On 18 December the Saudi Arabian cabinet approved for the first time in over a decade a balanced budget for the year 2001 (1421-1422H) at SR215bn ($57.3bn), representing a 37% increase in revenues and a 16% increase in expenditures over the previous year (see table below). In a statement to the cabinet, King Fahd ibn 'Abd al-'Aziz said that the budget was aimed at achieving a fiscal balance while supporting certain sectors and promoting a reduced dependence on government expenditure to ensure continued development. The king emphasized that allocations to education and health had been increased by 8% and 8.5% respectively and were the highest in the budget (see Table below), adding that the government will build new schools and hospitals and that spending in these sectors could generate up to 27,000 new jobs.

The king highlighted the measures taken during the course of the year to promote economic development, including the new foreign investment law, which allows non-Saudis to own real estate, the establishment of the Saudi Arabian General Investment Authority (SAGIA) and the creation of the Higher Tourism Commission. He also noted ongoing efforts at privatization and said it is hoped that “these efforts and initiatives will pave the way for broadening and diversifying the base of the national economy.” 

Saudi Arabia’s Budgets: 1998-2001

(SRBn)

With both crude oil prices and production volumes reaching levels substantially in excess of original budget expectations, it came as no surprise to see actual revenues for 2000 coming in at SR248bn ($66.1bn) an increase of some SR91bn ($24.2bn) or 58% above the budgeted figure of SR157bn ($41.9bn). As a result, with actual expenditure registering an increment of only 10% above the budgeted figure, a projected budget deficit of SR28bn ($7.5bn) was transformed into a surplus of SR45bn ($12bn) in the actual turn-out for 2000. If we assume that 75% of the budgeted revenue for 2000 plus all of the actual out-turn increase were attributable to oil, then it can be concluded that Saudi Arabia’s government oil revenue for the year reached some $55.6bn. According to MEES calculations, the weighted average FOB price for Saudi crudes (Super Light, Extra Light, Light, Medium and Heavy) worked out at a little over $26/B for the year 2000, while crude oil production rose by over 1mn b/d to 8.33mn b/d from 7.27mn b/d in 1999. In addition, production of natural gas liquids (NGL) accounted for a further volume of some 750,000 b/d in 2000.

In 2000, Saudi Arabia is estimated to have generated an income stream to the treasury on oil exports of around 7.85mn b/d (7.2mn b/d of crude oil and refined products, and 660,000 b/d of NGL), after allocations for local consumption (1.1mn b/d), the Yamamah defense contract and other special status local projects. The average FOB price of $26/B for Saudi crudes would have left about $24/B for the treasury after making allowance for a production cost of, say, around $2/B.

As for 2001, the Saudi Government seems to have adopted a cautious stance in forecasting a balanced budget with revenues and expenditure equating at SR215bn ($57.3bn). On the assumption that oil receipts will account for some 80% of the revenue figure (ie SR172bn or $45.9bn) and that oil production and export streams may decline by about 300,000 b/d or more in 2001, it would appear that the government is forecasting an average price for Saudi crudes somewhere in the region of $20-21/B. This looks like a reasonably conservative projection.

The Ministry of Finance has made it clear that thus far the oil windfall was used to pay part of the government’s debt and arrears to farmers and other contractors. Any surplus in the coming fiscal year will be used to pay domestic and foreign public debt in a cautious fiscal approach that should boost growth prospects. Foreign debt according to the International Monetary Fund stands at around $30bn (MEES, 4 December). The Ministry of Finance said in a statement that nominal GDP is expected to grow by 15.5% to reach SR618bn ($164.8bn), compared to SR535bn ($142.7bn) in 1999, and that private sector GDP is expected to grow by 3.13%. (For more details on macro-economic projections, see the full statement below.) This performance has filtered through to the capital and money markets. Along with the Tunisian market, the Saudi bourse was the only Arab market to achieve a positive performance this year, having gained some 13% since January. And there is stability in the money market: according to the Saudi Economic Review issued for 3Q 2000 by Riyad Bank, it has been “noticeable” since April 1999, with M2 forecast to be up 10% at the end of the year and up 6% in 2001 (see Table below).

Saudi Arabia: Monetary Indicators (1998-2001)

(SRBn)

Source: Saudi Economic Review , 3Q 2000, Riyad Bank.

Fiscal austerity has been welcomed by various sources. A report on the budget by Saudi American Bank (Samba) Chief Economist Brad Bourland issued on 20 December says that “consistent with past conservatism in oil price forecasts, this [oil price assumption] allows for a sustained and substantial decline from the price levels seen throughout 2000...We believe this conservatism continues to be warranted.” Said al-Shaikh, NCB’s Chief Economist, also described the budget projections as “conservative” and said that increased capital expenditure – notably in health and education – should serve to stimulate the economy. “The education allocation is around 25% of total expenditures,” he said “and includes the construction of some 800 new schools and the enrollment of an additional 17,000 students at universities.” The government also plans to develop health care facilities and construct 50 new medium-sized hospitals. “There hasn’t been that much spending in the recent past in these areas,” said Dr al-Shaikh, “which makes it more apparent in this budget.” He predicts the construction sector and associated industries will benefit significantly. “I expect the momentum for non-oil manufacturing growth to continue in 2001. Non-oil private sector growth will probably rise by 4-4.5%.” Dr al-Shaikh also noted the balanced nature of the budget, suggesting that the public sector may be able to reduce domestic borrowing and funds can be freed up for private sector credit.

Already the agricultural sector is benefiting from higher revenues. The Arabic daily Asharq Al-Awsat , quoted an official from the Grain Silos and Flour Mills Organization as saying that SR900mn ($240mn) worth of arrearages was paid on 16 December to over 17,000 farmers. This represents the final installment for wheat and barley for the harvest of 1997. According to the paper, this payment is in addition to the installments amounting to SR1.7bn ($453.3mn) which were paid three months ago for the same harvest, bringing total arrearage payments to SR2.6bn ($693mn).

Transparency

However, despite a generally bullish response to the budget there remain areas of concern, one of which is government debt. On 4 December the Saudi daily al-Watan ran an article by 'Abd Allah Nasir al-Fawzan in which he questioned why, given the rise in oil prices (and the associated surplus), the government was increasing domestic debt, and called on the authorities to clarify this policy. Quoting 3Q figures released by the Saudi Arabian Monetary Agency (SAMA – see Table below), Dr Fawzan noted that commercial banks’ claims on the government had risen to SR127bn ($33.9bn) by the end of September. Even though some of the surplus might have been used to pay off non-commercial bank debt, Dr Fawzan said that this seems illogical. “Why would there be an increase in bank debt if the government had a surplus to pay off other sources?” he asked, adding that the increase could not be an attempt to sop up excess liquidity since there was none.

Growing pressure on the government may have prompted the Minister of Finance, Ibrahim al-'Assaf, on 20 December to clarify that the government plans to allocate SR33bn ($8.8bn) from the year 2000 surplus to “pay firms, construction companies, farmers and a part of the public debt.” He also said total domestic debt stood at around SR600bn ($160bn) and settling it would “take priority over building up the kingdom’s foreign currency reserves.” He gave no explanation, however, as to why domestic commercial bank debt is rising.

Bank Claims On Public Sector

Source: SAMA

Some analysts suggest that rising domestic debt is partially the result of rolling over new bonds rather than new issuance or due to the settlement of external debt accrued by the government and/or state owned enterprises such as Aramco and SABIC. Most agree that the year 2000 surplus of SR45bn ($12bn) cannot simply have gone to pay off contractors. As one Saudi banker told MEES, “that would have been captured internally, it would have been obvious. We would have seen money supply growing significantly, which it has not.” As the same source points out, SAMA does not provide information on non-commercial debt owed by the government to state agencies such as the General Organization for Social Insurance, but it could be substantial and could explain where some of the surplus has gone. “But it’s all guesswork at the end of the day,” he added.

Even the budget itself is less clear than in previous years, as the Samba report points out. “The 2001 press release on the budget did not include the same level of details in its breakdown of spending by category as in past years, underscoring our ongoing concern about adequacy of transparency in government finances.” Such concerns are widespread, particularly since military spending is excluded entirely from the budget statements. Samba predicts that for 2000 “military spending stayed flat or declined, consistent with trends in recent years.” According to the International Institute for Strategic Studies (IISS), however, Saudi Arabia’s military budget for the year 2000 was around $18.7bn – a rise of 1.6% over the previous year and the highest in the region both in absolute terms and per capita (MEES, 20 November). More worryingly, and despite the country’s ongoing WTO accession process, Samba believes that subsidies “may also increase in 2001, primarily because the government in mid-2000 reinstated barley subsidies that had been suspended 1998.” According to Samba, these typically cost the government around SR4bn ($1.1bn) every year.

Structural Reform

While the budget offers an upbeat prognosis for the coming year, it fails to commit the government to any structural reform, which might reduce the country’s vulnerability to the volatility of oil prices. Suggestions such as the IMF’s proposal that the kingdom create an oil stabilization fund to “smooth out” government expenditure and thus reduce the fluctuations in government spending that result from oil price fluctuations have yet to gain ground (MEES, 4 December).

The less-than-obvious reference to further privatization may also cause concern about the direction of economic policy and the impact of high oil prices on the reform drive. The recent withdrawal of SBC Communications of the US from negotiations with the Saudi Telecommunications Company on acquiring a strategic stake in the state-owned telephony provider – thereby imparting serious impetus to the Saudi privatization process – bodes poorly for future divestment (MEES, 11 December). SBC withdrew reportedly due to differences about the net worth of the company and issues related to financial transparency. Without private capital, however, and a drive to improve overall economic efficiency in the light of the WTO accession process, the kingdom’s long-term growth prospects, economists suggest, would appear restricted.

Increased government spending on capital projects will be welcomed in the short term to boost economic activity. The inclusion of new government agencies such as the Saudi Geological Survey Commission, the General Investment Authority and the Higher Tourism Council in the budget may help unemployment. But the budget does not address the problem of long-term solutions to the pressing problem of job creation. As Samba points out, the pledged 27,000 new jobs may “help stem the unemployment challenge...but private sector job creation is the answer...not government hiring [...which...] would contradict the stated goal of limiting government growth, and would further weaken the budget structure, which is already heavily oriented toward payment of salaries and other current expenditures at the expense of capital (infrastructure) spending.” In any case, the creation of 27,000 jobs is not likely to make a major difference in a labor market that receives over 100,000 new entrants each year.

Some analysts argue that high government spending is inevitable, since the Saudi private sector is insufficiently developed to undertake the task of building the nation’s infrastructure, but even innovative solutions such as private-public partnerships seem to be off the agenda. “There’s nothing creative about this budget,” one economist told MEES. “They will initiate projects but the economy will continue to be run from a public mentality perspective, the government is the provider. The perception is that you have just one resource so you use it and once it’s depleted you just go back to where you started.” Promoting the private sector’s role in infrastructure could also free up government resources, for example, to invest in a high-tech infrastructure capable of supporting export-oriented industries. The same source suggests that even when capital investment brings private sector opportunities, the beneficiaries are often only those with strong connections. “Ultimately, they’re just circulating money from one pocket to another.”

Freeing up government resources would also allow for a heavier investment in the quality of education. The increased allocation to this sector in the latest budget is a positive commitment to human resources, but is quantitative rather than qualitative. The pledge to create 800 new schools will no doubt be welcomed by those pupils currently being educated in what are often little more than converted houses rather than purpose built buildings. But as in many other Arab countries, the Saudi education system is based broadly on didactic rather than cognitive curricula and at the graduate level tends to produce knowledge and skills in arts-related subjects rather than disciplines more closely attuned to the industrial needs of the country. Analysts suggest that there has to be a complete restructuring of the whole education system.

Criticism of Saudi Arabia’s policy direction often focuses on the country’s failure to mobilize private capital and foreign investment as a major source of production and income diversification, preferring instead to adopt expensive socially-oriented policies such as a commitment to subsidies and social infrastructure. The unexplained reduction of the electricity price hike introduced earlier in the year is a case in point (MEES, 13 November). While social policies per se are not undesirable, they must be sustainable and not threaten the ability of the country to diversify its income base. As one analyst told MEES, “given the tribal nature of both Saudi society and its government apparatus, non-economic issues are often afforded more attention than long-term economic efficiency.” This is compounded by the fact that the government has long relied on domestic borrowing to finance its deficit and avoid external borrowing, and in so doing removes any incentive to adopt more efficient policies. The latest budget shows that policymakers have not forgotten the relatively recent dramatic decline in oil revenues. But it shows no obvious commitment to economic efficiency concerns or to income diversification – all of which would require a radical shift in policy which Saudi Arabia’s policy makers, at least for the time being, seem unwilling to make.

Appropriations

(SRBn)

Note: Budget lines items were categorized differently this year from the preceding one. No information was given on subsidies and social programs and the previously titled “infrastructure, industry and agriculture,” also includes “other economic sectors.” 

Autonomous Government Institutions

(SRMn)

Extracts of the Text of the Statement issued by the Ministry of Finance and National Economy on the National Budget 1421-1422 (2001) published on 18 December.

Mecca, 18 December: A press release was issued by the Ministry of Finance and National Economy on the national budget for the fiscal year 1421-1422 (2001) highlighting the main economic features and the outcome of the fiscal year 1420-1421 (2000), as follows:

I. National Economic Developments

1. Gross domestic product (GDP): GDP is estimated to grow in the year 2000 by 15.5% at current prices and by 4.11% in constant prices to reach SR618bn compared to SR535bn the previous year. One of the main factors contributing to this growth was the increase in oil prices and the quantity produced. As such, oil sector growth is expected to reach 39.4% at current prices.

Private sector GDP growth is estimated at 3.13% at current prices and growth in the non-oil industrial sector is expected to reach 7% – 3% in the construction sector, 4% in the electricity and gas sector, 3% in the transportation, communication and storage sector.

The non-oil GDP deflator is estimated at 0.75% in 2000, which is consistent with the decline in the cost of living index.

2. Balance of payments: Preliminary estimates from the Saudi Arabian Monetary Agency (SAMA) show that the current account will achieve a surplus of SR55.6bn in the year 2000 as a result of the increase in the prices and the volume exported of oil and non-oil products despite an increase in imports and transfers. Non-oil exports are estimated to grow by 10.2% in 2000 to reach SR24bn.

3. Developments in the banking sector: Bank deposits during the first 10 months of the year 2000 grew by 4.3% while currency in circulation outside the banks fell by 15.7%. The banks’ capital and reserves increased in the same period by 2.3% to reach SR43.3bn by the end of October 2000.

4. Stock exchange: As a result of the increase in domestic economic activity and positive investor sentiment with the rise in oil prices, the stock exchange contributed to record improved performance in 2000. The all-share index stood at 2,286 on 14 December compared to 2,028 at the beginning of the year, representing a rise of 13%.

II. The Outcome For Fiscal Year 1420-1421 (2000)

Actual revenues for the year 2000 are expected to reach SR248bn while actual expenditures for the year are estimated at SR203bn – an increase of SR18mn over the budgeted amount. The remaining revenues will be allocated to settle part of the debt obligations as well as outstanding payments for farmers and contractors.

III. The National Budget For 1421-1422 (2001)

The main features of the 2001 budget are as follows:

1. Total revenues for the fiscal year 2001 are projected at SR215bn.

2. Total expenditures for the fiscal year 2001 are budgeted at SR215bn. The new budget is expected to create 27,000 new jobs and focuses on the education, health and social. The budget includes new programs and projects worth SR38bn.

(For budgetary appropriations see table above.)

Specialized development institutions:

Specialized development institutions will continue to provide loans to development projects in the field of industry, agriculture and real estate at an estimated value of SR6.3bn in year 2001.

© Copyright MEES 2003.