October 19, 2016 / 5:05 AM / 10 months ago

Saudi has little room to slow austerity drive, IMF says

* Pace of austerity appropriate -IMF regional director

* Economic growth slowing sharply this year

* IMF says spending cuts would threaten five-year target

* Budget deficit to shrink but remain very high this year

* Acknowledges great uncertainty in economic forecasts

By Andrew Torchia

DUBAI, Oct 19 (Reuters) - The International Monetary Fund feels the pace of Saudi Arabia's austerity drive is broadly appropriate and there is little room for Riyadh to ease up on the spending cuts that have slowed economic growth sharply, a senior IMF official said.

Its budget strained by low oil prices, the Saudi government has slashed capital spending this year and delayed payments that it owes to some companies, while last month it announced cuts to allowances for public sector workers.

Gross domestic product growth fell to 1.4 percent year-on-year in the second quarter, the lowest in more than three years. The non-oil sector - the part of the economy directly affecting most people's living standards - expanded just 0.4 percent, after shrinking 0.7 percent in the first quarter.

Masood Ahmed, director of the IMF's Middle East department, said Riyadh could not soften austerity policies significantly without endangering its goal of balancing its budget in about five years.

"I don't see there is a lot of scope for postponing fiscal consolidation," he told Reuters in an interview.

Ahmed said the IMF expected Saudi Arabia to run a fiscal deficit of 13.0 percent of GDP this year, compared to an estimated 15.9 percent last year. The Fund projects next year's gap at 9.5 percent.

Months-long delays in state payments to construction firms have hit the sector hard, forcing some companies into severe financial difficulties. Ahmed said the delays were "not a preferred method" of cutting the budget deficit but it was hard to impose austerity without pain.

The IMF expects Saudi economic growth to bottom out at 1.2 percent this year, rebounding to 2.0 percent in 2017. Some private analysts think growth could be near zero this year.

In a twice-yearly report on regional economies published this month, the IMF said it was difficult to estimate how much austerity policies would slow growth in the Gulf oil exporters, and that any forecasts could prove wrong by a wide margin.

"An adverse feedback loop between budget spending cuts and tightening credit conditions could reduce the private sector's ability to pick up the slack created by the shrinking public sector," it said. (Editing by John Stonestreet)

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