SAUDI Arabia will be hoping to achieve significant growth rates if its economy is to keep up with demography. The kingdom's per capita gross domestic product (GDP) has been falling since the late 1980s along with oil prices. An improved oil market in 1995 cut the budget and current account deficits and gave a boost to the kingdom's reserves, but no one is looking to the oil sector for spectacular growth in the foreseeable future.

The state sector, so dependent on oil revenues, is equally unlikely to provide growth opportunities. However, what the government may lack in funds, it is making up for with new initiatives. The new cabinet is showing an openness to private sector involvement which would have been unimaginable until very recently.

The sixth five-year plan, covering the years 1995-1999, laid unprecedented emphasis on the role of the private sector as a source of future growth. Privatisation is on the agenda for the national carrier Saudi Arabian Airlines (Saudia), the telecommunications system and the electricity companies. In the meantime, commercial finance is being sought for power projects and the first infrastructure schemes to be built on a build-own-operate basis are under study.

'The move to the private sector is making the budget less relevant,' says Henry Azzam, chief economist at National Commercial Bank. 'As the private sector becomes more mature, it is no longer looking to the government to hold its hand. Things will become less cyclical and less dependent on oil.' The main trends expected in 1996 are:

GDP. Growth in the economy is expected to be modest. In real terms, GDP was static in 1994 and 1995 and this is likely to be the case again in 1996. This contrasts with the average rate of 3.8 per cent a year predicted in the sixth development plan. Expectations of lower oil prices in 1996 suggest that the contribution of oil to GDP will be flat during the year. Public sector GDP is also expected to be stable and growth in the private sector is expected to be subdued by the government's tight fiscal policy. Growth is expected to be seen in export-oriented industries such as petrochemicals and in areas such as mining, where a number of new projects are getting off the ground.

The balance of payments. Trends in the kingdom's current account are generally positive, helped by a larger trade surplus and a falling services and transfers deficit. 'The current account deficit will decline considerably both as an absolute and as a percentage of GDP if the government continues to retrench,' says Azzam. 'Especially if non-Oil exports continue to rise.' The kingdom's trade balance has been helped by higher oil prices, exports from new non-oil industries and restrained import growth. Oil exports are estimated to have risen by 6 per cent in 1995 to $40,000 million. The call on Saudi oil is expected to continue to rise. The IMF's article IV report estimates that oil export earnings will reach $45,000 million a year by 2000.

Non-oil exports are soaring, due mainly to the meteoric rise of the Saudi Basic Industries Corporation and an accompanying revival in the world petrochemicals market. Non-oil exports are estimated to have reached $5,700 million in 1995, 27 per cent higher than in 1994 and 50 per cent higher than in 1993. Imports are estimated to have risen by 5 per cent in 1995 to $22,400 million.

In the services account, gains made by lower government payments have in part been offset by higher expatriate remittances. At $6,100 million, government payments for services are about one quarter of what they were in 1991. However, private transfers, mostly by expatriate workers, remain stubbornly high. These stood at $8,810 million in the first half of 1995 and were expected to have reached $16,000 million by the end of the year.

These trends are estimated to have helped cut the current account deficit by 26 per cent in 1995 to an estimated $6,700 million.

The capital account. This has been financed in the main by capital inflows from the private sector. Commercial banks repatriated an estimated $3,000 million in 1995 and $4,200 million in 1994. Private individuals are also repatriating capital to invest in new businesses, and capital is flowing into the kingdom from foreign companies to set up joint ventures. The inflows have helped the Saudi Arabian Monetary Agency (SAMA - central bank) rebuild its depleted foreign reserves. They peaked at $9,420 million at the end of the second quarter of 1995, their highest level since 1991. However, weaker oil prices in the second half of the year pushed them back to $8,620 million by the end of December 1995, although this was still 17 per cent higher than at the end of 1994.

'More capital repatriation will eventually happen,' predicts Saud Saleh al-Saleh, general manager of the local Saudi Investment Bank. 'Investors will find good opportunities to invest here in terms of return and competitive advantage. You will find more and more projects coming to the market. It won't happen overnight. But, in the medium- to long-term, when existing projects come onstream, people will be able to see the size of returns. They will have a big impact in their preparedness to invest at home.'

Kevin Taeker, chief economist at Saudi American Bank, agrees. 'To get sustained inflows, the kingdom must offer opportunities which are as attractive as can be found offshore. Given the spending power and demography of the kingdom, new ventures do offer a good rate of return.'

The oil market. Saudi Arabian oil sold for an average of $15.50 a barrel in 1995, $2.50 more than the government had anticipated in the budget. However, the forecasts for this year are less promising, for three reasons. The first is the growth of non-OPEC production, which is eating into OPEC market share. Output from the North Sea is expected to leap by 12 per cent in 1996 to about 6.7 million b/d. While OPEC took a 36.5 per cent share of the world's crude oil market in 1994, in 1996 this is expected to fall back to 35.5 per cent, including changes in stocks.

The second problem is quota violations by OPEC members. In 1995, Saudi Arabia kept close to its OPEC quota of 8 million b/d, producing an average of 8.01 million b/d from its Saudi Aramco fields and 212,500 b/d as its share from the neutral zone. However, production from other OPEC members, notably Nigeria, Gabon and Venezuela, has gradually edged above the agreed quotas. Venezuela produced an average of 2.7 million b/d of crude oil in 1995, 350,000 b/d higher than its OPEC quota.

A third issue is the possible return of Iraqi oil to the market. A flurry of speculation in February greet the resumption of negotiations between Iraq and the UN about the terms of Iraqi oil sales. At the time, the kingdom's ambassador to the US Prince Bandar Bin Sultan expressed his sympathy for the predicament of the Iraqi people. Iraqi oil sales would have an 'important impact' on the kingdom's economy, he said. 'But lifting the suffering is more important than oil and money.' However, he explicitly tied Iraq's return to its adherence to UN Resolution 986.

Whenever it happens, Iraq's return is expected to push prices down. Non-OPEC production is certain to continue rising, taking market share, and OPEC quota violations leave little room for manoeuvre in the market if Iraq does return. These factors are unlikely to change for the better in the foreseeable future, threatening a decline in world oil prices of up to $2 a barrel. Yet, such an event may be just what is needed to get OPEC members acting in concert once again.

Inflation The cost of living index was on average almost 5 per cent higher in 1995 than in the previous year. This was due almost exclusively to the price rises introduced in the budget statement of January 1995. Subsidies were cut on fuel, telecommunications, electricity, water and domestic flights. The absence of similar factors this year is expected to push inflation back down to 1 per cent through 1996.

Interest rates. Riyal interest rates have fallen since the beginning of the year in line with dollar rates. The repurchase rate has been cut twice since 1 January to 5.85 per cent.