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May 01 2011

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Saudi Arabia trade: Trade patterns and regulations

• According to the Sovereign Wealth Fund Institute, Saudi Arabia’s two sovereign-wealth funds—the Saudi Arabian Monetary Agency ( SAMA ; the central bank) Foreign Holdings and the Saudi Arabian Investment Company (Sanabel)—managed US$439bn and US$5.3bn in assets respectively at end-March 2011. Together they hold 10.3% of global sovereign-wealth-fund assets.10
• The government allocated a record budget for 2011, up by 7.4% from 2010 to almost US$155bn; 26% of the budget is for education/training, and 20% is for health and social development and infrastructure. The government aims to spend US$400bn on infrastructure projects over five years.10
• Foreign direct investment (FDI) to Saudi Arabia dropped to US$35.5bn in 2009, after peaking at US$39.5bn in 2008. This reflected a global trend, however, rather than any deterioration in the country’s economic environment or FDI potential. Inflows recovered in 2010, increasing to US$37.3bn. 12
• Following the 2011 uprisings across the Arab world, King Abdullah bin Abdul-Aziz al-Saud launched a concerted effort to advance “Saudiisation”, calling for “urgent discussions” between business and the government. The project aims to expedite local private-sector employment. Although preliminary indications from the labour ministry show that Saudi unemployment was around 10% in 2010, this is probably underestimated.26
• Based on the latest information from SAMA , the Saudi Industrial Development Fund ( SIDF ; a lending facility that targets private-sector industries and public-utility companies) had a stock of outstanding loans of SR21.18bn at the end of the first quarter of 2010, up from SR9.84bn five years earlier. The SIDF still lends funds to large industrial projects (particularly in petrochemicals), though lending activity has plunged since 2008.36
• As part of the Gulf Co-operation Council (GCC), Saudi Arabia is party to a number of free-trade agreements (FTAs) and negotiations conducted by the economic bloc as a whole. By end-May 2011 the GCC had signed FTAs with Singapore (December 2008), the European Free-Trade Association (June 2009) and New Zealand (October 2010), though these had yet to be enacted.49
• The Communications and Information Technology Commission reports that broadband access has grown remarkably since 2005, averaging annual growth of 123% by end-2010. The number of broadband subscriptions surpassed 4.4m by end-2010, with a penetration rate of around 16%.61

• There is a risk that the wave of social unrest that has swept across the Middle East and North Africa could reach Saudi Arabia and threaten political stability. Nevertheless, the country’s ruling Al-Saud family looks to remain in power.5
• Two spending packages, worth a combined US$129bn (30% of 2010 GDP), will produce a huge increase in social spending. These should boost private consumption and drive up real GDP growth to 6.5% in 2011, up from 3.8% in 2010.7
• High international commodity prices and a recent government redraft of social-spending pledges look to raise average inflation from 5.4% in 2010 to 8% in 2011. But softening global prices for goods and non-oil commodities will probably slow the inflation rate by 2012.7
• Inward FDI looks to continue growing. The Economist Intelligence Unit estimates that it will reach US$39.2bn (accounting for 3.7% year-on-year GDP growth) in 2011, and US40.7bn (4.1%) in 2012.12
• Saudi Arabia’s current account will probably record surpluses in both 2011 (US$124.1bn) and 2012 (US$75.8bn) as oil exports continue to dominate the trade account. The kingdom has enjoyed 12 consecutive years of surpluses; its last deficit was in 1998.49
• We do not expect a single currency, via the Gulf monetary union, to be introduced before 2012, if at all. We anticipate that the riyal’s peg to the US dollar will remain.50

Saudi Arabia has traditionally been a net exporter of capital, which it has financed by strong current-account inflows—mainly from oil export earnings. Inflows of foreign direct investment (FDI) have historically been volatile and have tended to move largely in line with developments in the oil market, albeit with a lag. At times, FDI flows also have been discouraged by international security concerns, such as the September 2001 attacks on the United States and the 2003–04 militant attacks on Western targets in Saudi Arabia.

Saudi Arabia’s FDI position has improved since 2005, reflecting several trends: a better security situation; the removal of some investment barriers following its 2005 accession to the World Trade Organisation; a rapidly expanding domestic consumer market; and major investment projects encouraged by government incentives. FDI inflows peaked in 2008, at US$39.5bn, accounting for 4.2% year-on-year change in GDP. Inflows dropped to US$35.5bn (0.6% GDP change) in 2009, but this was more a reflection of global patterns rather than a deterioration in Saudi Arabia’s economic environment or FDI potential. Inward investment has rebounded since then, with inflows hitting US$37.3bn (3.4% GDP change) in 2010. The Economist Intelligence Unit expects this trend to continue, with inflows of FDI estimated to reach US$39.2bn (3.7%) in 2011 and US$40.7bn (4.1%) in 2012.

Saudi Arabia is the region’s largest oil exporter by a considerable margin, and crude-oil sales have historically accounted for 90% of overall export earnings (though the portion is dropping with the development of downstream petroleum industries). With proven reserves sufficient to last for more than 80 years at 2011 production levels, and additional large undiscovered reserves believed to be in place, the country will remain a dominant force in the world oil market for decades to come.

The Economist Intelligence Unit estimates that the value of Saudi Arabia’s exports totalled US$235.3bn in 2010, up from US$189.7bn in 2009.

Saudi Arabia’s current-account surplus reached US$68.9bn for 2010. This was the country’s 12th consecutive year of surpluses; the last deficit was in 1998. We forecast that the current account will record surpluses in both 2011 (US$124.1bn) and 2012 (US$75.8bn) as oil exports continue to dominate the trade account.

We estimate that the value of Saudi Arabian imports totalled US$88.4bn in 2010, up from US$82.3bn in 2009. Saudi Arabia relies on external suppliers for almost all of its non-hydrocarbons needs. According to the latest data available from the World Trade Organisation, in 2009 the kingdom’s top merchandise suppliers (by share of imports) were the European Union (31.9%), the United States (13.6%), China (9.7%), Japan (8.7%) and South Korea (4.5%).

Saudi Arabia became the 149th member of the WTO in December 2005, after more than a decade of negotiations. Given that oil constitutes such a large share of the kingdom’s exports and that most countries do not apply import tariffs to oil, the accession will probably have little effect on the kingdom’s current account. However, it will phase out all export subsidies on agricultural goods. In addition, Saudi Arabia will eliminate any non-tariff measures that cannot be justified under WTO rules. Nevertheless, the kingdom will retain the right to restrict the importation of goods deemed contrary to morality or the public good, such as pornography, alcohol and pork.

A customs union came into force on January 1st 2003 among the six member states of the Gulf Co-operation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. After first eliminating internal tariffs on goods with at least 40% of their value added within the group, the council agreed in December 2001 to unify regional customs tariffs for standard non-GCC goods, beginning on January 1st 2003. Tariffs on luxury goods and other specifically exempt goods were set at 7.5%. The customs union established a general external tariff of 5%. During a 15-month implementation period, minor obstacles continued to arise because of variances on prohibited items and questions of how to accommodate bilateral free-trade agreements between some GCC members and other Arab states. Nonetheless, GCC customs counters are now in place at airports and ports, expanding the new system beyond goods shipped via land transport.

Upon accession to the World Trade Organisation in December 2005, Saudi Arabia eliminated tariffs on pharmaceuticals and on products covered by the WTO Agreement on Trade in Civil Aircraft. Tariffs on computers, semiconductors and other information-technology products ended on January 1st 2008.

The Saudi press reported in January 2008 that the customs authorities had reduced tariffs on 22 products, ranging from perfumes to plastics. This decrease in customs duties was the second phase of a larger initiative on the part of the government to reduce tariffs, increase market competitiveness and comply with WTO regulations. The first phase of tariff reductions came in 2003.

By 2008, however, WTO requirements were not the only driving force behind the kingdom’s tariff reductions. The government announced in early April 2008 that it would cut the customs duties payable by importers on 180 items, including food and beverages and building materials, all of which had experienced strong rises in global market prices. Throughout 2008, the government reduced tariffs on many of the goods highlighted during the April announcement, but it was not until June 2009 that the tariffs on virtually all of those commodities had been removed or greatly reduced. The government said it would review the revised import tariff list in April 2011 to verify if import prices of certain goods had fallen sufficiently to justify reintroducing tariffs; there was no indication, however, that this review had taken place by the end-April deadline. By June 2009 Saudi Arabia had reduced or eliminated tariffs on 851 products (including the 180 items especially selected in April 2008). Sources within Saudi Arabia’s trade ministry indicate that the government continued to lower tariffs throughout 2009 and 2010, though not with the same intensity as in the years immediately following WTO accession. For instance, the government cut entirely the tariff on wheat imports, even though the GCC is committed to a 5% common external tariff on goods entering the trading bloc, aside from specified exceptions.

Although the GCC countries have agreed in principle to the idea of a “single entry point”, ambiguities remain over the distribution of customs revenues. GCC states share customs revenues based on the final destination of imports. This understanding was codified in an agreement of the GCC Finance and Economic Committee in April 2010. Members have since agreed on a common set of tariffs for exports (5% for 90% of goods and no fees on other products), but anomalies still persist internally, and goods continue to be checked at some border crossings within the GCC. In March 2011 Abdel Aluwaisheg (the director-general for international economic relations at the GCC) confirmed that officials hope to agree this year on how customs revenue will be distributed among GCC states. Saudi Arabia (the largest country in the bloc) is a major trade partner of its co-members, accounting for about half of intra-GCC trade.

The GCC had agreed to form a common currency by January 1st 2010. However, Oman withdrew its support in December 2006, and the UAE withdrew from the union in May 2009, after other GCC members agreed to house the planned Gulf Monetary Authority (GMA; a precursor to the central bank) in Riyadh. Saudi Arabia, Bahrain, Kuwait and Qatar remain committed to plans for a Gulf monetary union, despite the withdrawal from the project of the UAE and Oman. A joint monetary council has been established, with the governor of the Saudi Arabian Monetary Authority (SAMA) , Mohammed al-Jasser, as its chairman. This body probably evolve into the group’s central bank by the end of 2012. However, the countries involved still need to agree on various technical issues and meet the convergence criteria. The Economist Intelligence Unit does not expect the introduction of a single currency before 2014, if at all.

Saudi Arabia was an original signatory to the Greater Arab Free-Trade Area (GAFTA), initiated by the Arab League in 1997. According to the terms of the agreement, tariffs for 124 commodities among Arab member countries were to diminish gradually at an annual rate of 10%, beginning on January 1st 1998 until January 1st 2007. The removal of tariffs occurred faster than expected, and by 2005 a free-trade area was established. Intra-Arab trade has since increased but falls short of expectations, primarily because of the absence of comparative advantage among member states and pre-existing trade relationships outside of the Arab world. By April 2011, 18 of the 22 Arab League members had signed the agreement. Aside from GAFTA, Saudi Arabia maintains bilateral trade and technical co-operation agreements with a number of other Arab countries that allow complete or partial tariff exemption on designated commodities.

As part of the GCC, Saudi Arabia is party to free-trade agreements (FTAs) and FTA negotiations conducted by the economic bloc. The GCC signed FTAs with Singapore (December 2008) and the European Free-Trade Association (EFTA; June 2009), which comprises Iceland, Norway, Switzerland and Liechtenstein. Negotiations with New Zealand on an FTA were concluded on October 31st 2010, following six rounds of meetings. As at end-April 2011, however, press reports indicate that the agreement has yet to be ratified by ministers on both sides. The GCC was holding FTA negotiations in April with the European Union, India, Mercosur (comprising Argentina, Brazil, Paraguay and Uruguay) and Turkey.

Saudi Arabia forbids imports of certain items for religious or security reasons, and it taxes others to protect domestic industry. It bans imports of alcohol and of non-medical drugs, and also most non-Islamic religious materials and other materials deemed offensive to Islamic principles. Weapons and electronic equipment are tightly controlled for security reasons, and Palestinian imports may require proof of origin to demonstrate that they are not Israeli. In 1994 the government banned the import of satellite dishes, though Saudis can buy them in Bahrain. Private ownership of these dishes (though illegal) is widespread.

The only significant non-tariff barrier is the Arab boycott against Israel, which blacklists foreign companies that are deemed to support Israel in various ways. However, the application of the boycott appears open to ad hoc interpretation, and its sponsors have removed some major companies from the blacklist. The Gulf Co-operation Council (GCC) agreed at the end of 1994 to lift the secondary and tertiary boycotts on companies trading with Israel, though some companies on that list have been refused visas, suggesting that the regulations are still applied selectively. Saudi standards are sometimes seen as biased against imports from particular countries. Health regulations, issued by the King Abdul Aziz City for Sciences and Technology (KACST) and the Saudi cabinet, also have been applied intermittently to halt certain imports (for example, fruits and vegetables from Jordan, and meat, especially beef, from the UK). The affected countries have argued that such bans constitute non-tariff barriers.

In February 2009 the Saudi Arabian Department of Customs implemented a regulation requiring all items shipped to Saudi Arabia to have the country of origin engraved or affixed by a non-removable sticker. If the product is not properly labelled, the item will be returned to the sender, who will be responsible for any cost incurred in extra labour, shipping and penalty charges.

The Saudi Arabian Standards Organisation (SASO) introduced a mandatory import-certification procedure in 1995, which covers 76 products. The organisation intends eventually to extend coverage to all merchandise imports. The 76 products liable for certification fall into five general categories: food and agriculture; electronics; cars and related parts; chemicals; and other generic goods. Goods not included on the list are subject to the older procedures, which require exporters to seek SASO verification before shipment. Exporters whose goods are included on the regulated list must obtain an International Certificate of Conformity (ICC) before shipment, allowing them to export to Saudi Arabia without further need to contact the SASO.

The SASO has contracted with Intertek Testing Services (US) to provide quality testing worldwide. An ICC is issued based on pre-shipment inspection and product testing to ensure that goods conform to Saudi specifications before export. Each ICC is valid only for the shipment with which it is issued. It is possible, however, to obtain a certificate valid for an unlimited number of shipments over a 12-month period by having a product “listed” at the relevant Intertek Testing centre. Pre-shipment certification and inspection fees are calculated on the basis of the free-on-board (fob) value of the shipment, though additional testing fees may apply. In January 2002, following a recommendation from KACST, the cabinet decided to allow the import of irradiated foods.

There are no specific taxes on exports.

There were no free trade ports or zones at end-April 2011, but the government is considering creating free-trade zones. There are no designated tax-free zones in Saudi Arabia.

The government prevents the export of Saudi and non-Saudi goods that receive a state sales subsidy.

There is no official export-credit programme. In the absence of a national export-credit institution, Saudi companies tap into the trade facilities of the Islamic Development Bank (IDB; based in Jeddah), the Inter-Arab Investment Guarantee Corp (based in Kuwait) and the Arab Monetary Fund (based in Abu Dhabi). Long-term financing programmes of the IDB promote non-traditional exports. Partial financing is available. For smaller transactions (less than US$4m), up to 80% of the value of the exported goods can be covered. Transactions exceeding US$4m can receive up to 40% coverage. Repayment periods range from six months to five years, depending on the type of good. Goods originating from IDB member countries (including those with at least 40% value added from Arab countries) are eligible for coverage.

The Inter-Arab Investment Guarantee Corp (IAIGC) offers export-credit guarantees against commercial and non-commercial risks. The scheme covers trade among Arab countries in goods with at least 40% value added from those countries. Payment terms may not exceed 180 days for commercial and non-commercial risk coverage.

Traders also may benefit from the Arab Trade Financing Programme (ATFP), which was established in 1989 and began to extend inter-Arab trade-credit lines under sponsorship of the Arab Monetary Fund (AMF) and other Arab financial institutions. The ATFP provides financing facilities for eligible trade transactions of goods of Arab origin and associated services. Goods are considered eligible for ATFP financing if entirely produced or manufactured in an Arab country from primary resources and other domestic components of production originating in that country or in any other Arab country. Goods are also eligible if the value added in an Arab country is at least 40% of the value of the goods. The ATFP can also finance imports of capital goods essential for production from non-Arab countries. Six-month revolving lines of credit are available, with financing for up to 85% of the transaction’s value. The Saudi Export Development Centre (SEDC) is the focal point of the ATFP in Saudi Arabia.

The following Saudi government sources are useful contacts for regulatory information in the country (though many web sites here are Arabic only):

• Board of Grievances, PO Box 75606, Riyadh 11138; Tel: (966.1) 402-1724; Fax: (966.1) 403-4296.
• Communication and Information Technology Commission (CITC), PO Box 75606, Riyadh 11588; Tel: (966.1) 461-8020; Fax: (966.1) 461-8000; Internet: http://www.citc.gov.sa.
• Department of Zakat and Income Tax, PO Box 6898, Riyadh 11452; Tel: (966.1) 402-2893; Fax: (966.1) 403-4127; Internet: http://www.dzit.gov.sa.
• General Organisation for Social Insurance (GOSI), PO Box 2963, Riyadh 11461; Tel: (966.1) 478-5721/477-7735; Fax: (966.1) 477-9958; Internet: http://www.gosi.com.sa.
• Inter-Arab Investment Guarantee Corp, Arab Organisation Building, Al Matar Road, Jamal Abdelnasser Street, Al-Shuwaikh, Kuwait (PO Box 23568, Al-Safat 13096, Kuwait); Tel: (96.5) 484-4500; Fax: (96.5) 481-5741; Internet: http://www.iaigc.net/.
• King Abdul Aziz City for Science and Technology (KACST), PO Box 6086, Riyadh 11442; Tel: (966.1) 488-3555; Fax: (966.1) 488-3118; Internet: http://www.kacst.edu.sa/en/Pages/default.aspx.
• Ministry of Commerce and Industry, PO Box 1774, Riyadh 11162; Tel: (966.1) 401-2220; Fax: (966.1) 403-8421; Internet: http://www.commerce.gov.sa.
• Ministry of Culture and Information, Nasseriya St, Riyadh 11161; Tel: (966.1) 401-4440/401-3440; Fax: (966.1) 402-3570. Internet: http://www.info.gov.sa/English/eDefault.aspx.
• Ministry of Finance, Airport Road, Riyadh 11177; Tel: (966.1) 405-0000; Fax: (966.1) 405-9202; Internet: http://www.mof.gov.sa.
• Ministry of Labour, Omar ibn al-Khattab Street, Riyadh 11157; Tel: (966.1) 477-1480; Fax: (966.1) 477-7336; Internet: http://www.mol.gov.sa.
• Saudi Arabian Basic Industries Corporation (SABIC), PO Box 5101, Riyadh 11422; Tel: (966.1) 225-8000; Fax: (966.1) 225-9000; Internet: http://www.sabic.com.
• Saudi National E-Government Portal, King Abdul Aziz Communication Complex, Al-Morsalat Quarter, Riyadh 11112; Internet: http://www.saudi.gov.sa.
• Saudi Export Development Centre (SEDC), PO Box 220130, Riyadh 11311; Tel: (966.1) 276-5443; Fax: (966.1) 406-5196; Internet: http://www.sedc.org.sa/.
• Saudi Arabian General Investment Authority (SAGIA), PO Box 5927, Riyadh 11432; Tel: (966.1) 203-5555; Fax: (966.1) 263-2894; Internet: http://www.sagia.gov.sa.
• Saudi Arabian Monetary Agency ( SAMA ), PO Box 29923, Riyadh 11169; Tel: (966.1) 463-3000; Fax: (966.1) 466-2378; Internet: http://www.sama.gov.sa.
• Saudi Aramco, PO Box 5000, Dharan Airport 31311; Tel: (966.3) 876-5229; Fax: (966.3) 876-6520; Internet: http:// www.saudiaramco.com.
• Saudi Arabian Standards Organisation (SASO), Iman Saud Ibn Abdulaziz Mohamed Road, Mohammadia, Riyadh; PO Box 3437, Riyadh 11471; Tel: (966.1) 452-0000; Fax: (966.1) 452-0086: Internet: http:// www.saso.org.sa.
• Saudi Electronic Internet Exchange (SaudiEDI), Internet: http://www.saudiedi.com/sanam/pfk/ PfkMainServlet?pContents=/sau/sauWalkinUrl.jsp&pAction=FIRST&pPortalId=SAU.
• Saudi Industrial Development Fund ( SIDF ), PO Box 4143, Riyadh 11491; Tel: (966.1) 477-4002; Fax: (966.1) 479-0165; Internet: http://www.sidf.gov.sa.

The following chambers of commerce also provide useful contacts:

• Council of Saudi Arabian Chambers of Commerce and Industry, PO Box 16683, Riyadh; Tel: (966.1) 405-3200; Fax: (966.1) 402-4747; Internet: http://www.saudichambers.org.sa.
• Eastern Province Chamber of Commerce and Industry, PO Box 719, Dammam; Tel: (966.3) 857-1111; Fax: (966.3) 833-5755; Internet: http://www.chamber.org.sa.
• Federation of GCC Chambers of Commerce, PO Box 2198, Dammam; Tel: (966.3) 826-5943; (966.3) 826-6974; Internet: http://www.fgccc.org.
• Jeddah Chamber of Commerce and Industry, PO Box 1264, Jeddah; Tel: (966.2) 651-5111; Fax: (966.2) 651-7373; Internet: http://jcci.org.sa.
• Riyadh Chamber of Commerce, PO Box 596, Riyadh; Tel: (966.1) 404-0044; Fax: (966.1) 402-1103 Internet: http:// www.riyadhchamber.com/index.php.
• US-Saudi Arabian Business Council, 1401 New York Avenue NW, Washington DC 20005; Tel: (202) 638-1212; Fax: (202) 638-2894; Internet: http://www.us-sabc.org.