The outlook for Saudi Arabia's economy is "broadly favorable", with real gross domestic product (GDP) expected to grow by six percent this year as the Kingdom benefits from increased oil revenues, prudent economic management and government spending, the International Monetary Fund (IMF) said Tuesday.

GDP grew 7.1 percent in 2011, the Washington-based lender said in a review of the Saudi economy. The Saudi non-oil economy grew by 8 percent during the year, the highest since 1981, the report added.

The Saudi real oil GDP was likely to grow by 4.5 percent this year, while the real non-oil GDP was poised to hit 6.5 percent, said the IMF executive board report which was concluded on July 2 in consultation with Saudi Arabia.

Despite increased economic activity, inflation stabilized at 5 percent as food inflation subsided and imports of capital goods and labor helped prevent bottlenecks from emerging, it added.

The IMF commended Saudi Arabia for providing important support to the global economy in 2011 by raising oil production to help stabilize global oil markets.

The commitment to provide $ 15 billion in additional resources for the IMF has also contributed to global stability, it said.

“Adverse spillovers from unrest in the region and the euro area crisis have been limited so far. Higher oil revenues have been used to accelerate domestic developmental objectives as well as to support other economies in the region and beyond,” the report added.

New initiatives to address pressing social issues such as unemployment, availability of affordable housing and SME financing, translated into an increase in real government spending of 20 percent.

“Nevertheless, despite increased spending and strong import growth, fiscal and external surpluses strengthened further in 2011 as oil revenues rose. Monetary aggregates grew strongly in 2011 and credit growth reached double digits as the economic expansion translated into increased demand for credit,” said the top financial body.

Consistent with the peg to the US dollar, monetary policy remained accommodative and policy rates remained unchanged. The banking system remained highly capitalized and liquid with improved profitability, it added.

The IMF in its report welcomed the Saudi authorities’ efforts to stabilize oil markets and noted the positive spillover to the region from the Kingdom’s higher growth, public spending, and expanded financial assistance.

Higher oil revenues, said the report, have strengthened fiscal and external balances and have boosted social spending and savings for future generations.

However, the IMF cautioned that the authorities needed to forestall any inflation pressures engendered by robust growth through a proactive use of liquidity and macroprudential policy tools.

“While the government has built significant policy buffers, fiscal spending is above the level consistent with an intergenerationally equitable drawdown of oil wealth,” the report stated.

Hence there was a need to preserve flexibility in entitlements, ensure efficiency in spending and broadening the tax base, it added.

The global organization welcomed the Saudi authorities’ efforts to strengthen budget institutions and further delink fiscal spending from oil price developments.

The fixed exchange rate continues to serve Saudi well. ‘Since the peg limits the scope for monetary policy conduct, the use of macroprudential and liquidity management tools remains key to effective policymaking.’ Saudi authorities’ efforts to strengthen financial supervision and risk management, as well as their progress toward adopting Basel III standards is commendable, it added.