The economy is set to record solid, if unspectacular, growth of some 2-3 per cent in real terms in 1997 despite a 25 per cent fall in world oil prices since the start of the year. Oil revenues are still of overriding importance to the Saudi economy but the world's largest oil exporter is showing no signs of any action to raise production rates. Respect for the long-standing OPEC quota of 8 million-barrels-a-day (b/d) remains at the centre of oil policy.

The price of the benchmark Brent crude averaged $19 a barrel in the first eight months of this year and $20 a barrel for the revenue year to date, from last November to the end of August. This implies an average price for Arab Light of $18 a barrel in the revenue year so far, against a budget assumption of around $16 -16.50 a barrel. Even if prices remain at the lower end-August levels for the two remaining revenue months, the government's revenue forecast should be achieved comfortably.

Analysts say the outlook for the economy in the short term is good. 'The core of the Saudi economy is very solid in terms of fundamental policy, based on the commitment to a free market,' says Abdulaziz al-Dukheil, president of the Consulting Center for Finance & Investment in Riyadh. Oil prices trading in the current range of around $18-23 a barrel for Brent will provide stable revenue and ensure ample liquidity, increasing both bank deposits and nominal growth in the economy, he says.

Earlier this year the IMF said that the fiscal policies adopted two years ago and attempts to increase non-oil revenues had led to 'a significant improvement in fiscal and external accounts'. Last year, Saudi Arabia recorded its first current account surplus since 1982. It was a modest one, at some $200 million, and will be hard to repeat. But it stands in marked contrast to the deficit of $5,300 million in 1995 and the staggering 1991 deficit of $27,500 million. Rising imports and lower oil earnings are expected to push the current account back into the red this year, to the tune of about $2,000 million.

The 1997 budget was widely welcomed by the private sector as encouraging growth, although analysts cautioned that it remains biased towards wages and salaries at the expense of investment in infrastructure. A manageable deficit of around 3-3.5 per cent of gross domestic product (GDP) is expected this year. 'Gauged by the level of investment and new projects, sentiment in the private sector is good. And there is great potential for growth,' Al-Dukheil says.

However, the longer term outlook is unclear. Action to tackle deep-rooted structural problems in the economy should be a priority. 'The speed and depth of... [reforms] will play a crucial role in sustaining a high level of private sector investment, growth and employment creation,' the IMF says.

There are signs that a wide-ranging economic reform effort is in the making but progress has been modest. 'Most of the emphasis so far has been on surface issues,' says one analyst. 'Some current problems are being addressed, for example through Saudi-isation. But the source of the problems, the structural issues, have not really been tackled,' he says.

The IMF has repeatedly advocated reform and diversification of the revenue base and is keen to see more taxes. Suggestions include: a sales tax; a 10 per cent excise duty on certain goods; a turnover tax for local and foreign companies; gasoline and diesel price rises; cuts in subsidies and the public sector wage bill; and a freeze on spending. Other IMF recommendations include accelerating privatisation 'within a clear strategy of government disengagement from commercial activities'.

Speaking in late August, Second Deputy Prime Minister and Defence & Aviation Minister Prince Sultan said, 'A month ago, there was a decision which was sent to specialised committees to study privatisation...and this includes all the government sector...' In early August, a cabinet statement reiterated plans to encourage national and foreign capital to invest locally; increase job opportunities and raise per capita income; and increase the effectiveness of the Saudi economy and its ability to face global competition, especially in the light of applying to join the WTO.

Yet, speedy moves to privatise are not expected. Official statements have so far been short on detail and many government companies will require restructuring and commercialisation before privatisation can be considered. The highly profitable petrochemicals and industrials giant Saudi Basic Industries Corporation (Sabic) is a candidate for an early sale. A reduction of the government's stake to 49 per cent from 70 per cent has been mooted.

Longer in coming will be the privatisations of Saudi Arabian Airlines, at present undergoing an extensive corporate restructuring, and telephone services, being expanded by the Ministry of Posts, Telegraphs & Telephones under a contract awarded to Lucent Technologies.

One sector to see changes this year is the operation of the ports, which will now be run by the private sector on an income-sharing basis under 10-year lease contracts. 'It is not what one would call complete privatisation nor is it a subcontract. It is a flexible semi-privatisation programme,' says Imad Abdul Jawad, general manager of Globe Marine Services, which has the contract for roll-on-roll-off and passenger ship facilities at Jeddah.

There have also been tentative steps towards private sector participation in the electricity sector, through independent power projects (IPPs). In April, five local and international contracting groups answered an invitation to bid for the long-awaited Shuaiba power station on a build- own-operate (BOO) basis, the first time such a method has been considered seriously.

Some four months after bids were submitted it remains unclear whether the IPP or the more conventional lump sum turnkey method will be chosen for Shuaiba. However, the government's continued interest in the idea was signalled recently when the consultants for the IPP option were asked to proceed with the next phase of evaluation. A shortlist of bidders is now being drawn up before proceeding to parallel negotiations on agreements for energy conversion, fuel supply, intra-shareholder relations and credit support. A firm decision on the project is not expected until late this year.

Stock market reform is another aspect of plans to restructure the economy. After the launch of the first country fund earlier this year - giving international investors unrestricted access to Saudi shares for the first time - the Commerce Ministry has taken steps to encourage more large private companies to consider a listing. With a total capitalisation of more than $50,000 million, the market is the biggest in the Arab world but only 71 stocks are quoted and only a few of them are actively traded.

In August, the ministry issued new regulations for companies wishing to convert to public joint-stock companies. The rules say a firm should: be at least 10 years old; have made a profit in the previous year; offer at least 51 per cent of its shares to the public; and have minimum assets and partners' equity of SR 75 million ($20 million). Companies will also be required to show a return on equity of not less than 10 per cent in each of the five years preceding application to convert and project a similar return for each of the five years following.

Officials said the aim was to enable the government to take any decision on turning a company public objectively and easily. The rules are also designed to help clarify the procedure for owners of private companies and make available more information to potential investors, they said.

Reaction in the business community has been generally positive, with the accent on increasing disclosure particularly welcomed. However, some analysts take the view that the requirements for return on equity may be too demanding. 'I would like to see 10 per cent over the past five years as an average return, not a minimum,' says one.

Overall, analysts say there is much for Saudi Arabia's economic planners to be pleased about. Share prices have risen by more than 20 per cent this year, turnover on the stock market is also considerably improved; foreign currency reserves have been rebuilt after some drawing-down last year; the government has no foreign debt; and domestic debt is declining as efforts continue to repay government contractors and suppliers.

Yet, others say that the government is not moving fast enough. They fear that the optimism about the immediate feature could reduce the sense of urgency and lull the government into delaying the structural reforms that are essential if long-term growth is to be achieved.