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IMF says Saudi Arabia's economic transformation is still an oil story
SAUDI Arabia's efforts to shore up public finances and revive economic growth are still pretty much dependent on oil prices, even as the kingdom tries to reduce its reliance on revenue from crude exports.
The world's biggest oil exporter will need crude prices to average almost US$88 a barrel this year to balance its budget, according to the latest IMF economic outlook released on Wednesday in Dubai. That compares with US$70 in the previous forecast in October. Brent crude, an international benchmark, is currently trading above US$70 a barrel, the highest level since 2014.
The increase in the so-called breakeven price reflects the government's plan to boost public spending to a record this year in an attempt to revive economic growth.
The latest IMF data sees Saudi Arabia's economy expanding 1.7 per cent in 2018, after contracting 0.5 per cent last year. But the rebound is mainly driven by higher government spending, the model that sustained the kingdom's economy over more than four decades.
"This expected acceleration in growth is not a free lunch - the government is picking up the bill," said Ziad Daoud, chief Middle East economist for Bloomberg Economics. "The old model of an economy driven by government spending and financed by oil hasn't really changed." Middle Eastern oil exporters had to constrain government spending in recent years after crude prices slid in 2014. Now that oil is trading around US$70 a barrel, budget deficits are starting to shrink for most countries.
Cumulative deficits in the Gulf Cooperation Council, the six-country bloc that includes Saudi Arabia, the United Arab Emirates and Qatar, will fall to about 2 per cent of gross domestic product in 2019 from almost 11 per cent in 2016, according to the IMF.
But the non-oil balance, which strips out revenue earned from hydrocarbon exports, gives a better picture about progress in diversifying government revenue. For Saudi Arabia, the shortfall is expected to rise to about 39 per cent of the non-oil gross domestic product in 2018 compared with 37 per cent last year, IMF data showed. BLOOMBERG