a constantly growing agenda. International relations have become increasingly complex on multiple fronts. Domestic reforms are gathering momentum - and by doing so are demanding considerable attention. However, unlike times past, the decision-makers can be reassured that they are facing the challenges on a sure economic footing.

In what is looking to become Saudi Arabia's strongest performance since 1981, oil export earnings are on course to reach up to $80,000 million this year. The maths behind the figures could not be simpler. Saudi Arabia produced an estimated 9 million barrels a day (b/d) in the first half of 2003, while oil prices hovered around $28 a barrel. Despite higher spending on security-related issues, the windfall will ensure the government will book a rare budget surplus in the range of 5.5 per cent of gross domestic product (GDP).

The figures are positive indeed. More importantly, they are supported by significant achievements on the economic reform front. Key legislation such as the capital markets and insurance laws have been approved and are on their way towards implementation. An anti-money laundering law has also been given the green light by the Council of Ministers. And Prince Abdullah Ibn Faisal Ibn Turki, chairman of the Saudi Arabian General Investment Authority (Sagia), has stressed its commitment to reduce further the negative list for foreign investment.

The speed of reform is no big surprise, given Commerce & Industry Minister Hashim Yamani's earlier announcement that Saudi Arabia would be joining the World Trade Organisation (WTO) no later than early 2004. The final hurdle will be reaching a bilateral trade agreement with the US, the last major accord to be signed before accession can be granted.

While observers in and outside the kingdom acknowledge the benefits of the latest reform push, there is almost unanimous consensus that another issue is topping the reform agenda - education. Only with the right education standards in place will the government be able to control rising unemployment, which has risen to 8.2 per cent, according to the latest Economy & Planning Ministry figures. 'In my view, the most important economic reform issue is education,' says an economist in Riyadh. 'It may not seem so obvious because access is there, the infrastructure is there and the graduates are there. So it does not seem to be a problem. But it is a very serious issue. When you talk to the private sector, they say there is a huge supply/demand mismatch [of graduates' skills]. There is no critical thinking among graduates. Sorting this out will take a long time, at least 15 years.'

The discrepancy between what is required from graduates and what they can offer has long been a topic of discussion among local and foreign businessmen. This is particularly the case since the government is increasingly enforcing Saudiisation regulations, calling for a minimum percentage of Saudi employees in various sectors of the economy. Businesses are now beginning to introduce training schemes for young Saudis, but the need for the government to intensify its efforts to improve education is becoming more and more urgent.

'There is no shortcut to train Saudis,' says Ihsan Ali Bu-Hulaiga, an economist and member of the Majlis al-Shoura (consultative council). 'One cannot expect only small and medium-sized enterprises to do the human development. It is for the government to do so. The solution will come at a cost and this will need to be mostly shouldered by the government.'

The education debate is not only central to the kingdom's economic future: it has important political dimensions as well. The 12 May suicide attacks on expatriate compounds in Riyadh killed at least 26 people, and shook the country to its foundations. Since the attacks, the government has been quick and decisive in its response and has launched an unprecedented security operation.

'The danger of terrorism still exists in our country,' Interior Minister Prince Nayef bin Abdulaziz said in late July. The statement came only days after security forces had arrested 16 Al-Qaeda suspects in Riyadh, Qassim and the Eastern Province that were accused of planning terrorist attacks against 'vital Saudi installations and targets'. But these were not the only arrests. As part of a broader campaign to crack down on Islamic militants, security forces have swept through the kingdom, arresting hundreds of alleged militants and confiscating guns, grenades and explosives.

The crackdowns have been met with resistance. The recurring gun battles might be cause for concern but, perversely, also provide some sort of comfort. 'The positive thing in all this is that the government shows that it is serious about providing security and going after militants,' says the Riyadh-based representative of a European company.

Others are less sanguine. Almost 100,000 Western expatriates live in the kingdom, mostly in compounds similar to those that were attacked, but there has been some thinning of numbers. 'People are coming back from their holidays,' says a Riyadh-based lawyer. 'But the Western expatriate community has definitely shrunk. Depending on businesses' needs to have people on the ground, some companies have decided to base their people elsewhere.'

Message

While the police are securing the streets, the message has been taken to the mosques. The Council of Islamic Scholars, a 17-member council headed by Grand Mufti Sheikh Abdulaziz al-Sheikh, on 16 August announced that 'acts of sabotage such as bombings, murder and destruction of property are serious criminal acts and an aggression against innocent people'.

The agenda is being pushed on other fronts too. The government has clamped down on cash donations to what the US might regard as questionable charities in an attempt to prevent the flow of money to terrorist organisations. The move was supported by a temporary ban on private relief and charity groups sending cash donations abroad.

The government's toughening line has been cheered in Washington, and has gone a long way towards convincing the US administration that Riyadh continues to be an important regional partner. However, the relationship has been strained, not least by Washington's late-July decision to withhold parts of a 900-page congressional inquiry into the 11 September terrorist attacks. It has been widely leaked that the classified 28-page section examine the role foreign governments, including Saudi Arabia's, played in the outrage.

The Bush administration has repeatedly rejected calls for declassification of the section, even in the face of the highest-level intervention from the Saudi side.

'It is an outrage to any sense of fairness that 28 blank pages are now considered substantial evidence to proclaim the guilt of a country that has been a true friend and partner to the US for over 60 years,' Foreign Affairs Minister Prince Saud al-Faisal said in a statement following a meeting with President Bush at the White House on 29 July. 'This accusation is based on misguided speculation and is born of poorly disguised malicious intent.'

On the other side of the Atlantic, relations with the UK improved after the early-August release of five Britons, one Canadian and one Belgian, imprisoned in Saudi Arabia since 2000 for their alleged involvement in a wave of bombings connected to alcohol smuggling.

The show of clemency - and their release - will help re-establish a certain level of trust with both London and Washington. But the question being asked among Saudi decision-makers is what role the kingdom is going to play in the region now that US interests are focused on Iraq. The concern in Riyadh is clear: how will regional geopolitics be changed by Washington's new foreign policy and how should Saudi policy be developed in response?

There are other concerns. Ongoing disorder in Iraq could also affect Saudi Arabia, in particular if a Shia-led government were to emerge in Baghdad. More importantly, there is the issue of Iraqi oil. While Iraqi production is highly unlikely to flood international oil markets in the short term, over the medium-to-long-term it will throw up a host of new questions for OPEC in general and Riyadh in particular. Perhaps the Iraq donors' conference planned for late October in Madrid will present the perfect forum for the Saudi government to lay out its thinking on the problems over its northern border.