DUBAI: The International Monetary Fund (IMF) projects Saudi Arabia to swing to a fiscal deficit of 1.2% of GDP in 2023, from a surplus of 2.5% in 2022, it said in its latest assessment report on Wednesday.

The Saudi government has forecast a second consecutive budget surplus for this year, albeit narrower than in 2022.

Saudi Arabia’s economy grew 8.7% last year on the back of high oil prices, allowing it to record its first budget surplus in almost a decade. But cuts to production this year and lower prices are expected to hit oil revenues and weigh on growth.

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On Tuesday, Saudi Arabia and Russia said they would extend voluntary oil cuts to the end of the year, despite a rally in the oil market and analyst expectations of tight supply in the fourth quarter, sending prices higher.

Overall economic growth in 2023 is projected to slow sharply to 1.9% according to the IMF, with oil GDP growth to decline by 2.5% this year; non-oil GDP growth is projected at 4.9% this year.

“The outlook is positive – with non-oil GDP growth momentum expected to remain strong – despite an uncertain external environment,” the IMF said in its Article IV country report, adding risks to the outlook were balanced.

Government-led reforms and the growth of private investment in new sectors has supported non-oil economic growth in Saudi Arabia, a key element of Vision 2030, the kingdom’s economic transformation plan overseen by Crown Prince Mohammed bin Salman.

Vision 2030 is a vast economic transformation plan into which the government has been pouring hundreds of billions of dollars and aims to diversify the kingdom’s economy away from oil.

The IMF recommended maintaining the VAT rate at 15%, the highest among Gulf states, as well as energy subsidy reforms which should be accompanied by social programmes to limit the impact on vulnerable groups.