Saudi Arabia’s government is spending more than it should do if it wants to preserve the country’s oil wealth for future generations, the International Monetary Fund (IMF) said in a report released on Tuesday.
“While the government has built significant policy buffers, fiscal spending is above the level consistent with an intergenerationally equitable drawdown of oil wealth,” the Fund said in an annual assessment of the Saudi economy.
The IMF did not specify an appropriate level of spending, but said the government should be flexible in providing social welfare benefits, broaden its tax base and ensure its expenditure was efficient.
Partly in response to unrest in the Arab world, Saudi Arabia boosted spending to a record SAR804 billion ($214 billion) in 2011, 39 per cent more than initially planned and 23 per cent higher than in 2010, its fastest growth in a decade.
In May, Finance Minister Ibrahim Alassaf said there might be a bit of extra spending this year, adding that the Kingdom’s fiscal position was comfortable.
The OPEC member, which overshot its annual budget plans by an average 23 per cent in the past decade, outlined spending of SAR690 billion in its 2012 budget.
Due to heavy spending, the Gulf country’s dependency on oil has risen notably. The price of crude that is needed to balance the government budget is projected to rise to $98 per barrel by 2016 from an estimated $80 in 2011, the IMF said in April.
However, robust oil prices, currently above $110 per barrel, have been helping to boost Saudi Arabia’s fiscal cushion. The central bank’s net foreign assets rose to a record $591 billion in June.
“We were able in the past few years to formulate medium- range fiscal policies,” Alassaf told Al Arabiya television on Tuesday when asked to comment on the latest IMF report.
“And the reason is because we built suitable reserves, especially investments that allow us to implement fiscal policies even if the oil prices fluctuate as we have witnessed in the past,” he said.
Other parts of the report praised Saudi Arabia’s economic policies, including its help to stabilise global oil markets in 2011 and commitment to provide $15 billion of additional resources to the IMF.
The Fund said the Kingdom’s near-term economic outlook was broadly favourable, keeping its 2012 growth forecast at six per cent. Adverse spillovers from unrest in the region and the Euro area crisis have been limited so far, it added.
The IMF also underlined the need to prevent any inflation pressures caused by robust growth through a proactive use of liquidity and macroprudential policy tools, raising its 2012 forecast to 5.2 per cent from 4.8 per cent seen in April.
Saudi annual inflation slipped to 4.9 per cent in June, its lowest level since August 2011.