May 17, 2017 / 5:27 PM / 2 months ago

Don't tighten fiscal policy too fast, IMF warns Saudis

3 Min Read

The International Monetary Fund logo is seen inside its headquarters at the end of the IMF/World Bank annual meetings in Washington, U.S., October 9, 2016.Yuri Gripas/Files

DUBAI (Reuters) - The International Monetary Fund warned Saudi Arabia on Wednesday not to tighten fiscal policy too fast, saying rapid cuts to the government's budget deficit could damage the economy.

Tim Callen, head of an IMF team which held annual consultations with Saudi officials last week, said Riyadh's goal of balancing its budget was appropriate. Low oil prices in the past couple of years have pushed it deep into the red.

But Callen added, "The target of balancing the budget, however, does not need to be met in 2019 as set out in the Fiscal Balance Program given Saudi Arabia’s strong financial asset position and its low debt.

"A more gradual fiscal consolidation to achieve budget balance a few years later would reduce the effects on growth in the near term while still preserving fiscal buffers to help manage future risks."

Riyadh has pledged to eliminate the deficit, which totalled $79 billion last year, by 2020 through cuts to spending and energy subsidies as well as sharp increases in fees and taxes.

The strategy is working; the deficit shrank 71 percent from a year earlier to $6.9 billion in the first quarter of 2017, about half the government's original projection. But the austerity steps have slowed growth in the non-oil part of the economy to near zero.

The government's fiscal plan includes more energy price reforms as soon as this year, but Callen said that while such reform was important, "there is scope for a gradual implementation to give households and businesses more time to adjust."

In a sign that it is concerned about the economic slowdown, the government last month reversed one austerity step, restoring financial allowances for civil servants that it had cut in September.

It is not yet clear whether Riyadh is willing to relax austerity plans further to boost growth. However, authorities have said they plan an industrial sector stimulus package in the fourth quarter of 2017, which looks likely to involve some form of additional spending.

"The authorities are beginning to make good progress in identifying and reducing obstacles to private sector growth, including by reducing customs clearance times, making it easier to start a business, and moving toward completion of the new bankruptcy and commercial mortgage laws," Callen said.

Reporting by Andrew Torchia; Editing by Toby Chopra

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