“The outlook remains broadly positive” despite a projected one percent contraction in GDP (gross domestic product) this year due to lower oil production, the IMF executive board said in the report. It noted that nonoil GDP — the appropriate measure of job-creating economic activity in oil-exporting countries — is projected to grow by 3.3 percent in 2009, supported by an expansionary fiscal stance. However, lower oil production would lead to a contraction in overall GDP of almost 1 percent for the first time since 1999. Inflation is expected to retreat to about 4.5 percent. The fiscal and external accounts are projected to be in surplus, albeit at a much lower level, owing to a fall in oil revenues and the expansionary fiscal stance. There are some downside risks associated with the speed and depth of global recovery and the normalization of global financial markets. IMF directors commended the Kingdom “for their leadership role in stabilizing world oil markets by maintaining their capacity expansion plans despite lower oil prices,” the report said. The IMF said the country’s banking system remains on firm ground. The directors welcomed the measures taken to enhance bank liquidity and stabilize the inter-bank market. They commended efforts to further strengthen the financial regulatory and supervisory frameworks, including measures to improve banks’ risk management systems, implement remaining Financial Sector Assessment Program (FSAP) recommendations, and assess the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework. These measures have helped the banking system to remain profitable and well capitalized. The directors approved of the exchange rate peg between the US dollar and the Saudi riyal. They felt that the peg has provided a credible and stable nominal anchor and contributed to macroeconomic stability. “Some directors encouraged the authorities to consider a more flexible exchange rate regime for the Gulf Cooperation Council monetary union,” the report said. The directors also encouraged progress toward a monetary union by developing operational responsibilities and the governance structure of the future central bank, harmonizing macroeconomic statistics and establishing an efficient payments system. In view of the policy constraints posed by the peg to the US dollar, the IMF directors see fiscal policy as key to macroeconomic stability and nonoil growth. They commended the authorities for their decisive fiscal response to mitigate the impact of the global recession on economic activity. The fiscal stimulus package, which was the largest relative to GDP among G20 countries, “appropriately focused on capital spending and will contribute both to diversified domestic growth and the global recovery.” At the same time, the directors stressed that fiscal policy would need to be managed flexibly to safeguard medium-term sustainability, and that spending should be adjusted once the recovery has taken a firm hold.
