IT is no longer a question of whether the Saudi government will act to correct the imbalances in the kingdom’s economy, but how it will be done and at what pace.
Riyadh is looking for ways of cushioning the blow to national living standards that balancing the budget and containing the growth in indebtedness will inevitably entail. Many options are under consideration. One that is not being considered is a continuation of the fiscal policies of the past which are clearly unsustainable.
The 1995 budget, unveiled in January, pointed the way ahead for public finance. It called for cuts in government expenditure for the second year running. The deficit is to be slashed and new steps taken to boost government earnings, at present mainly provided by proceeds from the oil industry.
This is the prescription the kingdom’s creditors, potential investors and growing business community hoped for. Now they want to see results to substantiate the government’s commitment to getting its finances in order.
Convincing the outside world that Riyadh is serious about slashing the deficit is a challenge. The credibility issue was highlighted by the new budget statement which showed that the goal of achieving a balanced budget in 1994 was missed by a wide margin. Instead, the deficit ballooned to SR 40,000 million, significantly more than the deficit called for in the 1993 spending programme and one of the highest ever.
Most analysts had concluded that matching income with expenditure in 1994 was unrealistic in view of the further fall in crude oil export earnings, but the scale of the deficit came as a surprise. If the government is obliged to seek financing on a similar scale in 1995, the support of a financial community that has kept faith in the Middle East’s largest economy will be tested.
The of the 1995 budget are:
Spending. This has been set at SR 150,000 million, 6.2 per cent lower than in the 1994 budget. This is about 38 per cent of gross domestic product (GDP) and the lowest level for public spending since 1988. Defence spending was set at SR 49,492 million, 33 per cent of the total budget for the year and about 12 per cent of GDP (see table).
The aggregate figures underestimate government spending in several ways. The budget statement said that the municipal and water sector is projected to raise SR 1,088 million from revenues which would be spent in the year. The state telephone company is to spend what it earns from its services. This is projected at SR 2,175 million in 1995.
Income. Total government revenue is projected at SR 135,000 million, a rise of 12.5 per cent on the 1994 figure. The income forecast is conservative. It appears to be based on an assumption that average crude oil prices in 1995 will be about $1 a barrel lower than most analysts expect. Increases in visa fees and domestic air fares, the end of unlimited free telephone use within major cities and higher fuel, power and water charges are expected to raise more than SR 9,000 million for the government.
The deficit. The goal is just over SR 15,000 million, equivalent to less than 4 per cent of GDP. If this target is achieved, it will be the lowest deficit since 1983. The government is attempting to avoid international borrowing, so the amount it needs will have to be raised domestically, through further bond and note sales or more borrowing from local financial institutions.
The budget’s most striking feature is the revenue-raising measures. This is the first occasion in modern times that the annual budget will reduce the living standards of many Saudi Arabians. The issue is a sensitive one. In a speech about the 1995 budget to the majlis al-shoura in January, King Fahd said increasing prices was a better option than more borrowing from the banks. It was a temporary measure and would be dropped ‘as soon as matters are restored to their natural course’.
This may be a long wait, if projections contained in the IMF’s annual survey of the kingdom’s economic affairs are even partly accurate. This was prepared several months before the 1995 budget was unveiled. Its forecasts were based on no fundamental changes in the government’s fiscal policies. These showed public expenditure rising to almost SR 190,000 million and the budget deficit reaching SR 23,800 million in 1998.
The report said that these forecasts showed the policies pursued in the first half of the 1990s were untenable and would lead to rapid growth in debt and debt service. This in turn would reduce the government’s scope to cut spending, drain foreign assets, crowd out private investment and obstruct efforts to achieve sustainable economic policies.
The IMF said that the government had decided to tackle these trends through a combination of spending cuts and efforts to raise non-oil revenues. This was a move the fund welcomed. It urged Riyadh to concentrate on cutting ‘unproductive’ spending and finding ways to raise non-oil revenues in a lasting way. The IMF concluded that it ‘supports the authorities’ intentions to reduce expeditiously and substantially implicit and explicit subsidies, an approach which would also be a pre-requisite for successful privatisation.’
The 1995 budget suggests that the government is taking the IMF’s advice. The implications for the economy will be profound. With government cutting its expenditure and reducing subsidies, spending on consumer and capital goods is set to continue. The 1994 trade figures show that spending in the economy has been heavily squeezed since the 1992 cyclical peak. Then, expenditure on imported goods alone totalled more than $33,000 million. In 1994, the figure was down to less than $24,000 million.
As a consequence, economic growth – which was in double figures in both 1990 and 1991 – has stagnated in the past two years. MEED estimates that there was zero real growth in 1994 and expects the economy to mark time at best in 1995. This view, shared by most analysts, was contradicted by the budget statement which said the kingdom’s economy grew by 6 per cent in 1994.
The economic slow down is having its positive effects. MEED estimates that the current account deficit tumbled to about $5,000 million in 1994 as spending on imports was compressed. Other analysts believe the deficit was higher than the MEED estimate, but well down on the level recorded in 1993. The balance of payments outlook is also difficult to judge. The IMF forecasts the deficit could grow to more than $16,000 million in 1995, rising to almost $19,000 million the following year. In contrast, the Petroleum Finance Company of Washington, in a recent forecast for the GCC, projects a Saudi deficit of less than $11,000 million in 1995, falling to less than $10,000 million in the following 12 months.
Inflation is under control. The budget statement said that the consumer price index rose by only 0.6 per cent in 1994 compared with 0.8 per cent in 1993. The government’s determination to defend the parity of the riyal against the dollar coupled with growing competition in the Saudi market should ensure that price rises will continue to be modest, despite the 1995 utility price rises.
The strongest muscle in the kingdom’s economy is the oil sector. Oil production in 1994 averaged more than 8 million barrels a day (b/d) for the third complete consecutive year, confirming Saudi Arabia’s position as the world’s leading crude oil exporter. Unless Iraqi oil exports are allowed and markets are disrupted, the kingdom’s output and exports should remain steady throughout 1995.
The oil price news is also encouraging. If OPEC discipline holds, and Iraq remains embargoed, there is reason to believe they could rise a further $1 a barrel during the year. Saudi Aramco is working to increase its revenues from petroleum products and liquefied petroleum gas (LPG) sales. The increases in petrol prices in the 1995 budget should help free up refined products for export.
Saudi Basic Industries Corporation (Sabic) had an excellent year in 1994 and other non-oil industries are making inroads into regional and international export markets. These achievements suggest that the kingdom has many of the ingredients for a positive economic performance. The policy-makers are now tackling the challenge of creating the right mixture of policies for consistently strong growth in the future.