IMF urges Saudi Arabia to reduce oil dependence (UPDATED)

2015 August 19 (Wednesday) 12:46:58

International Monetary Fund (IMF) has urged Saudi Arabia to reduce its dependence on oil, because of slump of price and very high state expenses, which exhaust resources of the Kingdom.

IMF has urged to make wide-scale financial changes and diversify the entire economy to stimulate economic growth and create jobs.

IMF also offers to introduce VAT or land tax.

It is expected that this year growth of real GDP of Saudi Arabia will slow down to 2.8% and in 2016 it will drop to 2.4%, because the state costs will have to be reduced in proportion to the price decline. This could hardly be done, because this year budget deficit could reach 19.5% of GDP. Earlier deficit was expected to constitute 5% of GDP.

In 2014 the Kingdom made $631 million a day with the oil price of $100 per barrel, but now the profit is only $340 million a day with the similar volumes. The analysts polled by Financial Times say that in 2015 the deficit will reach $130 billion.

The Kingdom was forced to issue bonds to the amount of 20 billion Rial ($5.33 billion) to fund the budget deficit and it is planned to borrow billions to maintain the expense plan.

IMF experts believe that the bank system of the Kingdom is in good condition and could withstand low oil price and poor growth.

IMF claims that now the fixed currency rate is a good strategy, but claims that budgetary consolidation is needed to support the tie-in in the long-term.

Unemployment in Saudi Arabia is still high and number of able-bodied population grows. The birth rate in the Arabic oil producing countries has been high for many years and the fact that over 50% of population in Saudi Arabia is younger, than 20 years is very important. In Saudi Arabia many young people simply cannot find work, therefore there is a risk of support of various extremist movements by young people.

Some countries of the Persian Gulf take steps to change their economy to reduce dependence of the economy on oil.

For instance, this month UAE has tied up local fuel prices to the world market prices. It also plans to introduce VAT and corporate profit tax.

Saudi Arabia has found a good way out of the slump of oil prices. Kingdom has decided to increase diesel fuel supplies to the world market.

Saudi Arabia is the biggest petrol consumer in the Near East, over 25% of total volume of produced oil (over 10 million barrels a day) is consumed within the country. All refining plants of the Kingdom started consuming more oil, because of price decline and its excess at the world market. In early August 2015 Saudi Arabia offered 2.8 million barrels of diesel fuel as part of the tenders through Aramco Trading Co, reported Reuters.

The fuel has very low sulfur content and this volume is equal to Japan’s consumption within 3.5 days.

Till 2010 Saudi Arabia did not export diesel fuel, but in 2014 its export exceeded 300,000 barrels a day.

The diesel fuel is first of all exported to the European countries as well as India and South Korea.

According to the new studies “Sophisticated Approach: Saudi Arabia Goes Beyond Crude Oil” published in Energy Policy magazine, the Kingdom plans to diversify its economy and it is going to produce oil products.

In order to make these changes, Saudi Arabia will have to move forward in its economic development. –0—