Saudi Arabia Addressing Jobs, Housing as Economy Rebounds

High oil revenues have created strong external and fiscal surpluses

Robust economy provides an opportunity to advance social priorities

Challenge is to ensure social initiatives do not compromise fiscal sustainability

With GDP projected to grow 6.5 percent in 2011, Saudi Arabia is working to consolidate its gains, focusing on economic diversification and sustained growth while seeking to help stabilize the international oil market. The authorities are also initiating new measures to address the economic issues facing this fast-growing country, such as high youth unemployment and growing housing demand.

To mark the first time the IMF’s annual assessment of Saudi Arabia’s economy has been published, IMF mission chief David O. Robinson sat for an interview.

IMF Survey online: What is the near-term outlook for the Saudi economy?

Robinson: The near-term outlook is very strong. There is a positive impact from higher oil prices, which started recovering in 2010 from their sharp drop the previous year. In addition, as unrest erupted in Libya, Saudi Arabia announced that it would increase its oil production in order to offset any shortfall in the market, and production has increased substantially in recent months. So oil revenues are increasing from both price and volume effects.

These high oil revenues have translated into a strong surplus in the fiscal accounts and a current account surplus of 20 percent of GDP. With no official external debt and reserves that amount to nearly 2½ years of import cover, the authorities can afford to invest in social initiatives.

IMF Survey online: What risks does the economy face?

Robinson: The key external risk to the economy is a large and sustained drop in oil prices. When oil prices fell sharply in the early 1980s and then remained low, Saudi Arabia ran fiscal deficits for almost twenty years, accumulating government debt of more than 100 percent of GDP. The economy is somewhat different now, with substantial buffers built up over the last several years. The authorities were able, for example, to respond in 2009 to the sharp fall in the price of oil as global demand fell by raising public spending levels, which provided important support for the private sector. But insofar as it accounts for 80-90 percent of fiscal revenues, oil will always remain a key risk.

More generally, there is also a risk of a pickup in inflation. Inflation has so far remained below 5 percent—despite pressures from imported food...