The Kingdom’s economic performance has been exceptionally strong and the outlook remains buoyant, according to the International Monetary Fund (IMF).

Inflation would likely remain at around 5 percent, although the IMF urged Saudi authorities to monitor it closely for signs of economic overheating.

In its annual review of Saudi Arabia, the IMF also said overall real GDP is estimated to have grown by 7.1 percent in 2011, with 8 percent growth recorded in the nonoil sector — the highest since 1981 — and private sector growth at 8.5 percent.

Masood Ahmed, director of the Middle East and Central Asia Department, commented: “Oil production has been raised to ease pressures on global oil prices, and increased government spending coupled with accommodative monetary policy has supported continued acceleration in nonoil activity.”

Reacting to the IMF’s observations, Jarmo T. Kotilaine, chief economist at the National Commercial Bank (NCB), said: “The main challenge for Saudi Arabia is the extreme uncertainty of the global backdrop.”

The IMF report also said Saudi Arabia has provided important support to the global economy during a period of high global uncertainty, including through its actions in stabilizing the global oil market.

It pointed out that higher imports and increased workers’ remittances linked to the strong growth of the Saudi economy, together with expanded financial assistance have exerted a positive spillover and helped support other economies in the region and beyond.

Commenting further on the IMF’s observations, Kotilaine added: “The main challenge for Saudi Arabia is the extreme uncertainty of the global backdrop. Should Europe and the US manage to muddle through without major disruptions, private sector confidence would probably remain strong.”

In that case, he said robust private sector activity, fueled by elevated bank lending and capital market activity, would provide a third pillar to the strong growth drivers provided by the hydrocarbons sector (with probably continued resilience in prices and production) and government spending.

This might necessitate some vigilance, although actual overheating seems unlikely, the economist said.

Inflation looks relatively range-bound thanks to external growth factors and credit growth is still moderate by historical standards, he added.

“On the likelier scenario that there will be at least some exogenous disruptions, market confidence will be repeatedly tested and overheating concerns seem exaggerated. If anything, private sector and capital market activity would experience renewed volatility, even if public sector spending, underpinned by at least some oil sector resilience, would probably translate into growth rates fairly close to their historical trend. A major euro zone crisis would be a game changer, potentially bringing back echoes of 2008-9,” Kotilaine said.

Basil Al-Ghalayini, CEO of BMG Financial Group, added: “During last year, we have noticed the high government expenditure coupled with oil prices increase have created temporary boom in the Saudi economy.

That pushed investors and traders to channel the bulk of their liquidity to play the local stock and properties markets. That by itself has created an inflationary pressure on these assets classes’ prices. However, now there are some concerns about the instability in the euro zone and the slower growth rate in Asia, especially in major oil importer economies such as China, which may put some pressure on the Saudi economic growth.”

The IMF report said fiscal and external surpluses are expected to remain very strong at almost 17 and 27 percent of GDP, respectively.

The report said while there has been progress on diversification, the Saudi economy remains dependent on oil exports, and growth has been driven mainly by factor accumulation. Targeted government investment alongside product and labor market reforms can facilitate a more dynamic private sector and stimulate job creation for nationals.

The statement added: Taking advantage of the strong state of the economy to advance the reform agenda and further strengthen institutions will help sustain growth in the years ahead. While there has been progress on diversification, the Saudi economy remains dependent on oil exports, and growth has been driven mainly by factor accumulation. Targeted government investment alongside product and labor market reforms can facilitate a more dynamic private sector and stimulate job creation for nationals.

A strong and resilient financial sector also supports this process, with the 2011 Financial Sector Assessment Program (FSAP) Update providing a number of options that together with the ongoing implementation of Basel III will further strengthen risk management and promote capital market development.