In a predictably cautious manner, Saudi Arabia has approved its year 2002 national budget with a projected 27% reduction in revenues and a 6% decrease in expenditures compared to 2001, revealing a fiscal policy still intrinsically linked to oil price movements (see Table below). A statement issued by the Ministry of Finance and Economy on 8 December announced that the Saudi cabinet had ratified total spending of SR202bn ($53.9bn), total revenues of SR157bn ($41.9bn) and a resultant deficit of SR45bn ($12bn), raising the possibility that the country may miss its professed target of eliminating deficits by the year 2004 (as per the latest five-year development plan). Even the current fiscal year, according to preliminary estimates, is likely to generate a deficit of SR25bn ($6.7bn), exceeding the target despite an average oil price of around $21/B, broadly in line with the assumed oil price assumption of $20-21/B, due to an estimated 7% overrun for actual revenues and 18.6% for expenditures (MEES, 1 January 2001).

While official statements give no explicit information regarding the underlying oil price assumption for the latest budget, extrapolations can be made. On the basis that non-oil revenues generate some 20% of the total, it can be assumed that Saudi Arabia expects to achieve total oil export revenue of SR125.6bn ($33.5bn) in the year 2002. If total oil production for the year averages around 7.053mn b/d (the country’s OPEC-allotted quota effective 1 January 2002), of which 1.2mn b/d is allocated to domestic consumption, the Yamamah defense contract and other special status local projects, the total income stream available to the treasury (including the Neutral Zone) will be based on a crude oil and refined product export level of 6.183mn b/d in addition to exports of around 650,000 b/d of NGLs, bringing the total to 6.833mn b/d. The figure suggests that the budget assumes an underlying oil price assumption averaging $15.5/B for Saudi oil exports (or roughly $17/B for Brent and $18/B for WTI) and an implied production cost average of around $2/B.

Saudi Arabia’s Budgets: 1999-2002

(SRBn)

This conservative figure (around 25% lower than last year’s assumption), coupled with the projected 21% reduction in expenditure compared to the 2001 actual turnout, highlights the country’s ongoing vulnerability to oil price volatility and an apparent inability to use fiscal policy as an economic buffer. National Commercial Bank (NCB) notes in its overview of the budget published on 10 December, “the actual expenditure of 2001 suggests that the government has adopted an expansionary fiscal policy,” whereas “the projected expenditure figures of 2002 seem to indicate a reversal to a contracted fiscal policy.” Such policy contradictions – and the inherent correlation between oil price movements and Saudi spending habits – do little to instill confidence in fiscal management, serving more to disrupt economic and notably private sector activity rather than protect it. They also ignore suggestions such as those of the International Monetary Fund (IMF) that the kingdom should create an oil stabilization fund to “smooth out” government expenditure and thus reduce the fluctuations in government spending (MEES, 4 December 2000).

Given the country’s official commitment to liberalization and expressed desire to increase the role of the private sector – an issue highlighted in last year’s budgetary statements, where measures such as the new foreign investment law, the creation of the Saudi Arabian General Investment Authority (SAGIA) and the Higher Tourism Council and privatization were emphasized – the year 2002 budget with its gaping deficit is less than reassuring. According to the Saudi American Bank’s (Samba) Chief Economist, Brad Bourland, the sheer size of the deficit may force the government’s hand, since “combined with likely lower oil production and prices in 2002 than in 2001, neither government spending nor oil revenues will be drivers of growth in 2002. This leaves the burden for growth on the private sector, which adds impetus for the government to pursue the range of economic reforms under way to liberalize further the private sector, in particular [through] privatization and attraction of foreign direct investment.” Other economists suggest that increased funding pressures may force the government to consider the possibility of taxation. 'Abd al-Wahab Abu Dahesh, senior economist at Riyad Bank, has said that the country is “prepared for gradual taxation” suggesting that “taxes can be imposed immediately on production sectors to direct investments, upgrade private sector efficiency and supervision.”

However, official statements contrast with such suggestions and with the previous year’s budgetary pledge that the country was promoting measures to “pave the way for broadening and diversifying the base of the national economy” (MEES, 1 January 2001). This year King Fahd ibn 'Abd al-Aziz’s comments focused on spending in education (369 new schools and colleges are to be built in the coming fiscal year), training, health and social welfare (see Table below for budgetary allocations). “We were keen to appropriate enough funds to complete these projects according to plan”, the king said. His announcement that the country’s public real estate fund would be supported with SR2bn ($533mn) to enhance its ability to finance housing loans for citizens – notwithstanding the potential boost that can be generated from higher spending – offered further confirmation that the government’s welfare role will not be diminished. The king also pledged to support the labor force and called on government officials, particularly those in charge of services directly concerned with public interests, to exert their utmost effort to meet the citizens’ needs.

Appropriations

(SR Bn)

The king’s remarks are likely to have been welcomed among the country’s lower income sectors, especially if, as Samba points out in its report issued on 10 December, they suggest that “spending cuts would come primarily in defense and security.” They might also satisfy those who call for a much more significant investment in the country’s human resource base (although the planned spending targets are wholly quantitative rather than qualitative and do not match population growth of 3.5%). However, they do little to attract the attention of investors (other than those perhaps interested in winning lucrative school construction contracts), since they suggest that the government is more focused on politics rather than economics.

Some estimates suggest that given the country’s ambitious investment targets over the next 10 years, its demographic challenge and the potential $50bn shortfall in available domestic funds, particularly noticeable given the relatively low budgetary allocation to infrastructure upgrading and capacity adding (see Table above), nothing short of a “revolution in capital market development” coupled with “increased incentives for foreign companies to heighten their involvement” will ensure that Saudi Arabia’s citizens’ needs are met. Ibrahim al-'Assaf, the Minister of Finance and National Economy, made a passing reference to the government’s future plans to privatize many governmental sectors, including desalination and Saudi Airlines, and talked of broadening the economic base to lessen dependence on the budget. But he was quick to note that the new budget should not create any burden on Saudi citizens and should protect them from the negative impact of international economic developments.

And as with so many of its predecessors, the year 2002 budget raises more questions than it answers, most predictably in the field of closed accounts. Given the oil price revival during the earlier part of the year, and the fact that – with revenues outstripping budgetary projections and expenditures higher than the usual 10% overspend –  the government could presumably have balanced the budget had it wanted to, the final deficit of SR25bn ($6.66bn) comes as something of a mystery. Since no disaggregated figures are issued on closed accounts, there is no official explanation as to why the target of a balanced budget could not have been met, which leads inevitably to speculation that “either defense expenditure has gone up to account for purchasing new defense systems, they’ve boosted reserves, or paid off private sector debt…or it has gone to other places to contribute to other things.” According to analysts at the International Institute for Strategic Studies, Saudi Arabia’s defense budget rose by 30.8% in 2001 to  $25.9bn from $19.8bn in 2000 (MEES, 19 November).

The overspend also contradicts official statements earlier in the year to the effect that budgetary targets were likely to be met. Dr 'Assaf offers only a vague justification, saying that while budget targets were proceeding well in the first half of the year, negative impacts of the world economy affected the oil market in the second half (see budget statements below). Domestic statistics further cloud the picture. The Quarterly Statistical Bulletin of the Saudi Arabian Monetary Agency (SAMA) for 3Q shows that broad based money supply (M3) rose by 1.8% from the end of 2000 to SR320.3bn ($85.4bn) by 30 September – a healthy rise but not one commensurate with increased spending levels. While demand deposits have also grown by around 10% since the beginning of the year, this is partly explained by the decline of money in circulation as money transfers becoming increasingly automated and as currency outside the banks falls.

According to the IMF, Saudi Arabia has improved its economic data and information dissemination, although even the politically correct Fund acknowledges that there is room for “further efforts” (MEES, 19 November). Such efforts are not likely to be forthcoming without external pressures, something that the government’s reliance on domestic rather than potentially more transparent international borrowing clearly averts. Dr 'Assaf confirmed on 9 December that he “dismissed the idea of foreign borrowing to cover part of the deficit of the coming year’s budget,” saying that local institutions were “sufficient” to cover a debt burden that is set to rise from the current SR630bn ($168bn – or 94% of the official 2001 GDP estimate of SR668bn) to SR675bn ($180bn) during 2002, given the projected deficit of SR45bn ($12bn).

Few doubt the capacity of domestic banks or government institutions such as the General Organization for Social Insurance to fund the gap (although some comment that rising debt contradicts earlier pledges to rationalize spending and contain public borrowing). More worrying is that deficit finance in 2002 will be skewed towards current (around 70% of the total unofficially, but 55% officially) rather than productive capital expenditure. (Budget statements announced that some 86,000 teachers are to join the 900,000-strong civil service during the course of the year.)

Further concerns have been voiced over a costly debt management policy that rejects the international capital markets. The Riyad-based Consulting Center for Finance and Investment points out that the country incurs “a high level of interest payment” on “high domestic debt (SR633bn by 2002) that is now dangerously positioned (105% of GDP 2002).” Saudi Arabia has tapped the global capital market through a two-year $272mn floating rate note issued in December 1994 and underwritten by Saudi British Bank – albeit indirectly, since the deal involved a contractual obligation structured in a special purpose vehicle – but the kingdom has never expressed a desire to repeat the process. Notwithstanding the fact that the structure was necessarily complex in order to veil the underlying government obligations, analysts suggest that the government’s reluctance to borrow directly stems from disclosure implications. This, despite the fact that some majority owned Saudi corporations, such as SABIC subsidiaries and Saudi Aramco, regularly tap the international bank market and accept international law to govern the transaction. Bankers say that other government entities, such as the power companies SCECO Central and SCECO West, are constrained by the lack of viable business models and substantial sustained subsidies (where sales revenues fail to match production costs), rather than necessarily fears over limited transparency.

Even GDP figures raise questions. According to the budget statement, GDP is expected to grow by 1.8% in nominal terms in 2001 to reach SR668bn ($178bn), yet official figures put nominal year 2000 GDP at SR649bn ($173bn), which would suggest growth of 2.9%. Whatever the final outcome, GDP looks set to fall next year. NCB’s Chief Economist, Said al-Shaikh, notes in the Market Review and Outlook issued on 10 December that assuming the historical expenditure multiplier average of around 3.1, nominal GDP is forecast to decline by 6% to SR626bn ($167bn) in 2002. Sparse data complicate any accurate assessment of how well the kingdom would cope with reduced growth. Figures on the country’s total external assets remain ‘guesstimates’, military spending is a moving feast and even broad-based economic figures are kept under wraps. The Saudi Minister of Labor and Social Affairs, 'Ali ibn Ibrahim al-Namla, recently denied claims that unemployment in the kingdom stood at 20%, saying that it was “limited,” but offered no concrete figure to counter the claims.

Such opacity may have gone unchallenged in the past in a world where interest in the Saudi economy was more focused on oil production. And for now, given the country’s relatively stable economic fundamentals – something that could change rapidly if oil prices fail to rebound in the coming year, or worse, collapse – there is no undue concern regarding the shape of the kingdom’s finances. The Saudi financial sector continues to report, in the main, solid profitability, stable asset quality and strong liquidity. The government can also generate further revenue, albeit in one-off transactions, through the planned partial flotation of Saudi Telecommunications Company or a reduction of its holdings in SABIC subsidiaries. But in the wake of the 11 September attacks, and with growing concern about the financial transparency of individuals, institutions and sovereigns, pressure on Saudi Arabia to open its books more fully could increase. For the time being, though, given the more pressing focus on Saudi Arabia’s ability to maintain domestic stability, few are likely to question the government’s less than radical stance on economic policy and heavy focus on “the Saudi citizen.”

Autonomous Government Expenditure By Institution

(SRMn)

Edited Extracts of the Text of the Statements Issued by the Ministry of Finance and National Economy on the National Budget 1422-1423 (2002) published on 8 and 9 December.

Mecca, 8 December : Following is a press release issued by the Ministry of Finance and National Economy on the new Saudi budget.

“The Ministry of Finance and National Economy is pleased to summarize the recent economic development, the outcome for the fiscal year 1421-1422H (2001), and the highlights of the budget for the fiscal year 1422-1423H (2002).  

National Economic Developments

Gross Domestic Product (GDP): GDP is estimated to reach SR615bn ($164bn) in 2001 in constant prices (base year 1999), up by 2.2% from last year, despite the decline in oil sector GDP, especially in the fourth quarter of 2001. Private sector GDP is estimated to have grown in real terms by 5.9%. In particular, the non-oil industrial sector is estimated to have grown by 9.3%, communication and transport sector by 9.1%, electricity, gas and water sector by 4.5% and the construction sector by 3.3%. In current prices, GDP is estimated to have reached SR668bn ($178bn), a decline of 1.8%, mainly due to lower oil prices. Private sector GDP growth in current prices is estimated at 6.0%. Inflation is estimated to have declined by 0.8% in 2001, while the non-oil GDP deflator is estimated to show a slight increase of 0.8%.

Balance of Payments: According to preliminary data from SAMA (Saudi Arabian Monetary Agency), the current account is estimated to record a surplus of SR31.3bn ($8.4bn) in 2001 as compared to a surplus of SR53.7bn ($14.3bn) in 2001. This mainly reflects weakness in the world economy and its adverse impact on the oil market. Non-oil exports are estimated to have grown by 4.3% in 2001 to reach SR25.9bn ($6.9bn). The outcome for the fiscal year 1421-1422H (2001): Revenues are expected to reach SR230bn ($61.3bn) in 2001; expenditures are expected to amount to SR255bn ($68bn); and the deficit is expected to reach SR25bn ($6.7bn), which represents 3.7% of GDP.

In addition, the specialized development institutions (the Industrial Development Fund, the Agricultural Bank, the Real Estate Development Fund, the Credit Bank and the Public Investment Fund) will continue to be active in providing credits to projects and services in the areas of industry, agriculture and real estate. These credits are projected to reach SR6.2bn ($1.65bn) in 2002. Also, in order to meet the increasing demand for housing loans by citizens, the capital of the Real Estate Development Fund will be increased by SR2bn ($0.5bn) in 2002.

Jiddah, 9 December : The Minister of Finance and National Economy, Dr Ibrahim al-'Assaf, has confirmed the keenness of the government of the custodian of the two holy mosques, King Fahd ibn-'Abd al-'Aziz, that the new budget should not create any burden on Saudi citizens and, instead, keep them away from the negative impacts of international economic developments witnessed by a number of countries.

In a press conference he held at the conferences palace in Jiddah, Dr Assaf said the new budget was prepared under difficult circumstances and expectations, mainly in view of the sharp fall of oil prices, which brought down the revenues and expenditures estimates in comparison with the current budget. He said the revenues in the current budget amounted to SR230bn ($61.3bn) and expenditures SR255bn ($68mn) with a deficit of SR25bn ($6.7bn). However, the minister expressed hope that the projected deficit could be diminished by increasing the revenues or curbing the expenditures. Looking to the current budget, the minister said it was proceeding well in the first half [of the year] in terms of revenues and expenditures, but in the second half, negative impacts of the world economy affected the oil market which resulted in curbing the flow of oil revenues. Despite this situation, the new budget includes funds for new developmental projects crucial to the welfare of citizens in accordance with the directives of King Fahd.

On the new budget, Dr 'Assaf said the revenues were projected at SR157bn ($41.8bn) and expenditures budgeted at SR202bn ($53.9bn), including the establishment of 34 hospitals among several new projects. Not a single municipality among the 177 municipal and rural complexes was deprived from the new projects of the new budget, which include asphalting, water flood drainage and electrification. He said the budget approved the construction of new roads of a total length of 2,500 km, most important of which are Jiddah-Jazan, Riyad-Wadi al-Dawaser-Abha and al-Hafuf-Salwa al-Batha Road, which extends to link the kingdom with the UAE and Qatar. The minister said new projects were also approved in the field of water dams, desalination, educational colleges and medical institutions.

He noted that economic developments, except petroleum, witnessed very good growth rates, about 6%, compared with current prices. He said that a taxi drivers’ loan program will begin after the blessed Eid al-Fitr. Dr 'Assaf ruled out the idea of his ministry borrowing from abroad to pay for the deficit in next year’s budget. He added that more than 86,000 teaching jobs have been created in the new budget but emphasized that there was no recession in the local economy. He explained that salaries of state employees account for more than 55% of the budget. The minister stated that, during the current fiscal year, domestic public debt exceeded SR600bn ($160bn). It is expected to reach SR630bn ($168bn) during the next fiscal year budget, he said. The minister saw no problem in repaying the domestic debt.

Dr 'Assaf said speculation on the Saudi riyal in 1998 will not be repeated because the Saudi economy is strong now. The Minister of Finance and National Economy said there was an Administrative Restructuring and Organization Committee headed by Prince Sultan Bin 'Abd al-'Aziz, second deputy premier, minister of defense and aviation and inspector-general, to reform governmental agencies. He noted there have been future plans to privatize many governmental sectors, including desalination and Saudi Airlines. He concluded that the state works hard to develop the economy, to increase revenues and broaden the economic base to lessen the economy’s dependence on the state’s budget.  

© Copyright MEES 2003.