WASHINGTON, (Reuters) – The outlook for Saudi Arabia’s economy is positive as it confronted the global financial crisis handily, the International Monetary Fund said on Friday, noting gross domestic product not related to oil will likely grow 4.5 percent this year.
The fund’s executive board also said the country’s banking system is fundamentally sound, and the credit outlook has recently improved.
But the board, which had bilateral discussions with Saudi Arabia in July, said “vulnerabilities remain, especially from the volatility of oil prices.”
The country handled the crisis with “strong and timely policy measures, particularly the large and well-targeted fiscal stimulus and the skillful conduct of monetary policy,” the IMF said. It also supported the country’s plans to unwind the fiscal stimulus and “return spending growth to sustainable spending levels.”
The growth in non-oil GDP will be supported by an expansionary fiscal stance and a pick-up in credit, the IMF said, but it raised concerns about resulting inflation.
“While the current monetary stance is appropriate, excess liquidity will need to be mopped up in case inflationary pressures emerge,” the directors said.
Inflation should remain at about 5 percent this year due to persistent increases in rent and food and also due to “an expansionary fiscal and accommodative monetary stance.”
“Beyond 2010, inflation would gradually decline in line with the expected rise in global interest rates and the gradual exit from the fiscal stimulus,” the IMF said.
The key risk to the economy is a sharp decline in oil prices, the IMF said, though revenues are strong now.
“Both the fiscal and external accounts are projected to improve, reflecting an improvement in oil revenues,” it said.
The fund also supported “efforts to slow the growth in domestic consumption of oil products, noting that a comprehensive reform of the subsidy system would contribute to lower fiscal costs