Saudi Arabia's outlook remains “broadly positive,” the International Monetary Fund said Tuesday. In its annual review, the IMF forecast though said Saudi economy would shrink by one percent this year, with gross domestic product from the oil sector expected to contract sharply by 10.3 percent. But the performance of the non-oil sector would likely remain robust and expand by about 3.3 percent, the IMF added. The IMF said the challenge for Saudi Arabia in the short term was to preserve financial sector stability and mitigate the effects on the domestic economy from the global recession. It also said inflation should ease to about 4.5 percent this year, from 9.9 percent in 2008. Saudi Arabia's economy remains solid and its banks have weathered the global crisis, the IMF said in a report Tuesday which also commended the world's leading oil exporter for helping stabilize oil prices. “The outlook remains broadly positive” despite a projected one percent contraction in GDP this year due to lower oil production, the International Monetary Fund executive board said in the report. The IMF also said the country's banking system remains on firm ground. “The banking system has weathered the global crisis. It remains profitable and well-capitalized with low non-performing loans.” The report emerged from consultations with Saudi Arabia which concluded on July 13. It was not clear if the impact of the dispute between two leading business groups, the Algosaibi and Saad groups, which has put an estimated $16 billion of loans from mostly Saudi and Gulf banks at risk, was calculated into the IMF's assessment of the Saudi financial system. IMF directors commended Saudi Arabia “for their leadership role in stabilizing world oil markets by maintaining their capacity expansion plans despite lower oil prices,” the report said. They also approved of the exchange rate peg between the US dollar and the Saudi riyal. “Some directors encouraged the authorities to consider a more flexible exchange rate regime for the Gulf Cooperation Council monetary union,” the report said. Meanwhile, the IMF nudged Gulf Arab states to make progress toward a Gulf Cooperation Council (GCC) monetary union by developing joint operational responsibilities, creating a governance structures of a future central bank and harmonizing economic statistics. “Some (IMF) directors encouraged the authorities to consider a more flexible exchange rate regime for the Gulf Cooperation Council monetary union, in consultation with other members of the union,” the IMF added. On July 7, GCC Secretary-General Abdul-Rahman Al-Attiyah was quoted as saying it was too early to talk about who will run a planned joint Gulf Arab central bank, but the 2010 start date for monetary union is still on track, he said.
