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SAU-Growth-Strategy.pdf

2017

GROWTH STRATEGY

Saudi Arabia

Final: July 1, 2017

Page 1

2017 Growth Strategy – Saudi Arabia

2017 Hamburg Growth Strategy

Table of Contents A..... Economic Objective and Context……………………………………………………………………………………………………. 2

B. Implementation of Past Growth Strategies………………………………………………………………………………………3

C. Major New Policy Actions Supporting Growth - Hamburg Summit…………………………………………………..5

C1. Macroeconomic Policies and Infrastructure Investment…………………………………………………………….5

C2. Structural Reform and Other Actions to Foster Strong, Sustainable Balanced, and Inclusive

Growth………………………………………………………………………………………………………………………………………8

Annexes…………………………………………………………………………………………………………………………………………….13

Annex 1. Key Economic Indicators………………………………………………………………………………………………………….13

Annex 2. Implementation of Past Growth Strategies – Hangzhou, Antalya and Brisbane commitments….14

Key Commitments………………………………………………………………………………………………………………………….…..14

Key Commitments for Monitoring Purposes…………………………………………………………………………………..14

Non-key Commitments……………………………………………………………………………………………………………………...27

Annex 3. Major New Policy Actions Supporting Growth – Hamburg Summit……………………………..……….…..41

Annex 4. Past Commitments – St. Petersburg Fiscal Commitment………………………………………………..……….. 43

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

A. Economic Objective and Context

Saudi Arabia’s economic policies continue to focus on achieving higher economic diversification and

growth over the medium term, while safeguarding macroeconomic and financial stability. Thanks to a

prudent mix of macroeconomic policies and solid fundamentals, supported by sizeable fiscal buffers and

a resilient financial system, the Saudi economy has faced the recent external challenges from a position

of strength. Considering the timely policy response, the Saudi economy grew by 1.7% in 2016, despite the

protracted negative oil price shock accompanied by an increase in local energy prices and other measures

to rationalize government spending. Growth prospects in 2017 point toward slower economic growth,

mainly because of the decline in oil production in line with the agreement with major oil producers.

Driven mainly by the drop in oil revenue, the fiscal deficit in 2016 was about 12.4 % of GDP and the current

account balance was in deficit of 3.9 % of GDP in which both variables showed some improvement

compared to 2015. The government debt at the end of 2016 was around 13 percent of GDP, still one of

the lowest debt levels in the G-20.

As one of the Executive Programs of the Vision 2030, the government announced the Fiscal Balance

Program (FBP)1 to provide intense scrutiny of government finances and acting as a spur to increased

efficiency in order to develop a more effective government. The FBP aims at implementing a targeted

social spending program, while making the economy more competitive. In addition, fiscal space can be

created due to reforms in the social welfare system to enable long-term investment programs to ensure

a successful delivery of the Vision.

While the financial sector witnessed little credit growth in 2016, the Banking Sector performance

remained strong with return on equity of 12.6%, return on assets of 1.8% and Capital Adequacy ratio at

19%. The Banking Sector Non-Performing Loan ratio was 1.4% with a coverage of 166%. The liquidity

position had improved considerably with LCR at 199% and NSFR at 124% by the end of Q4 2016.

Over the medium-term, growth prospects point towards higher growth underpinned by structural reforms

intended to enhance economic resilience while preserving macroeconomic stability. To this end, the Saudi

government has recently embarked on a package of ten additional Executive Programs to achieve these

central objectives by implementing a number of reforms with a view to improve the business

environment, bolster job creation for Saudi nationals, and increase the role of the private sector in the

economy — especially the small and medium enterprise (SME) sector. More specifically, there is a clear

focus toward implementing several structural reforms guided by Vision 2030 and its implementation

programs, including the National Transformation Program (NTP), to transform the Saudi economy into a

more efficient and diversified economy. The Vision 2030 sets a roadmap for a deep and ambitious socio-

economic change in the Kingdom, whereas the NTP set out specific commitments of the government’s

ministries and other entities for the period through 2020. Therefore, the payoff of these structural

reforms, as it is the case in most countries, is expected to fully materialize in the medium-term.

1 For more details on FBP, please visit http://vision2030.gov.sa/sites/default/files/attachments/BB2020_EN.pdf

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

B. Implementation of Past Growth Strategies

The implementation of key commitments under the past growth strategies is progressing well in general,

albeit with varying degrees of speed based on the nature and complexity of the needed reforms. The new

progress in implementing these commitments includes:

 Increase competition through improving the business climate and adopting new policies for the

privatization of certain public sector services and activities.

 On employment, efforts will continue to lower unemployment rate, enhance technical and

vocational training, boost female labor force participation, and strengthen the private sector

commitment to employ Saudis through incentives and efficient government interventions.

 Implement the programs under the Vision 2030 (the National Transformation Program, the Fiscal

Balance Program, the Human Capital Program, the Privatization Program, and the Program for

Strengthening Public Sector Governance).

 On the commitment to promote trade, Saudi Arabia's trade strategy emphasizes more openness

to the rest of the world which facilitates dynamic economic gains through agreements with a

number of countries, especially member countries of the G-20. Examples of such agreements are

those in the context of China's Silk Road project and the cooperation initiative with Japan.

 A macro-fiscal unit has been established within the Ministry of Finance, which will be critical in

improving macro-fiscal analysis and facilitating the development of a formal medium-term fiscal

framework.

 In order to improve asset-liability management and ensure an effective financing of the budget,

a Debt Management Office has also been created within the Ministry of Finance.

 Specialized Credit Institutions will continue to deliver on their respective roles in financing.

 As part of its role in delivering upon the National Transformation Program and the Saudi Vision

2030, the Ministry of Labor and Social Development and its affiliate entities are currently

designing, developing and managing several programs and initiatives aiming to reform the labor

market. The main programs include:

o An updated Nitaqat program, aiming to refine nationalization rates at a granular level to

enable it to fit each private enterprise abilities, capabilities and needs, in line with national

strategic directions and aspirations.

o Doroob online training portal was launched to help equip school and university graduates

acquire skillsets necessary for working in the private sector.

o The National Labor Gateway (Taqat) was established, which is Saudi Arabia's online

employment platform that registers labor demand and supply. lstiqdam (foreign labor

visa request) service was redesigned to ensure that all jobs created by the Saudi economy

are offered on Taqat to nationals before approving lstiqdam request for the job.

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

o GOSI launched the unemployment insurance scheme (SANID). The main objective of introducing such scheme is to protect Saudi employees mainly in the private sector from the consequences of loss of employment. The implementation of SANID is progressing well, were the number of employees’ subscription increasing rapidly.

o Expanding employment opportunities with the Job Creation Employment Commission (JCEC): In the short term, the JCEC is focusing on telework and flexible work arrangements. These activities and others will allow the JCEC to fulfill its mandate by helping to define and shape labor market strategy and by maintaining important private-sector relationships. Through these areas of focus, the JCEC can help the Kingdom accelerate job creation, promote employment in diverse sectors and address regional unemployment disparities.

o The wage protection program, aiming at protecting labor rights related to wages, and increasing the attractiveness of employment in the private sector.

o Job stability incentive programs, where HRDF rewards nationals who leave Hafiz and join the private sector with financial rewards with up to 24,000 SR in installment during the first two years in the job.

o Classical training support programs, where HRDF subsidizes training of nationals in specialized colleges and training institutes. The contribution amount and duration differ based on the training program.

o Classical employment subsidy programs, where HRDF contributes 50% of the national's monthly salary (maximum of 2000 SR) for two years to encourage nationalization of private sector entities.

 Moreover, in April 2016, SAMA launched "SADAD Account" which is a secure electronic and non-

card based online payment service. It allows user to make real time purchases from online

merchants without the need for cards or cash. It will act as a system that will facilitate direct debit

from the consumer’s bank account earmarked for e-commerce. This service is expected to

contribute positively to Saudi Arabia economic activities. In particular, it is the first step in

digitizing conventional payment options, involving innovation and enablement of mobile

payments. It will also lower the dependency on cash in the economy due to increased penetration

of e-Payments and accelerated growth of e-commerce economy. In addition, this service will

increase SMEs and ‘home-based’ entrepreneurs and enable SME’s to move away from Cash on

Delivery and regular bank transfers.

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

C. Major New Policy Actions Supporting Growth - Hamburg Summit Macroeconomic management has been focused not only on regulation measures but also on the

institutional level. Indeed, at the regulation level, a countercyclical approach has been recently adopted

in order to reach a balanced budget by 2020. Moreover, the control system has been strengthened and

public expenditures has been enhanced through new measures, such as the Fiscal Balance Program, Fiscal

Stimulus Program, and the establishment of the Bureau of Spending Rationalization.

C1. Macroeconomic Policies and Infrastructure Investment

The overarching objective of the Vision 2030 initiative is to build a more diversified economy that is

protected from the volatility of the global oil market and provides jobs and higher income to Saudi

nationals. This will be achieved through reforms to enhance education and training, improve business

environment, support growth of SMEs, and fully utilize the country’s competitive advantage to help

increase non-oil exports. In addition, the government will undertake an ambitious program of

privatization of some governmental entities to maximize investment capacities and improve governance,

transparency, accountability, and efficiency. This will include selling a minority stake in Aramco in the

public equity markets and transfer of some of the government’s assets to the Public Investment Fund

(PIF), which is expected to become the largest sovereign wealth fund in the world.

The government has been adopting a sizable but gradual fiscal consolidation that combines streamlining

recurrent spending, enhancing the efficiency of public investment, and broadening the revenue base by

boosting non-oil revenues. As mentioned above, the authorities are targeting a balanced budget by 2020.

In this regards, the Fiscal Balance Program (FBP), the 2017 budget, and the Quarterly Budget Performance

Report provide greater clarity about the government’s fiscal policy intentions. This should help businesses

and consumers better plan their decisions and provide more certainty to investors. The FBP rightly focuses

on a range of reforms to reduce the fiscal deficit. These include new non-oil revenue measures, further

energy and water price reforms, and continued restraint of current and capital spending.

On Rationalizing the government spending, the Bureau of Spending Rationalization (BSR) has been

established to help government entities identify opportunities to increase the efficiency of operational

and capital spending. Capital projects are being prioritized and cost savings identified, while on the

operational side, savings are being sought through improvements to procurement processes and a re-

evaluation of programs. The following fiscal initiatives are being pursued:

 The 2017 budget projects a reduction of total government expenditure by about five percent from

2016 levels, to reach SAR 890 billion. The priority in the allocation of fiscal resources in 2017

continues to be given to development projects, which constitute more than 25 percent of planned

government spending.

 The establishment of the "Citizen Account" which provides direct cash payment to low and middle

income households in order to offset the impact of the energy price increase.

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

 The government is in the process of introducing an excise tax system as well as finalizing the

necessary arrangements for the introduction of a value-added tax (VAT) by 2018 in line with the

GCC countries.

 The aim to implement all energy price reforms over a five-year period to complement non-price

measures and to improve energy and water efficiency. Other non-oil revenue is targeted to be

increased.

 In addition to development spending envisaged in the budget, Specialized Credit Institutions (Saudi

Industrial Development Fund, Saudi Fund for Agricultural Development, Real Estate Development

Fund and the Saudi Credit and Saving Bank) are expected to continue with their respective roles in

financing different development projects by injecting more than SAR 49.9 billion.

 The authorities will continue to restrain expenditure by reducing the size of the civil service

workforce, decreasing the spending on wages and salaries, and to increase reliance on new revenue

sources. This will also be supported by the renewed emphasis on efficiency, transparency, and

accountability, particularly with regard to the management of public institutions and by the key

performance indicators for Ministries, the setting up of a National Project Management Office, and

increased scrutiny of new capital projects.

 Cognizant of the strategic importance of expanding and upgrading the country's economic and

social infrastructure in order to realize the goals of the Kingdom's Vision 2030 initiative and the

objectives of the National Transformation Program 2020, Saudi Arabia has made large

commitments to investment in a variety of infrastructure projects. Some of these projects are large

and their implementation had started some years ago. Certainly, investment in infrastructure

projects provides vital support to economic growth and social development.

 The government also realizes that there is an urgent need to broaden the revenue base, given the

fact that a broader base of non-oil revenue is essential for a sustainable fiscal position. In raising

additional revenue, the government is seeking to do so in a way that minimizes negative economic

impact. The year 2016 saw the implementation of the first phase of non-oil revenue enhancement,

which included increases in visa, municipality, and rural fees. In 2017, the levy on all expats will be

gradually revised upwards, which will provide an additional signal to employers to hire more Saudis.

In addition, a fee on dependents will also be levied. The policy according to which neither Saudi

nationals nor foreign labor pay income taxes will remain in place. Overall, non-oil revenue is

targeted to be increased from SAR 169 billion in 2015 to SR 530 billion by 2020 and to one trillion

by 2030.

On monetary policy, financial regulation, and macro-prudential policy, a decline in liquidity occurred in 2016 due to several factors, including the low level of oil prices and the decrease in government spending. The 3 month SAIBOR has increased within 14 months from around 0.77% in August 2015 to around 2.4 % in October 2016. Therefore, SAMA took actions to reduce the volatility in the 3 month SAIBOR and to stabilize the 3 month inter-bank market. These actions include:

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

 In September 2016, SAMA introduced 7 and 28 day Repo at 2% and injected around 22 Billion Riyals in the market on behalf of government agencies.

 In October 2016, SAMA introduced 90 day Repo at 2% and reduced SAMA bills weekly issuance from 9 to 3 billion Riyals.

 In November 2016, SAMA approved and appointed Thomson Reuters to be the benchmark administrator and calculation agent for SAIBOR.

As a result, the SAIBOR went down from around 2.4 % in late of October 2016 to 1.8% as of February 2017.

Moreover, the SADAD Account e-commerce payment service provided by SAMA has now reached its

“market adoption phase’’ where the combination of a critical mass of merchants and a growing

customer base is supporting the expansion of the service. Furthermore, SADAD Bills service continues

to grow strongly. In the span of more than 10 years, SADAD has carried out substantial and notable

undertakings, with a billion of reconciled bills and a trillion Saudi Riyals were transacted using SADAD

Payment System. At end of March 2017, the gross transaction volumes have increased by 8.3% in the

past 6 months compared with the same period in 2016/15 and the values have increased by 6.2%.

Improving transportation infrastructure is an integral part in the government’s efforts to promote

private investment and enhance energy efficiency. Investments in infrastructure include the

continuation of mega-projects such as the Saudi Land Bridge project and the Riyadh and Jeddah metro

projects. It also includes enhancing logistics services through building a unique Regional Logistical

Hub, in addition to continue building ports capacity and improve their process and procedure. NTP

2020 sets several initiatives to improve the logistics services which include the following: development

of Multi-Modal Logistics Hubs in Yanbu and in Jubail Industrial Cities, removing trade restrictions on

air and truck transportation, and the localization and transfer of transport and logistics technology.

On the housing market, the Ministry of Housing has been tasked with 3 strategic objectives, one of

which is to “Stimulate the real estate supply and raise productivity to provide residential products

with appropriate price and quality” by, among other things, decreasing housing unit cost of gross

individual annual income from 10x to 5x by 2020. To increase affordability, REDF program aims to

offer, through participating banks, a mortgage package where the first SAR 500,000 of the mortgage

is priced at 0% interest.

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

C2. Structural Reform and Other Actions to Foster Strong, Sustainable

Balanced, and Inclusive Growth

In terms of structural reform, economic policies in Saudi Arabia are focusing on undertaking several

reforms that bolster job creation and promote private sector growth. In this regard, the government has

started various initiatives including the following:

 Decreasing the number of import/export documents: All stakeholders of the import/export process can now benefit from an officially implemented reform of decreasing the number of required documents to import into the Saudi Arabia from 12 to 4, and those of export from 9 to 3.

 Introducing the risk based inspection system. This diminishes the need to audit each and every shipment, increase efficiency of Customs and Ports, and decreasing the time and cost to import into the kingdom.

 24 hours’ customs clearance: Clearing Customs areas for import and export within 24 hours.

 One Stop Shops: The establishment of One Stop Shops for local and foreign investors in order to unify procedures across all licensing government agencies.

 Commercial Courts: The establishment of commercial courts in order to improve the judicial environment.

 Improving the electricity procurement procedures and enhancing the quality of hired contractors. Therefore, faster service and improved quality of getting electricity and installing meters.

 Removing requirement for company seal and thereby businesses are no longer required to have or provide proof of a company seal to Saudi government agencies or banks; this reform eliminates the need for businesses to find a seal designer and have a seal created, decreasing the time to start a business by 1 day, removing 1 procedure, and reducing the cost by approximated 50 SAR.

 Removing requirement for “under formation” bank account: Businesses no longer need to apply for a special “under formation” bank account at banks and provide proof of this account to government agencies. Eliminating this requirement reduces the time to register a business by 1 day and eliminates 1 procedure.

 Eliminate the need for physically picking-up the Articles of Association, instead it is automatically submitted online without scheduling an appointment.

 Eliminating paper-based business registration by introducing an online portal that registers companies using one single form in only one step between Ministry of Labor, General Organization for Social Insurance, and General Authority of Zakat and Income Tax.

 Automating the Municipality license to create an immediate license, and eliminating the need for physical application.

 Instituting unified ID number (700#): Finishing the implementation of the unified ID number (the 700 #) eliminates separate ID numbers for businesses at different government agencies (e.g. GOSI, Ministry of Labor, Ministry of Interior, Ministry of Justice, etc.).

 Reengineering Steps: Reengineering all steps to deal with construction permits to a total of 8 steps able to be completed via a new electronic portal across all relevant agencies within 16 days. New process makes the engineering offices responsible for monitoring and verifying completion of construction according the plans and regulations, increases the efficiency of GIS to including zoning information, and issues building completion certificate electronically, ensuring faster and easier inspection requirements. The process improves services provided and reduces the number of procedures for applying and issuing a building completion certificate.

Final: July 1, 2017

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2017 Growth Strategy – Saudi Arabia

 Case adjournments: Set a maximum cap on the number of adjournments (3 only) in commercial cases to emergency or unforeseen circumstances. This will help reduce bottlenecks and facilitate the issue of verdicts and judgements.

 Case management: Develop electronic case management tools for judges and lawyers. This will improve case management which will improve efficiency in the court, allowing faster time to issue a verdict.

 The Board of Grievances made judgments publicly available online and made it possible for anyone to attend trials in commercial cases in efforts to increase transparency and consistency in enforcing contracts and the quality of judicial processes.

 The Board of Grievances developed comprehensive and verifiable court statistics (clearance rate report and age of pending cases report) and published them on its website.

 The Board of Grievances have set time standards for the following court events: service of process, first hearing, filing of the statement of defense, completion of the evidence period, filing of testimony by expert, and submission of the final judgment.

 The Board of Grievances created a dedicated platform for initial complaints to be filed electronically.

 ESCWA Committee: Establish an ESCWA Committee in order to facilitate trade and transport.

 Crowdfunding: Developed a study to identify key incentives to develop sources of finance for SMEs.

 Saudi Arbitration: Activate the Saudi Arbitration Center and develop a campaign in order to motivate the private sector to use the service.

 Protecting Minority Shareholders: The issuance of the New Companies Law improving protection provided to minority shareholders.

 Certificate of Origin: The establishment of an electronic platform in order to send/receive electronic copies of the certificate of origin.

 The Ministry of Justice (MoJ) developed and published an electronic mechanism to receive complaints about errors incurred by notaries which are in turn linked to the court system.

 The General Authority of Zakat and Tax (GAZT) now accepts the online registration of companies without them being registered or having a bank account. Moreover, users of the online tax system can obtain their tax payment certificate (Zakat certificate) online from GAZT, without delays after validation of their online payment and full submission.

 Ministry of Commerce and Investment established bankruptcy committees and established a judicial department in the administrative court to adjudicate competition disputes.

 Revamping mechanisms for …