A construction crane sits above an illuminated highway leading past the King Abdullah financial district, center, in Riyadh, Saudi Arabia. Photographer: Waseem Obaidi/Bloomberg
The kingdom has raised billions of dollars in international debt, including a $12.5bn bond last week © Bloomberg

Saudi Arabia is considering easing austerity to spur growth as the kingdom battles recession and unemployment, the International Monetary Fund said.

The IMF, in its annual report issued after consultations with Saudi officials, said the authorities had indicated they were “considering the appropriate pace of fiscal adjustment given the weak growth”.

The IMF urged the government to push back its plan to balance the budget from 2019 to 2022 to allow for a smoother adjustment, given the kingdom’s ability to raise finance.

“A rapid fiscal consolidation is neither necessary nor desirable,” the IMF said.

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

The finance ministry’s aggressive mixture of cost cutting and revenue raising is set to narrow the fiscal deficit from 17.2 per cent of gross domestic product in 2016 to 9.3 per cent 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 per cent in 2016, is expected to fall to 0.1 per cent this year on lower oil production, the IMF said.

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

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

The government plans to boost the development of the private sector by targeting fiscal spending and streamlining regulations, the IMF said. The financing package for businesses development will cost around 1.5 per cent to 2 per cent of GDP a year through 2020.

While the fund praised Saudi Arabia’s commitment to reform plans, which follows IMF advice, it suggested that the government focus on implementation and expand the safety net for poorer citizens.

“They [the reforms] need to be well communicated and equitable to gain social buy-in to ensure their success,” the report said.

Some reforms have triggered a public backlash, such as initial water pricing increases and last year’s decision — now reversed — to cut civil service benefits.

The IMF suggested that the pace of the government’s plans to raise energy and water prices to international levels by 2020 could be “more gradual” to make sure compensation mechanisms are effective.

The government is setting up a household allowance to cushion the blow of higher utilities costs for poorer Saudis, who are accustomed to a cradle-to-grave welfare state.

Saudi Arabia, alongside the United Arab Emirates, its regional ally, has introduced an excise tax on tobacco and sugary drinks. They are also set to introduce value added tax set at 5 per cent in January.

The IMF called on VAT, once implemented successfully implemented, to be increased.

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