IMF's staff report on Saudi Arabia prepared for 2014 Article IV Consultation says: "Staff suggested that the fiscal adjustment could be achieved through a combination of expenditure and revenue measures."

The Report says: "On the revenue side, steps to increase non-oil revenues would help strengthen the budget position. Consideration should be given to a tax on higher-end property or vacant land, increasing fees/charges for government services, and an increase in energy prices (preferably coordinated at the GCC level)."

The report has estimated revenue foregone due to low domestic energy prices at about 10% of the country's gross domestic product (GDP).

The Report says: Staff recommended an upward adjustment of energy prices over the medium-term. This would help curb the rapid growth in domestic consumption, reduce existing incentives in the growth model towards energy intensive industries, and strengthen the fiscal position. In line with international experience, such a policy adjustment would need to be well-planned, phased over time, and clearly explained and communicated to the population and businesses. Although low

energy prices primarily benefit the better-off, an increase in energy prices would likely have an adverse impact on poor and vulnerable groups and compensatory measures would need to be put in place."

It continues: "Energy intensive industries would need time to adjust their production and cost structures to remain competitive. The potential inflationary impact would also need to be carefully managed. The authorities expressed concern about the macroeconomic and social implications of an adjustment to energy prices, and noted that the completion of public transportation projects would be a precondition for reforms."

Saudi Arabia has one of the highest levels of energy consumption per capita in the world and one of the lowest prices. The current energy pricing structure provides incentives for investment in energy-intensive industries, and domestic energy consumption has grown rapidly in recent years. To curb the rapid growth in energy consumption, the authorities are strengthening building and appliance energy efficiency standards, including in industry. Tighter vehicle emission standards and public transportation networks are planned over the medium-term. The authorities considered that these efforts will slow the growth of energy consumption over time.

The Report observes that t he fiscal surplus is expected to decline further this year and the budget is projected to move into deficit in 2015.

The fiscal consolidation that IMF staff had expected to take place in 2013 did not materialize, and it is important that the government now moves ahead and implements fiscal adjustment. An adjustment that reduces the non-oil fiscal deficit by about 3 percent of non-oil GDP a year during 2014–19 relative to the 2013 budget outcome would ensure that government deposits remain sufficient to manage a large drop in oil prices.