SAUDI ARABIA - Oct. 22 - IMF Urges To Speed Up Economic Reform.

A report in The FT says the IMF has called for the acceleration of economic reforms in the kingdom, warning that inaction will swell an already large public debt, put pressure on public finances and discourage investment. The IMF recommends that Riyadh speed up the implementation of a proposed income tax on expatriate workers, who make up 48% of total manpower, but also extend the tax to Saudis. It calls for measures to cut expenditure and strengthen controls over spending to eliminate extra-budgetary outlays. And it urges the authorities to make a clearer statement to the market of the timetable and steps to be taken to execute an announced privatisation policy.

The IMF warns that under an "unchanged policy stance" the economy over the next 5 years would remain vulnerable to a drop in oil prices, despite an expected pick-up in economic growth. The budget deficit would average about 4.5% of GDP and government debt, now at 95% of GDP, would continue to rise. The external current account would shift to a deficit and the Central Bank's net foreign reserves, now at about 20 months of imports, could decline to about six months of imports. The IMF report says: "Unless addressed effectively and expeditiously, macro-economic imbalances could weaken confidence, discourage investment and reduce non-oil growth, thus making it more difficult to achieve the employment objective". The IMF assessment reflects the kingdom's difficult economic challenges, which will be exacerbated by any prolonged period of low oil prices. The government has made efforts to restructure the economy but businessmen and economists say implementation has been frustratingly slow. With a budget that is dominated by wages and debt service payments, the government has little room to manoeuvre when oil prices drop. Economic growth, meanwhile, is not keeping up with the population increase of about 3.5% a year. Real GDP growth, according to the IMF, was a mere 1.2% in 2001 and is projected at only 0.7% in 2002.

But some of the IMF recommendations are controversial. Taxing expatriate workers, a move that the government aims to implement in two years, is seen as a way of bridging the gap between the wages of Saudis and expatriates and thus encouraging employment of locals. This is aimed at reducing a jobless rate of 10%, the IMF says. But some Riyadh officials say the move will be counter-productive, discouraging both local and foreign investment. It will not be extended, as the IMF advocates, to Saudi nationals because taxing locals remains too politically sensitive for the regime. Local economists say the "Saudisation" of the workforce is best achieved through changes in immigration policies and improving an education system that fails to prepare graduates for the job market. Saudis also are unlikely to take up menial jobs filled by expatriates. The IMF report sheds light on the size of spending outside the budget. In 2000, total oil export receipts reached $72 bn but the government reported oil receipts of $57 bn in the budget. The difference goes to the budget of Saudi Aramco, the state oil agency, and other off-budget expenses that local economists say includes the generous stipends to the 7,000-member royal family.