IMF urges Saudi action on domestic energy prices and wage bill

The Saudi economy is forecast to keep expanding strongly this year, showing little impact from the oil price drop, according to the IMF

The International Monetary Fund has urged Saudi Arabia to reduce domestic energy subsidies and its public sector wage bill as the world’s top oil exporter wrestles with plunging crude prices.

Oil prices fell to a more than six-year low near $42 a barrel last month, while Saudi government spending increased after the king ordered bonus salary payments in January following his accession to power.

The Saudi economy is forecast to keep expanding strongly this year, showing little impact from the oil price drop, the IMF said on Wednesday after consultations with the kingdom, but it urged it to adjust its fiscal position.

The fund said in June it projected Saudi growth this year to be 2.8 percent, falling to 2.4 percent next year, and that the government will likely run a deficit of 19.5 percent of gross domestic product in 2015.

Tim Callen, IMF mission chief to Saudi Arabia, told reporters that robust Saudi second quarter GDP growth suggested the annual rate of increase in economic activity may be slightly higher than forecast.

However, while the government’s high level of reserves and very low public debt mean it could continue to weather reduced oil revenue for several years, it should take steps now to control spending via economic reforms, the fund said.

It stressed the need for measures including higher domestic energy prices, long-term reductions to the size of the civil service, an expansion of non-oil revenue via land and value added taxes, and reforms to boost private sector employment.

“We think higher energy prices are needed. There will be benefits to that both on fiscal side and in terms reducing the growth of energy consumption, but it needs to be done as part of a complete package that well communicated to the public,” said Callen.

He added that the government should make efforts to identify those likely to be most affected by price increases, including low-income households and energy-intensive businesses, and look at ways to help them adjust to subsidy cuts.

A Saudi newspaper reported this month that the kingdom was looking more closely at cutting gasoline subsidies after the United Arab Emirates did so last month.

Allowing them to rise would be one of the biggest economic reforms in the country for years and a highly politically sensitive one as many Saudis regard cheap fuel as their right as citizens of a major oil producer.