Algerians and Saudis need to diversify economy

19 de maio de 2016

São Paulo – Algeria and Saudi Arabia need to quickly adopt reforms to promote the diversification of their economies and reduce their dependency on oil. In documents containing analyses of both countries released this Thursday (19), the International Monetary Fund (IMF) warns of the deterioration of Algerian economy and suggests that Saudis must contain public spending.

According to the IMF, Algeria has USD 143 billion in international reserves and room to put reforms into effect. The Fund points out that the state exerts too much control over the economy and suggests that part of the reforms must reduce this presence and turn the business environment more attractive to the private sector.

Listing state-owned companies is one of the recommendations, as well as promoting exports of Algerian products instead of limiting imports. “The collapse in oil prices has exposed long-standing vulnerabilities in a state-led economy that is overly dependent on hydrocarbons. Thus far, the impact of the oil price shock on growth has been limited, but fiscal and external balances have deteriorated significantly”, says the document.

From May 1 to 12, an IMF delegation headed by Tim Callen visited Saudi Arabia. Like Algeria, the Gulf country was strongly affected by the fall of oil prices, with the product being its main source of revenue. The Gross Domestic Product (GDP) should grow 1.2% this year after posting a 3.5% increase last year. For this year, the Fund estimates that Saudi Arabia will have a current account deficit of 9% of GDP. Current account represents the trade transactions of the country with the world. The fiscal deficit is estimated to be 14% of the GDP and represents negative results in the government’s total revenues and spending.

In the last few months, Saudi Arabia has been formulating proposals to transform and diversify its economy. They are part of the “Vision 2030” plan, which covers, among other topics, the development of the capital markets, efforts to attract foreign direct investment, economy diversification, privatizations and concessions through PPPs (Public-private partnerships).

“Vision 2030 sets out the goal of an appropriately bold and far-reaching transformation of the Saudi Arabian economy to diversify growth, reduce the dependence on oil, increase the role of the private sector, and create more job for nationals. The supporting policies that will be announced in the coming months are expected to set out how these goals will be achieved”, says the Fund’s statement.

The document also says that the country needs to contain public spending, promote a fiscal adjustment, “adjust” energy prices and that the introduction of a value-added tax (VAT) is “important”. This tax should be put into effect in the next few years along other Gulf countries.

*Translated by Sérgio Kakitani