The Saudi Ministry of Finance and National Economy has issued a budget for 2003 which forecasts government revenue of SR170bn ($45.3bn), government expenditure of SR209bn ($55.7bn), and a resultant deficit of SR39bn ($10.4bn). The budget was approved by a special session of the Council of Ministers chaired by King Fahd ibn 'Abd al-'Aziz in Makka on 27 November. In forecasting a budget deficit once again, the government continues the trend which has seen a deficit in its closed accounts since 1983, with the sole exception of 2000, running up in the process a debt of some SR651bn ($173.6bn) or 94% of GDP, the majority of which is owed domestically, primarily to commercial banks and government pension funds (MEES, 27 May). However, a budget decree was issued which stated that any surplus generated in fiscal year 2003 would go towards repayment of the public debt. The Ministry of Finance and National Economy was also mandated to borrow as necessary to close the gap between expenditure and revenue in fiscal 2003.

Compared to last year’s budgeted figures, the present forecasts see a rise in revenues of 8.3% from SR157bn ($41.9bn) and a rise in expenditure of 3.5% from SR202bn ($53.9bn), but a fall in the deficit from SR45bn ($12bn) –  a small step towards the government’s stated goal of eliminating deficits by the year 2005. Actual figures for 2002 saw revenues surge 30% above budget forecast to SR204bn ($54.4bn), and expenditure exceeding forecasts by 11.4% to reach SR225bn ($60bn). However, the deficit more than halved to SR21bn ($5.6bn).

Saudi Arabia’s Budgets: 2000-2003

(SRBn)

The oil price assumption used to calculate the budget, while not explicitly stated, can be extrapolated from available data. Total oil export revenue represents some 80% of Saudi government revenues which indicates that the government expects to receive SR136bn ($36.3bn) from oil in 2003. Crude oil production as determined by the kingdom’s OPEC quota (effective from 1 January 2002) is 7.053mn b/d, of which 5.453mn b/d of crude and refined products are exported. In addition 250,000 b/d of crude oil is exported from the Neutral Zone shared with Kuwait, while exports of natural gas liquids (NGLs) come to 340,000 b/d. The total income stream available to the treasury will therefore be based on a crude oil, refined products and NGLs export level of 6.523 mn b/d or 2.38bn barrels for the year. Domestic consumption, the Yamamah defense contract and other special status local projects account for 1.2mn b/d or 438mn barrels per year. These figures would suggest that the budget is assuming an average fob price for Saudi oil exports of around $18/B ^[1] which, after deduction of approximately $2.50/B for production costs, would yield a net inflow of some $15.50/B to the Saudi Treasury.

Recent experience suggests that actual Saudi production next year would rise above the official level of 7.053mn b/d either under the impact of an increased quota or over-quota output, or even a combination of both.

MEES 2003 Oil Production Assumptions

Economic Developments In 2002

The Ministry of Finance and National Economy budget statement summarized recent economic developments noting that GDP is estimated to have reached SR695bn ($185.3bn) in 2002, representing growth of 2.3% from 2001 at current prices and a real growth rate of 0.74%. The private sector has performed well, registering real growth of 4.2%, above expected levels and greater than the rate of population growth – a positive indication that the private sector can play an important role in economic growth and job creation, noted 'Abd al-Wahab Abu Dahish, Senior Economist at Riyad Bank. The non-oil industrial sector is estimated to have grown by 5.7%, communication and transportation by 7.1%, electricity, gas and water by 4.5%, wholesale, retail and hotels by 4%, and construction by 3%. Also noted was the contribution of the private sector which accounted for 46% of GDP and is becoming the main source of economic growth. The surplus on the balance of payments continued but fell slightly from SR35.1bn ($9.4bn) in 2001 to SR33.7bn ($9.0bn) in 2002. Liquidity increased at ratios suitable to finance economic activity and to maintain stability in local prices and the foreign exchange value of the riyal. Broad money supply during the first 9 months of 2002 grew by 6.7% compared to 1.8% for the same period last year, but inflation was reported at -0.4% for the year.

The statement added that the government aims to pursue development strategies including structural change in various economic, organizational and administrative spheres. To this end special units have been set up to create the necessary environment to diversify the national economy, to activate the role of the private sector in development and job creation, to optimize the use of resources, and to attract local and foreign investment.

Job Creation And Education Are Priorities, Says King Fahd

In his statement, which was delivered by secretary-general of the Cabinet 'Abd al-'Aziz al-Salim, King Fahd stressed that reducing unemployment (which stands at around 12% – MEES, 4 November) remains a primary objective for the government, which has taken a number of measures to promote job creation. These have included the establishment of a fund for human resources, financial and technical support for small and medium-sized enterprises, compelling the private sector to completely Saudiize certain job categories, and supporting the education sector and specialized and technical colleges. The budget was prepared so as to continue the progress of the development program and the rationalization of costs, he said, with priority given to education, health, social affairs, and infrastructure.

Reflecting these priorities, government expenditure by sector saw the allocation to education and vocational training continue to climb to a forecast SR57.5bn ($15.3bn) for 2003, representing over one quarter of government spending. King Fahd said that “in the last budget the education sector was allocated funds for the construction of hundreds of schools and a large number of colleges for both boys and girls,” adding that the new education program “aims at increasing the number of places at universities and colleges to accommodate the growing number of secondary school graduates, establishing vocational training centers and building new schools and colleges in all parts of the kingdom.”

Health care and social development also received a sizable and increased allocation from the budget of SR23.2bn ($6.2bn) which King Fahd said would cover the construction of new hospitals in various parts of the country and the expansion of existing health facilities. He also noted that the government was implementing development projects worth more than SR90bn ($24bn) and that the current budget would strengthen social care programs in general.

King Fahd also pointed out that a main feature of the budget was the allocation of SR3.4bn ($907mn) for the new Water Ministry to pay for drinking water and sewage projects. 'Ali al-Tukhayis, Deputy Minister for Water Affairs, said that the budget recognized the need to augment water resources, utilize waste water and rationalize water use. However, as Saudi Arabia’s National Commercial Bank (NCB) noted in its recent assessment of the kingdom’s water sector (MEES, 7 October), such allocations are unlikely to prove sufficient to meet investment needs of some SR340bn ($91bn) between 2003 and 2022.

Appropriations

(SRBn)

__________

Note : Water services were previously included with municipal services.

Autonomous Government Expenditure By Institution

(SRMn)

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* Correction : The Saudi Arabian Standards Organization (SASO) received SR81mn in 2002, rather than SR81,000.107mn as previously reported (MEES, 17 December 2001). Similarly, SASO received SR83.7mn in 2001 rather than SR83,691.830mn as reported in the same issue and MEES, 25 December 2000.

 Analysts Express Concern Over Mounting Debt

The primary concern of commentators following the announcement of the 2003 budget has been the continued deficit which makes achieving a balanced budget before 2005 on a sustainable basis look unlikely given the inability of the oil market to generate adequate revenue for a balanced budget, and the lack of structural change of revenues, as Brad Bourland, Chief Economist at Samba, noted in his 30 November report on the budget. As spending needs continue to grow, he said, Samba is increasingly concerned that Saudi Arabia faces years of very large deficits when the oil market suffers a downturn. 'Abd al-Rahman al-Zamil, chairman of the al-Zamil Group and the Saudi Export Development Centre, criticized the deficit, warning that “the government should take steps to reduce its expenditure and at the same time seek to open up various sectors to investors by giving them incentives… It is not a healthy situation,” he said, “our first priority should be to strive for zero budget deficit. Otherwise our economy will be in trouble.”

Ihsan Buhaliqah, an economist and member of the Shura Council, agrees, saying that the only viable option for the Saudi government over the long term is to reduce the deficit and debt burden which absorbs about SR30bn ($8bn) or 15% of expenditure. Unless major structural changes in public finance can be brought about to achieve a balanced budget, he says, the government will be unable to reverse the trend of rising public debt. He advocates a whole range of reforms including the establishment of an independent body to accelerate the privatization program, the expansion of the non-oil and private sectors, and the contraction and restructuring of the public sector. In particular Dr Buhaliqah pointed to the fact that government employees’ salaries and government administration constituted 85% of public expenditure, leaving little room for more important investment in capital, and distorting the labor market through inflated public sector wage packets. The proceeds of the government’s privatization program (MEES, 18 November) should be directly linked to reducing the burden of public debt, he said, with the funds channeled directly into a fund administered by the treasury.

Dr Buhaliqah also adds his voice to those of the IMF and Ahmad ibn Salih al-Salim, a professor at King Sa'ud University (MEES, 27 May), in calling for the creation of an oil stabilization fund to smooth out government expenditure and thus reduce fluctuations in government spending.

Taxation of both expatriates and Saudi citizens is put forward by Saudi economist 'Abd al-Rahman al-Sunai among others as another possible avenue for the government to increase and diversify its revenue base. However, Brad Bourland takes the view that a proposed new income tax on expatriate workers would be unlikely to substantially increase non-oil revenues and says that the introduction of a value added tax (VAT), which is under discussion, would raise more non-oil revenue. Furthermore, the Minister of Finance has repeatedly said that there is no intention on the part of the government to levy an income tax on Saudis any time soon.

The IMF in its recent Public Information Notice on the Saudi economy (MEES, 4 November) noted the kingdom’s expenditure reduction measures including the merger of various ministries and departments. But it went on to say that these measures should be expedited through increased focus on performance contracts and accountability, including targeted reductions in government employment under well-defined civil service reform, the introduction of time-specific and targeted subsidies, the rationalization of social expenditures, and better planning of capital outlays. The IMF stressed that reducing the budget deficit required broadening the non-oil revenue base (through economic diversification and the introduction of taxation, for example), and reducing expenditure. Furthermore, the report adds, “unless addressed effectively and expeditiously, macro-economic imbalances could weaken confidence, discourage investment and reduce non-oil growth, thus making it more difficult to achieve the employment objective.”

Judged against this benchmark, the 2003 budget is not particularly reassuring. It represents more a continuation of previous policies than a radical attempt to tackle difficult underlying problems such as overdependence on oil, rising unemployment and mounting debt. Despite the fact that oil price assumptions are characteristically conservative, the uncertainty surrounding the potential US conflict with Iraq means that actual oil prices and revenues for 2003 are anything but predictable. Nevertheless, analysts expect to see a deficit for 2003 whatever oil price materializes. While the receipts from the impending Saudi Telecommunications Company (STC) IPO and other sales of state-owned assets will help to chip away at the public debt, the privatization program is proceeding too slowly to make a significant contribution to the cause, and is, in any case, not a substitute for the more politically unpalatable reforms advocated by the IMF.

^[1] Saudi American Bank (Samba) research indicates that the 2003 budget is based on a price assumption of $17.50/B for Saudi oil. The Samba oil price is based on an assumption of average oil production for the year of 7.5mn b/d, although it notes that Saudi production is currently about 8mn b/d, about 1mn b/d above its OPEC quota.

The Saudi Consulting Center for Finance and Investment (CCFI) estimates that 2003 oil revenues will be SR125bn ($33.3bn) or 73.5% of total government revenue (although at different stages in its report it puts the oil share of government revenue at both 71% and 80%). This figure is based on an oil production of 7.06mn b/d and an average Arab Light oil price of $19.50-20/B.

© Copyright MEES 2003.