Saudi Unemployment Up, Economy Remains Stagnant

The International Monetary Fund said Thursday it is advising Saudi Arabia to slow down some of its sensitive cutbacks as economic growth remains stagnant this year and unemployment rises.

IMF says non-oil growth is projected to dip below 2% in 2017 while overall economic growth is expected to be close to zero. The kingdom announced recently that unemployment had risen to 12.8%, AP reported.

The kingdom's powerful heir to the throne, Crown Prince Mohammed bin Salman, is pressing ahead with wide-reaching plans to overhaul the economy and diversify revenue streams following a sharp decline in oil prices since 2014. His Vision 2030 aims to reduce unemployment, boost private sector growth and wean the country off what he has described as its "addiction to oil".

To prepare the country for a prolonged era of lower oil prices, the government has moved to consolidate spending. It has also looked to increase revenues through the implementation of taxes and subsidy cuts.

While the kingdom's budget deficit is expected to narrow this year, IMF mission chief, Tim Callen, warned that Saudi Arabia's pace of fiscal consolidation "is probably too rapid" because households and businesses need more time to adjust.

"The planned fiscal consolidation should proceed more slowly," he told reporters Thursday during a webcast.

A Political Maneuver?

Still, he hailed the Saudi king's surprise decree last week to lift the ban on women driving. Saudi Arabia was the only country in the world to impose such a ban.

The reversal of the ban—which goes into effect next summer—is seen as an economic boost because it will free many women from the constraints of having to arrange their transportation to work. For others, it will also alleviate the costs of hiring a private driver or of having to rely on ride-hailing apps like Uber and its local competitor Careem to get around.

Yet while some were quick to hail the long-discussed move as a giant leap forward for women’s rights in conservative Saudi Arabia, longtime observers are reserving judgment on whether the step is likely to lead to greater reforms or was simply a political maneuver.

It remains unclear, these observers say, if the measure was driven by a true desire for social reform, economic necessity, or a desperate need for good representation in the West.

Clear Expectations Needed

Government statistics released earlier this week show that women make up the overwhelming majority of job seekers in Saudi Arabia. Also, around 34% of Saudis seeking employment are between 25 and 29 years old. That number is expected to grow with half the population under 25.

"It's not surprising that unemployment has not come down given the weak growth of the non-oil economy," Callen said.

Saudis struggling to find work will also have to contend with government plans to introduce a value-added tax next year. In line with IMF recommendations, the kingdom has already put in place a sin tax on tobacco, soft drinks and energy drinks, and lifted some energy subsidies.

Callen said the IMF is advising the Saudi government to "set clear expectations about limited options in the public sector" where the bulk of Saudis are employed. The public wage bill eats up around 45% of total government spending.

Yawning Budget Deficits

The collapse in oil prices in 2014 has forced the kingdom to raise billions of dollars in international debt, including another $12.5 billion bond last week, and plough through more than $250 billion in reserves to help fund yawning budget deficits, FTonline reported.

The finance ministry’s aggressive mixture of cost cutting and revenue raising is set to narrow the fiscal deficit from 17.2% of gross domestic product in 2016 to 9.3% of GDP this year.

Saudi officials intend to review fiscal targets regularly to account for “changing economic and social conditions”, the IMF said. GDP growth, which declined to 1.7% in 2016, is expected to fall to 0.1% this year on lower oil production, the IMF said.

Official statistics this year have shown a contraction of 1% in GDP growth in the second quarter, following a 0.5% decline over the previous three months. Unemployment among Saudi nationals rose to 12.3% last year, compared with 11.5% in 2015. Youth unemployment is at 40.5%.

Non-oil growth in the second quarter also remains weak at 0.6%.