Tough task of putting reform into practice

05 April 1996

THESE are times of sweeping change for Saudi Arabia. Since tbe summer of 1995, the kingdom has seen a shake-up of its senior civil servants and a major cabinet reshuffle. The brief regency of Crown Prince Abdullah bin Abdel-Aziz, although not part of the plan, brought change at the apex of power in the kingdom.

The many new faces of Saudi officialdom have been bequeathed a programme of tight fiscal discipline amid economic diversification. The targets to be met include eliminating the budget and current account deficits and the creation of jobs for young Saudis. Whether the new government can muster the political will to press forward with the reforms that are needed to achieve these objectives remains to be seen. However, the first excursions into uncharted territory are being made, and observers detect determination at the highest level to pursue a sustainable strategy.

'There is a common thread running through Saudi policy,' says one Western diplomat in Riyadh. 'And that is living within one's means. However, with the economy still so dependent on oil, planning for that is a difficult task. What is lacking is predictability.'

Two forces are driving the government in its new direction. One is the need to reduce the reliance on oil and diversify the economy. The kingdom has the world's largest oil reserves and is still the world's largest oil exporter, but old cliches about its prodigious wealth no longer apply. Since the end of the Kuwait crisis, oil prices have been lacklustre and earnings have risen only slowly. Saudi Arabia has run budget and current account deficits consistently since 1982, but the circumstances that have prevailed since the liberation of Kuwait in 1991 have finally prompted the government to act.

New generation

A new generation of economic ministers has been appointed to push through a reform programme. The most prominent is Ibrahim al-Assaf, who was given the finance and national economy portfolio in February. The 46-year-old Al-Assaf is typical of the new breed of Saudi minister. He has a doctorate from the university of Colorado in the US, and has served in a number of prominent positions at home and abroad, most recently as a minister of state and deputy governor of the Saudi Monetary Agency (SAMA - central bank). Internationally, he has served as an executive director on the board of the World Bank. He was also an adviser to the Saudi Industrial Development Fund.

Much is expected of the new commerce minister, Osamah Faqih, who has a reputation for reinventing institutions. As head of the Arab Monetary Fund from 1989-94, Faqih repositioned the near bankrupt agency to promote regional capital markets. He introduced similar changes at the Islamic Development Bank, which he headed from 1994.

The steps taken so far have been small, but well received. The budget for 1996, announced at the start of the year, introduced no new expenditure cuts, but it maintained the tight spending discipline imposed by the outgoing finance minister Mohammad Ali Abalkhail. The Saudi Consolidated Electric Company for the Western Region (ScecoWest) has commissioned a study aimed at developing a legal framework for the construction of new and long-awaited power projects on a build-operate-transfer basis. In another departure from past practice, its sister company Sceco-East has gone to local and international commercial banks for finance for the expansion of the Ghazlan power station.

Bankers are interpreting the decision to go ahead with the purchase of new planes for Saudi Arabian Airlines as a sign that its privatisation will come sooner rather than later. The airline has begun a series of discussions with local business people as a preliminary to the process. Privatisation of the Scecos and of the post, telephones and telegraphs ministry are also under study.

Another force driving new policy initiatives is the pressure of population growth. The census of 1992 found 2.5 million more Saudi nationals than had been assumed previously. The total population, including expatriates, is more than 18 million, and is expanding at a rate of about 3.7 per cent a year. About half of the population is under 15 years of age, presenting a major challenge if they are to be gainfully employed in the future.

The situation is potentially serious. Per capita incomes have been falling steadily in the 1990s, and the average is now less than $7,000. There is concern that high unemployment could one day lead to social problems and unrest of the type witnessed in other countries of the region where population growth has outpaced job creation.

The government's strategy for tackling the problem includes reducing the expatriate community, which numbers more than 6 million. The Interior Ministry in December started enforcing Saudiisation quotas which are intended to cut the numbers of the foreign workers and the huge sum of the money they send home every year.

The authorities have stopped issuing visas for a growing list of job categories. At the same time the cost of employing nonnationals is being pushed up by higher visa charges and health insurance costs. It is hoped that economic growth, particularly in the private sector, will provide further employment opportunities.

Domestic conditions remain stable and there is considerable relief that there has been no repetition of the bombing in Riyadh in November. 'Confidence was not going to be dented by a one-off bombing,' says one local banker. 'It's only if it were repeated that people would get worried there was going to be a sustained campaign.'

However, the US government in January warned US citizens to be on their guard against further attacks. The target of the November bombing was a US military centre which provided training for the Saudi Arabian National Guard.

The government of Saudi Arabia prefers to keep its internal affairs to itself and King Fahd's illness at the end of November proved to be no exception. The royal court did not disclose the nature of his illness. Official statements stressed that the handover to Crown Prince Abdullah on 1 January would be temporary, but the conventional wisdom among analysts was that the appointment marked an irreversible transfer of authority. Diplomats in Riyadh were convinced that King Fahd had suffered a stroke, and might never fully recover.

The king's decision to resume his duties, officially confirmed on 21 February, came as a surprise to those outside royal circles. The relatively quick convalescence and the lack of official information during his illness provided fertile ground for speculation. In fact, since resuming his duties, King Fahd appears to be as active as ever. He has received foreign heads of state including Egyptian President Hosni Mubarak - although, pointedly, not a visiting King Hussain of Jordan and has chaired the weekly meetings of the council of ministers.

However, at 75 years of age, King Fahd is moving inexorably towards the end of his reign. Since becoming head of state in 1992, he has shown himself to be a pragmatic moderniser. While showing no inclination towards social reform, he has provided the kingdom with the outline of a constitution, in the form of the Basic Law of 1982. The Shura council, which first sat in 1993, was a cautious step towards accommodating the aspirations of western-educated professionals and conservatives alike. Three members of the Shura council joined the cabinet in the reshuffle of August 1995. Internationally, King Fahd took the fateful decision in 1990 to ally the kingdom with the US-led coalition against Iraq and allow western troops onto the kingdom's soil, cementing ties with the US in an overt manner.

Economically, the reign of King Fahd has coincided with swings in world oil prices from more than $30 a barrel when he succeeded King Khaled, to lows of $10 a barrel. In recent years this change of fortune has prompted the beginnings of an economic reform programme.

The regency of Crown Prince Abdullah has given a foretaste of King Fahd's appointed successor. On the domestic front, one of Crown Prince Abdullah's main actions was to issue certificates to farmers in lieu of official payments. The certificates are similar to the special bonds issued to contractors in March 1995 to clear up arrears to about 120 local and international contractors. 'The certificate issue reflects the different priorities of Crown Prince Abdullah,' says one local banker. 'Farmers are higher up on his list.'

The release of further certificates has continued under King Fahd, and bankers say that, by late-March, the total SR 9500 million owed to farmers up to the end of 1995 had been covered by the issue. However, just as debts to farmers are being settled, bankers report that arrears to contractors are once again on the rise.

Abroad, the region has lived up to its reputation for instability. The upsurge in violent opposition in Bahrain has caused particular concern to Saudi Arabia, perhaps its closest ally in the GCC. The kingdom has been vocal in its condemnation of the unrest. In January Crown Prince Abdullah described the situation as 'strange to our societies and a desperate attempt to destroy Arab and regional security.'

The unrest is not only seen as a possible inspiration for dissenters elsewhere in the region. Bahrain is the home of the US navy's fifth fleet, an essential element in the US security strategy in the Gulf and the dual containment policy for Iraq and Iran. Relations with Iran have not been helped by the Bahraini unrest. The Saudi media has accused Iran of being behind the opposition movement, which is drawn mainly from Bahrain's Shiite community.

Striking a balance

However, the government appears to have adopted a more measured view of the dispute between Iran and the UAE over the Gulf islands of Abu Musa and the Tunbs. In early January, Second Deputy Prime Minister and Defence & Aviation Minister Prince Sultan Bin Abdel-Aziz accepted Iran's right to a claim on the islands. 'We hope there won't be any friction between two neighbouring countries,' he said in Riyadh on 7 January. 'The UAE has a right to claim the islands, and at the same time we cannot say that Iran has no claim.' Saudi Arabia has backed the UAE's claim to sovereignty of the islands since the ownership dispute resurfaced in 1992.

The series of bombings in Israel in February prompted rare comment by the government on the Middle East peace process. While maintaining its quiet support for the process, the kingdom has refrained from close or unnecessary involvement, preferring instead to wait for the final shape of the settlement to emerge. Yet, at crisis moments, such as the assassination of Israeli prime minister Yitzhak Rabin and, in particular, the Hamas bombings in Israel, the kingdom has underlined its continuing support for the peace negotiations.

Foreign Affairs Minister Prince Saud alFaisal attended the summit of world leaders in Egypt on 18 March and was clear in his condemnation of all terrorist acts, whatever their provenance. 'As we all did during the massacre of the Al-Ibrahimi mosque in Hebron, where we unanimously condemned all forms of violence and terror, we equally condemn today, unanimously, the violent acts that took place in Tel Aviv and the Occupied Territories,' he said. Prince Saud also shook the hand of Shimon Peres, the first time that Saudi and Israeli government figures have made such a gesture.

Whatever the future course of the succession, a set of regional and economic constants means that Saudi policy is unlikely to deviate from its present path. Regionally, Saddam Hussein appears as immovable as ever in Baghdad, and traditional suspicions of Iran are unlikely to change. 'Saudi Arabia lives in a bad neighbourhood,' says one analyst.

The reliance on the US as the ultimate guarantor of security means that changes in the kingdom's foreign policy are unlikely. If and when Crown Prince Abdullah eventually does become king, the essence of Saudi policy is likely to be the same, even if there are some changes in emphasis. At home, the need to draw on private sector resources and maintain fiscal discipline, should ensure that domestic policies will remain equally constant.

Exchange rate: $1 = SR 3.75

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