na­tional Mone­tary Fund (IMF) urg­ing “spend, spend,” while the client coun­try replies “well, ac­tu­ally we’d rather hold on to the money for a while, if it’s all the same to you.” But some­thing like that seems to have hap­pened dur­ing the IMF’s re­cent coun­try visit to Saudi Ara­bia. The IMF has a well-de­served rep­u­ta­tion as an aus­ter­ity mer­chant and usu­ally seeks to im­pose a rigid regime of fis­cal con­trol. “Cut spend­ing, in­crease taxes,” is the ritual for­mula.Saudi Ara­bia is not in the same league as coun­tries that have to go beg­ging to the IMF. It has no need to bor­row money from the fund, be­cause it is sit­ting on some $470 bil­lion of re­serves from the years when oil was $100-plus per bar­rel. There is no risk of Saudi Ara­bia go­ing bust any time soon. But it is in a fis­cal fix. Be­cause of the halv­ing of oil prices, there has been a bud­get deficit for the past two years, a rare enough oc­cur­rence in Saudi eco­nomic his­tory to war­rant se­ri­ous ac­tion.The govern­ment’s re­sponse has in­deed been rad­i­cal. Scrap­ping pub­lic sec­tor perks, cut­ting sub­si­dies on fuel and util­i­ties, and im­pos­ing taxes, ex­cise du­ties and levies were dras­tic mea­sures in a coun­try with a low tax regime, high govern­ment em­ploy­ment and big sub­si­dies on es­sen­tials. The ac­com­pa­ny­ing strat­egy to re­duce oil de­pen­dency and pub­lic sec­tor eco­nomic dom­i­na­tion were truly trans­for­ma­tional. The Vi­sion 2030 strat­egy and the Na­tional Trans­for­ma­tion Pro­gram (NTP) 2020 en­vis­aged bal­anc­ing the bud­get by 2019 and min­i­miz­ing oil’s con­tri­bu­tion to the econ­omy a year later, as part of a mas­sive pri­va­ti­za­tion pro­gram. There has been some di­lu­tion of th­ese plans — wit­ness the re­in­state­ment of some pub­lic sec­tor ben­e­fits and the emer­gence of NTP 2.0 re­cently — but ev­i­dently the mea­sures are still suf­fi­ciently dras­tic for the IMF to warn that eco­nomic growth, fore­cast as neg­li­gi­ble this year and only 1.1 per­cent in 2018, was at fur­ther risk if the coun­try con­tin­ued to press its foot firmly on the brake. “Most di­rec­tors noted that Saudi Ara­bia has the fis­cal space to al­low a more grad­ual con­sol­i­da­tion than en­vis­aged in the fis­cal bal­ance pro­gram,” was the IMF-speak take on it. The mes­sage was, “you don’t have to be quite so tough, so soon.” The IMF said: “The au­thor­i­ties were not con­vinced, be­liev­ing that a rel­a­tively fast pace of price in­creases would min­i­mize im­ple­men­ta­tion risks.” In other words, Saudi pol­i­cy­mak­ers thought about it, but were ac­tu­ally quite happy to keep the brake pedal on the floor for the time be­ing. So, while that is a re­ver­sal of the usual IMF­client role, it is ac­tu­ally quite a healthy sce­nario for Saudi Ara­bia. The King­dom has the flex­i­bil­ity to ease off if the aus­ter­ity gets too se­vere, or if global and re­gional con­di­tions make it nec­es­sary. Maybe it has more lee­way than it cur­rently re­al­izes. The shrewd an­a­lysts at Emi­rates NBD As­set Man­age­ment in Dubai reckon that it can cover the deficit next year with a mix­ture of re­duced sub­si­dies and in­creased levies, even al­low­ing for ex­pen­sive items like the Ci­ti­zens’ Ac­count mea­sures to help the King­dom’s less wealthy. They also think that Saudi Ara­bia’s cred­it­wor­thi­ness is such that any short­fall in the pub­lic ac­count can be quite eas­ily made up in the in­ter­na­tional debt mar­kets. The King­dom tapped the bond mar­kets for $39 bil­lion in the past year, but its debt-to-GDP (gross do­mes­tic prod­uct) ra­tio is still only 12 per­cent, much health­ier than other A-rated sov­er­eigns. The IMF does make a co­gent point, how­ever, when it ex­plains that the mul­ti­plier ef­fect of cap­i­tal spend­ing is big­ger than cur­rent spend­ing, mean­ing that Saudi pol­i­cy­mak­ers would be bet­ter ad­vised to di­rect in­vest­ment to big in­fra­struc­ture projects rather than day-to-day ex­pen­di­ture like pub­lic sec­tor pay or sub­si­dies. Again, the IMF is ad­vis­ing the King­dom to spend big. The other po­ten­tial game-chang­ing event on the Saudi fi­nan­cial hori­zon is the fur­ther open­ing up of fi­nan­cial mar­kets with in­clu­sion in the two global in­dices — the MSCI and the FTSE Russell — that have so far eluded them. Both could come next year, and would mean an im­me­di­ate jump in the quan­tity of for­eign di­rect in­vest­ment (FDI) in the coun­try, as global in­vestors scram­ble to get up to weight in Saudi as­sets. Other Ara­bian Gulf coun­tries en­joyed a dou­bling of FDI once they were in­cluded in the big global in­dices. You might ask, if the fi­nan­cial scene is so po­ten­tially rosy, why bother at all with the pro­gram of state as­set sales, which in­clud­ing po­ten­tial $100 bil­lion ini­tial pub­lic of­fer­ing (IPO) pro­ceeds from Saudi Aramco, could even­tu­ally bring in $300 bil­lion to the King­dom’s cof­fers? The an­swer is that the Vi­sion 2030 pol­icy is de­signed to trans­form the econ­omy and so­ci­ety of the King­dom, by mak­ing its econ­omy and work­force more pro­duc­tive and ef­fi­cient, rather than just pro­vid­ing a short-term fi­nan­cial fix. It is trans­for­ma­tional, rather than re­me­dial. The IMF is say­ing to the King­dom, “Don’t worry, you’re on track and you can af­ford to be less ag­gres­sive in eco­nomic and fis­cal pol­icy.” That is a good po­si­tion to be in.

The King­dom has the flex­i­bil­ity to ease off if the aus­ter­ity gets too se­vere, or if global and re­gional con­di­tions make it nec­es­sary. Frank Kane

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