Arabian Business, Thursday, May 16, 2019 | Ramadan 11, 1440
IMF urges Saudi Arabia to mull VAT rate increase
Economic reforms in Saudi Arabia have started to yield positive results,
with non-oil growth picking up and female labour force participation and
employment increasing, according to the International Monetary Fund (IMF).
The IMF hailed the successful introduction of value-added tax, saying it has
underpinned an increase in non-oil fiscal revenues.
It added that consideration should be given to raising the rate from 5 percent,
which is low by global standards, in consultation with other GCC countries.
In a new report on the Saudi economy, the IMF noted that energy price reforms
have helped reduce per capita consumption of gasoline and electricity, measures
have been introduced to compensate low and middle-income households for the
higher costs resulting from reforms, while fiscal transparency has increased.
Reforms to the capital markets, legal framework, and business environment are
also progressing well but challenges remain, it added.
The report said Saudi government spending has risen, supporting growth but
raising medium-term fiscal vulnerabilities to lower oil prices.
"Fiscal consolidation is needed to reduce these vulnerabilities. More generally
the economic footprint of the public sector is still large. The unemployment
rate of nationals remains high. Job creation is a key challenge identified under
the government’s reform program. To deliver a diversified, productive and
competitive economy, reforms need to make Saudi nationals more competitive for
private sector jobs, raise foreign direct investment, and increase the
availability of finance for young and growing companies," the IMF added.
Its statement of the 2019 Article IV Mission to the Gulf kingdom said economic
outcomes improved in 2018.
Real GDP growth rebounded to 2.2 percent after contracting in 2017. Real oil GDP
increased by 2.8 percent (3.1 percent decline in 2017), while non-oil GDP growth
rose to 2.1 percent (1.3 percent in 2017).
Government spending increased, but the exit of expatriate workers and dependents
appears to have held back growth, it added.
Real non-oil growth is expected to further strengthen to 2.9 percent in 2019.
Recent monthly indicators have been positive and the increase in oil prices
since the turn of the year is boosting confidence.
The fiscal deficit narrowed in 2018 to 5.9 percent of GDP, the IMF said, adding
that despite the budget surplus in the first quarter, the deficit is expected to
rise to 7 percent of GDP in 2019.
"If oil prices are lower than assumed in the government’s budget plan, the
country would face large fiscal deficits unless spending was reduced, but from a
starting position of weaker fiscal buffers than in 2014," its report noted.
It added that labour market reforms should focus on areas to encourage Saudi
nationals to work in the private sector and companies to hire them.
Saudi authorities should clearly signal that government employment will not
increase in the future so that the wage at which workers are willing to accept a
private sector job is lowered, the IMF said.
It also urged the kingdom to strengthen education, training, and career
development to equip students with the skills in demand in the private sector
while also increasing the mobility of expatriate workers through reform of the
IMF official also called for regulations to be reviewed to ensure there are no
impediments to female employment.