PERCEPTIONS have improved dramatically this year as Saudi Arabia has started to reap the rewards of its financial discipline. The government, appointed in August 1995 with a mandate to explore reform, has kept a tight lid on spending, while windfall gains from higher oil prices have helped to transform the economic outlook. If current trends continue, the budget deficit could be eliminated by the end of the year. And, it is even possible to forecast a surplus in the current account for the first time since the early 1980s.
The economic turnaround is welcome news to the government after three years marked by recession and relative austerity. Speaking at the IMF in September, Finance & National Economy Minister Ibrahim al-Assaf forecast that gross domestic product (GDP) will grow by 6.2 per cent this year. This compares with just 0.5 per cent in 1995, no growth in 1994 and negative growth in 1993.
The minister is credited with enforcing the key element in the kingdom's economic strategy by restraining expenditure. 'He has been fleshing out what fiscal discipline really means,' says a financial analyst in Riyadh. 'He has been working very closely with the spending ministries to stick to the numbers. Actual outlays will come in very close to what was asked.' The forecast for 1996 was for a budget deficit of SR 18,500 million on spend-ing of SR 150,000 million. The proposed deficit was 23 per cent higher than in the previous year and equivalent to 4.1 per cent of GDP.
In practice the government should be able to balance the books and bring down its domestic debts. The combination of spending restraint and a surge in oil revenue has already enabled the authorities to pay off arrears to a variety of creditors, boost domestic liquidity and rebuild international confidence in the management of its finances. 'We have seen moves towards solving the issue of late payments and promises that all late payments will be settled by the end of this year,' says one Jeddah-based observer. 'Contractors are being paid more promptly than in the past.'
So far, the temptation to boost spending with some of the $10,000 million in extra revenues has also been resisted. Amid expectations that oil prices will remain high into next year, budgeted spending is likely to rise in 1997, albeit by a modest amount. 'The budget will be bigger,' says the observer. 'But they must strike a balance between showing that everyone can share in the fruits of higher oil prices and maintaining the financial discipline to which they are committed.'
The strength of other broad policy commitments will also be tested. Saudiisation is a central element of the 1996-2000 development plan and a matter of some urgency as young Saudis flood on to the job market. Efforts continue to promote national employment by making it harder to hire expatriates. In late October, a further 14 job categories were reserved for Saudis. By raising the cost and restricting the influx of foreigners the government hopes the private sector will hire some 659,000 more Saudi nationals by 2000 (see page 56).
Privatisation is a policy that has achieved prominence in government thinking in recent years, although it seems to be receding as it is more clearly defined. There has certainly been less talk of the privatisation of major state-owned companies. Saudi Basic Industries Corporation is a profitable enterprise that the exchequer would be reluctant to see sold off, while the telecoms network and the national airline are loss-makers that would not appeal to investors in their current condition.
'There is more talk about private participation in infrastructure,' says a banker. 'But they are not sure how they want to proceed with it.' The Royal Commission for Jubail and Yanbu is pressing ahead with a private joint venture to upgrade the utilities at the two industrial cities which could provide lessons for the rest of the country (see page 45). In the western region the Shuaiba power station has been tendered as a build- own-operate-transfer (BOOT) scheme. Funds for the Ghazlan power plant expansion in Eastern province are being raised through an international syndication but analysts stress that this project is not typical.
One of the ironies of the improved economic climate is that the impetus for reform, in general, and privatisation in particular, may start to slow. 'A general observation would be that countries generally privatise when they have to, which is not the case in Saudi Arabia,' says the Riyadh- based analyst. 'This is a capital surplus country, it does not need to privatise to work.' Equally, in the more benign economic conditions that prevail today, the raft of new revenue raising measures recommended by the IMF in 1995 - such as consumption taxes, higher excise duties and utility prices - are unlikely to be taken up in a hurry.
One reason for the reluctance to adopt such measures is the imperative of not imposing undue burdens, such as higher tariffs for utilities, on Saudi citizens. 'Consumer interests weigh very heavily here. How the balance is struck is going to be very important,' observes the analyst. The instinct of King Fahd is to impose as light a burden as possible upon ordinary Saudis.
Now aged 75, the king seems an unlikely agent of sweeping reforms. Since he succeeded King Khaled in 1982 Fahd has acquired the reputation of a very cautious moderniser. He has also proved to be remarkably resilient. In January, Fahd handed over authority to Crown Prince Abdullah so that he could convalesce after a severe illness, probably a stroke, that struck him down in late 1995.
Fahd and friends
Contrary to expectations that the arrangement might become permanent, Fahd resumed his official functions in late February. After a period of seclusion in Jeddah he has since been well enough to chair regular cabinet meetings and receive a flurry of official visitors. Regional figures have included President Mubarak of Egypt and Sultan Qaboos of Oman. President Chirac of France was the most prominent western guest. His July visit was followed by an order for 12 Cougar helicopters in a deal worth $600 million.
Recent months have also been noteworthy for the public reconciliation with Jordan and Yemen. To mark the end of their estrangement, King Hussain was received by the king in August for the first time since Jordan leaned towards Iraq in the Gulf crisis of 1990-91. In a similar vein, Second Deputy Prime Minister and Defence & Aviation Minister Prince Sultan paid a three-day visit to Yemen in late August, the first by such a senior official since the Gulf war.
The kingdom's close western connections were cruelly exposed in late June when a massive bomb exploded outside a military compound in Al-Khobar. Nineteen American servicemen died in the attack, which was the biggest peacetime assault on US forces since the Beirut bombings in 1983. It came less than a month after four Saudi citizens were executed for the bombing of a military compound in Riyadh last November which killed five Americans, a Filipino and an Indian. The bulk of the several thousand US forces that remain in the kingdom have been moved to more remote locations.
Developments around the region during the summer have left the kingdom more at odds than at ease with the US, its main arms supplier and most important ally. The government offered no public support to the US missile attacks on Iraq in early September and roundly condemned Turkish plans to create a security zone in northern Iraq. However, Saudi sympathy for the sufferings of the Iraqi people and support for the integrity of the country does not extend to Saddam Hussein, nor is it likely to.
As a cautious supporter of the US-sponsored peace process Riyadh has seen its hopes dashed by the election of Benjamin Netanyahu in Israel and the absence of US encouragement to Israel to make any concessions. At the Arab summit in Cairo from 21-23 June, Riyadh joined fellow Arab states in a renewed call for Israel's complete withdrawal from all occupied Arab land, including Jerusalem.
Despite the obvious differences with the US, the relationship remains mutually advantageous, with the US ensuring the security of the kingdom in return for stable oil supplies at reasonable prices. Under Fahd or his successor the realities of this relationship in a disturbed but strategic region are unlikely to alter significantly. The greater challenge for the regime will be to achieve the ambitious aims of the development plan and ensure employment and economic opportunity for the coming generations. Meeting the aspirations of the Saudi people would be the best guarantee of future security.
Exchange rate: $1= SR 3.75
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.