Saudi Arabia is actively looking at fiscal reforms to curb capital spending as oil prices continue to take a toll on its economic growth, Masood Ahmed, the International Monetary Fund’s (IMF) Middle East and Central Asia Department director, told Argaam in an interview on Wednesday.
“In our view, it’s important right now not only to identify how they are going to address the issue, but also set out and articulate a strategy for dealing with it,” said Ahmed. “That will provide more clarity to the private sector, which would then raise confidence.”
The new measures come amid ongoing uncertainty over fluctuating oil prices, which the IMF expects to remain low for several years, particularly when Iran makes its comeback to the market. Looking ahead, Saudi Arabia is projected to see its GDP growth fall to 2.2 percent next year from 3.4 percent in 2015.
The kingdom will face a budget deficit of around 21 percent of its gross domestic product (GDP) in 2015, the IMF estimated in its Regional Economic Outlook report. That figure is seen to remain little changed over the next few years— if the kingdom fails to make headway on fiscal reforms.
The fund has also revised its forecast for countries in the GCC, with an average fiscal deficit seen at 13 percent of GDP for 2015, compared to eight percent predicted earlier in the year.
The utilization of fiscal buffers is seen as a necessary move for regional economies in the short-term. However, the IMF warns that such funds are likely to run out in a number of Gulf countries in less than five years due to widening deficits.
Growing budget gaps are also increasing the need for finance, Ahmed pointed out. He described value added tax (VAT) as one of the “better available options” that could be used to address this need.
“I think it’s better if VAT is implemented at a region wide level in the GCC,” he added. “In a common trade region, it’s easier done this way. It’s possible, however, to implement it on a country level with some differences.”
The IMF highlighted progress made by the United Arab Emirates (UAE) and Kuwait in introducing energy pricing reforms. Still, real GDP growth in UAE is seen to slow in 2015 to three percent, from 4.6 percent in 2014.
On a positive note, Qatar and Kuwait are both forecast to record an economic growth of 4.9 percent and 2.5 percent in 2016, respectively.
Write to Joumana Saad at joumana.saad@argaamplus.com
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