Introduction to Saudi Economy: Perception and Reality

I. Introduction to Saudi Economy: Perception and Reality
Contrary to common perceptions, Saudis, on average, have grown poorer rather than richer, over the last two decades. Let's examine some basic figures. Nominal GDP has grown from SR415 b. ($110.6 b.) in 1982 to SR649 b. ($173 b.) in 2000, an increase of 56.3%.[1] At the same time, population has grown from 14.1 million to 20.7 million in 2000, or an increase of 46.8%. However, if an inflation rate of 2% compounded over 18 years is factored into the GDP, or 42.8%, one concludes that the Saudi GDP has declined by as much as 33.3%, or by one third, in real terms over this period of time. Two other indicators are equally instructive: the per capita oil export revenues have declined from a record of $23,820 in 1980 to $2,563 in 2001 (in inflation adjusted dollars). In 1989 the GDP per capita was $10,330; in 1999 it was $6900, in nominal value. The IMF's review of the Saudi economy indicates that with the exception of 2000, in which the overall central government budget registered a sharp turnaround to a surplus of 3.5% of GDP, due largely to a sharp rise in oil prices, "in every other year, the budget has run a deficit and the debt stock has run up to $170 b., which is equal to the size of the GDP." The annual deficits seem to confound Crown Prince Abdallah's statement that "overspending is a bottomless abyss." One could argue, however, that the overspending would appear so overwhelming only because the revenues in the non-oil sector have been constrained by inadequate tax regime.

Oil revenues make up around 90-95% of total Saudi export earning, 70-80% of state revenues, and around 40% of the country's GDP. Non-oil government revenues are constrained by a largely non-competitive market place where monopolies and "exclusive dealerships" dominated by members of the royal family and their cohorts, do not generate revenues in the form of, say, sales tax or income tax. While some of these monopolies and single-dealerships control as much 30-40% of various segments of the market, they are protected by the Shari'a (Islamic law) from paying taxes on their vast earnings. Rather, as will be discussed below, they are required to make a voluntary contribution of 2.5% in the form of zakat (religious charity) to organizations and groups of individuals of their choice. This religious protection to the rich and powerful renders the Saudi tax system one of the most regressive in the world. It is hardly surprising that some Saudi capital, estimated in the hundreds of billions, has found its way outside the country. It is even less surprising that so many Saudis have channeled their frustrations into international terrorism.

According to the Energy Information Administration, which is an agency of the U.S. Energy Department, "Saudi Arabia's weakened economy is particularly bad considering that the country needs strong economic growth in order to keep up with a rapidly increasing (and young --50% under age 18) population, and also, in order to face the challenge of finding good jobs for its people (outside of the public sector, which is overstaffed and a drain on the country budget)." Given this state of affairs, one wonders about the Saudi bullish optimism regarding economic stability enunciated by the Saudi Arabian Monetary Authority (the country's central bank),

"By the grace of Allah and then the wise policy of the Government of the Custodian of the two Holy Mosques [Mecca and Medina], these difficult international circumstances, which were sometimes accompanied by sudden fluctuations in oil prices, did not affect the general situation of the economy."

Of course Saudi Arabia can feel content sitting on the largest oil reserves in the world (169 billion barrels). Oil is an enormous national wealth, albeit a finite wealth. Still oil plays an important role in international economic relations. Many countries whether producers, exporters, refiners, owners of oil tankers, providers of transit rights, or consumers of oil or its derivatives, benefit from it at different levels.

The price of oil impacts the cost of production of many goods and services. Theoretically, oil could be a potent political weapon, as it was used as such after the 1973 war. However, Saudi Arabia, and other OPEC producing countries, is becoming increasingly aware, and has said so often, that oil may have become at best a dull weapon, for the following reasons:

1. the proliferation of the sources of oil supply; Russia, for example, has become a supplier to be reckoned with;
2. most oil producers, and in particular Saudi Arabia, are mired in deficits and debt and can ill afford a sustained period of oil embargo;
3. engineered oil shortage (reduced quotas for production or even a partial embargo) may be potent in the short run, but can only encourage industrialized countries to seek alternative sources of energy and a new means of energy saving; and
4. the creation of the International Energy Agency (headquartered in Paris), representing the major consumers, has become a countervailing force opposite OPEC by showing the way to its members to manipulate the price of oil by alternating between storage of oil when the price goes down and the release of stored reserves when the price goes up.

In short, the potential of wealth is Saudi Arabia is enormous but, absent good governance and sound fiscal policies, political turmoil and economic dislocations are not necessarily remote possibilities.

Reform of the Tax System
The Secretary-General of the Saudi Supreme Economic Council (SEC), Abdul Rahman Al-Tuwaijri, said his country had "moved boldly" to implement economic reforms by introducing a new foreign investment law, reducing the tax rate on foreign investors, allowing non-Saudis to own real estate and slashing customs tariffs from 12% to 5%. SEC is also providing greater legal protection against expropriation of investment. He emphasized that Saudi Arabia is not planning to impose income tax on individual incomes. While foreign companies are taxed at a rate of 45%, Saudi businesses and individuals pay a flat rate of 2.5% in the form of "zakat"or religious charity, in accordance with the shari'a, or the Islamic law. [This payment is voluntary and could be made to non-government organizations or even to terrorist organizations.]

The International Monetary Fund has recommended for some time to Saudi authorities to introduce indirect tax and other forms of local taxation to diversity the sources of revenues and reduce the chronic budget deficits.[2] [Vested interests, including many members of the extended royal family, remain adamantly opposed to the introduction of an income tax and prefer to hide behind the less binding "zakat" system.

Budget Deficits Add Additional Burdens on Public Debt
According to a report issued by the Saudi-British Bank under the title: "Limelight on the Saudi Budget for 2002," the government has taken measures to tighten its belt. Some cuts are felt in the social sector. For example, the allocation for health projects has been reduced by SR10 b. which is the equivalent of $2.6 b. However, the report points out those high recurrent expenditures on salaries and wages, servicing of national debt and maintenance costs restrict government budgetary flexibility.

The report points out that national debt was rising even as oil prices were going up. The debt of the public sector to the private banks has increased from SR76.6 b. ($20.4 b.) in 1995 to SR133 b. ($35.5 b.) in 2001. The budget deficit for 2002 is estimated at SR45 b. (or $12 b.)[3]

The Problem of Unemployment
Nothing raises as much concern in Saudi Arabia as unemployment and the methods of addressing it. While 100,000 enter the employment market every year only 30,000 jobs are created. Since government agencies are already overstaffed the private sector offers the only strategic solution.

As a result of this situation, new employment agencies are establishing themselves as intermediaries between job seekers and potential employers. This is a new and difficult domain because, traditionally, job interviews in Saudi Arabia are generated by personal or family contacts unless the job seeker is from a foreign country. Women represent only 10% of job seekers because women in Saudi Arabia are "child bearers" averaging between 4 and 6 children which, according to a Saudi employment expert, "is a job in itself. [4].

It was also reported that 300 Saudi pilots are looking for jobs after completing their training in the U.S. One unemployed pilot pointed out that that flight school graduates find difficulties in employment in private companies because the latter require at least 5000 hours of flying time which would cost $750,000, few pilots can afford. [5]

7 Million Foreign Workers in Saudi Arabia
The Saudi Minister of Labor, 'Ali al-Namla, said that there were 7 million foreign workers in his country, 5 million employed in the labor market and another 2 million doing domestic work. Arabs represent 40% of foreign workers and the remaining 60% are primarily citizens of Pakistan, Bangladesh and the Philippines. While unemployment is in the neighborhood of 15-20% the minister said it was difficult to Saudize (sa’awada) the labor market. 100%.[6]

Comparing the two entries of unemployment and the number of foreign workers in Saudi Arabia would suggest that there are many jobs that the Saudis have grown to consider beneath them to perform.

Saudi Arabia Seeks to Attract Foreign Investments
The Governor of the General Authority for Investments, Prince Abdallah Faisal bin Turki, estimates the size of foreign investments that may be attracted to his country stands at $20 b. annually. While he noticed reluctance on behalf of foreign companies to invest in the region after 9/11 the Prince believes that his country can create the environment that would attract foreign investors.[7]

Elsewhere, however, Prince Abdallah admitted that the 9/11 events have put a break on direct foreign investments in the Arab world and, particularly, in Saudi Arabia.[8]

Saudi Arabia to Announce its First Tourism Plan
The Saudi Supreme Tourism Authority will publish the first comprehensive national tourism plan next April. The plan is part of an attempt to diversify the Saudi sources of revenues.

Saudi Arabia has identified 10,000 sites with tourism, historical and environmental interest. The tourism sector contributes $10 b. to the GDP in terms of sales, income and value added.[9]

Halliburton will Develop Oil and Gas Field in Eastern Saudi Arabia
Halliburton Oil Company, whose previous Chief Executive Dick Cheney became Vice President of the United States, has won a $140 million contract from Saudi Arabia to develop the oil and gas Al-Qatif field in the eastern part of the kingdom. [10]

Saudi Official Criticizes "Oil for Food" Program
Abd Al-Rahman Al-Zamel, head of the Saudi Center for the Promotion of Exports said Saudi exports to Iraq declined last year to $360 million [he did not say what was the volume of exports during the previous year(s).] He attributed the loss of exports to "big powers" which control the "Oil for Food" program for preferring their own exporters over exporters from developing countries. During the current phase of the program, Saudis signed contracts for a total of $15.5 million. He also criticized the United Nations for delaying the opening of a corridor, because of "unconvincing technical reasons" between Saudi Arabia and Iraq to facilitate the flow of trade.

The spokesman implicitly admitted that there might be two other significant reasons for the decline of trade between the two countries: first, are the free trade agreement between Iraq, and Syria and Egypt; and, second, are the difficulties facing Iraqi importers to enter Saudi Arabia.[11]

Water Loss in the Gulf Countries
Abdallah Al-Hussein, the Governor of the Public Agency for the Desalination of Water in Saudi Arabia estimated the loss of water through leakage to more than 2 million cubic meters daily, at a direct cost of $3 million, including the cost of desalination, transport and distribution. There is also indirect cost caused by water leakage under highways and buildings. Similar leakage, estimated at 20% of supply, characterizes water supply in most Gulf states. [12]

Saudi Industrial Enterprises to be Excluded from Anti-Monopoly Measures
Crown Prince Abdallah has given Saudi industrial enterprises his assurances that the new anti-monopoly measures will not apply to them. In addition to their anti-monopoly aspects the new measures will terminate "exclusive dealerships" (similar measures were recently introduced in Lebanon) and encourage competitiveness. Some Saudi enterprises have control over an overwhelming share of the market and the new measures will set a ceiling of 30-35% of the market for any enterprise.

It is not surprising that businessmen strongly oppose the new measures [as mentioned elsewhere in this report, this is hardly surprising given the fact that Saudi enterprises pay voluntarily 2.5% of the profits in the form of charity. Income tax on Saudi nationals or enterprises does not exist. More importantly, most of these monopolies and exclusive dealerships are controlled by members of the Saudi royal family.][13]

The Campaign about Public Education
Some Saudi newspapers have initiated a campaign against rented schools. Some boys’ schools lack the most basic safety measures, have no emergency exits and their kitchens are used as classrooms. Some girls’ schools "are not suitable to be animal pens".

The campaign was triggered by a fire in a girls’ school in Mecca last week, which cost lives of 14 students and a teacher.[14]

Saudi-American Businessman in the Halal Meat Business
A Saudi-American businessman has decided to open a slaughter house and processing plant in North Dakota for the production and processing of halal meat (Muslim equivalent to Kosher meat). The animals will be given natural feed (no pork components) and the slaughter will be conducted strictly in accordance with Islamic laws. The businessman estimates the size of the market in the U.S. and the Middle East at $6 billion annually.[15]

II. Regional Economic News

Natural Gas Steals the Show
Oil exporting countries in the Middle East and elsewhere are encouraged by the growing demand for natural gas. Natural gas was one of the fastest growing sources of energy in 2000, rising at 4.6% p.a. compared with an increase of 1% p.a. in the demand for oil. Driven by environmental concerns, the demand for gas is likely to grow faster than the demand for oil, particularly in East Asia. On the other hand, the shipment of gas is far more expensive than the shipment of oil and the large oil companies earn more money selling oil than selling natural gas. One expert compared the development of natural gas projects to the construction of a new super highway—the benefits are long-term as cities begin to be built along it.

Saudi Arabia which has the fourth largest reservoir of gas in the world, after Russia, Iran and Qatar, is beginning to develop this natural resource as a major source of new revenues. It is negotiating with major oil companies for natural gas exploration agreements. [16]

Elsewhere, it was announced that the second largest power entity in Spain has entered into a contract with the Algerian gas company, Sonatrac, to buy 1 billion cu. meters of Algerian liquefied gas annually, beginning with the third quarter of this calendar year.[17]

OPEC Sources: $300 b. Gift to the World
A senior source in OPEC said the world should be grateful to OPEC for keeping prices down and thereby helping the world economy to recover. He estimated the value of OPEC's "favor" to the world at $300b. He said lifting the ceiling on oil production would be tied to the utilization by the industrialized countries of their oil reserves. OPEC is striving, through variable production quotas, to maintain a price range of $22 to $28 per barrel. The threat of military action against Iraq, and the concern about oil supply interruptions from the Middle East that would ensue, has given oil prices a boost in recent days. [18]

EU to Establish New Regional Bank
The European Union is due to announce at the end of this month the establishment of a Euro-Mediterranean Bank for Development to finance development projects in 27 countries in the Middle East, North Africa and the Balkans. The EU has earmarked E10 billion ($8.64) through the end of 2004 for this purpose. The EU is seeking to expand its relations with the countries in the region given that a number of Eastern and Central European countries are due to join the EU in the near future.

The establishment of such a bank, which will be a subsidiary of the European Investment Bank, must be approved first by the European Council and subsequently by the European Parliament.[19]

Arab Trade with the U.S.
Arab trade with the U.S. in 2001 reached $65 b. The U.S. Assistant Secretary of Trade, William Lash, said one of the most serious problems of American investments in the Middle East is the lack of transparency. He called on the Arab countries to open their markets and reduce tariffs on all agricultural commodities. [20]

Arab Airlines Suffer $400 Million Losses
Dr. Abd Al-Wahab Tuffaha, Secretary General of Arab Air Transport Association estimates the losses of Arab air carriers in 2001 at about $400 million. He identified 3 causes for the losses:

1. Economic slowdown worldwide
2. Events of 9/11
3. Israeli-Palestinian conflict which spilled over into the tourism sector in the immediate as well as in the surrounding areas.

He said the decline in the price of petrol was helpful but not sufficient to redress the entire losses.
He also said that tourist facilities are designed for the Western tourism and that attracting inter-Arab tourism will require changes in these facilities. [21]

Turkish Businessmen Sign $300 Million with Iraq
A delegation of Turkish businessmen, who visited Baghdad last week, signed $300 million worth of new contracts for the sale of Turkish goods and services to Iraq. The signing of the new contracts comes at a time when Turkey is trying to strengthen its trade relations with its southern neighbor despite political tensions arising from Turkish support of American policies. [22]

Turkish Company Signs Telecom Contract with Syria
A Turkish company, Itakablo, won a bid worth $67 million to provide telephone cables for the Syrian telephone network. The new service will cover 1.65 million subscribers. It is the first time that a Turkish company operating in the Middle East obtained such a large contract. The winning bid by a Turkish company coincides with the strengthening of the relations between Syria and Turkey. [23]

Syria and Jordan Seek New Bids for a Dam
Syria and Jordan have agreed to invite new bids for the construction of the 'Unity Dam" on the Yarmuk River at a lower capacity and cost than agreed upon earlier.

The two sides have agreed that the new dam will have a storage capacity of 125 million cubic meters annually to be divided equally between the two countries. The dam will be completed in 3 years at an estimated cost of $120 million. Bids were earlier invited for the construction of a dam with a storage capacity of 225 million cubic meters and an estimated cost of $250 million.

Jordan is considered one of the world 10 poorest countries in terms of water resources. The water needs of the country are estimated at 1 billion cubic meters annually but Jordan has had to make do with 850 million cubic meters. [24]

Jordan Sold its Share in Cement Company to PA
As part of its privatization program, Jordan confirmed the sale of its remaining 14.2% in the Jordanian Cement Company to the Palestinian National Authority for $45 million to be made in 4 equal payments. It was not clear who represented the Authority in this deal although there was a speculation that it was one of Arafat's senior aides or advisers.

The Palestinian market is the largest consumer of the Jordanian cement. Under the Paris Economic Accord between Israel and the Authority the import of cement by the Authority was exempted from tariffs. [25]

Palestinian Authority Seeks Interconnection with Egyptian and Jordanian Grids Yahya Shamiyya, the Director General of the Palestinian Ministry of Energy, was recently in Egypt to discuss the interconnection of the Palestinian power grids with those of Egypt and Jordan, after independence. At this time, Arab countries are not interested in such interconnection because of the linkage between the Palestinian and the Israeli power supply systems.

Shamiyya said Israel supplies the Gaza Strip with 105 megawatts while the needs are more like 150 megawatts daily. He complained that the electric power in Israel is expensive compared with neighboring countries [where power is subsidized]. In addition, many transformers and transmission lines were destroyed by Israel as a result of the Intifidah.[26]

III. Country Economic News

Egypt: Rise in Consumer Prices
The recent devaluation of the Egyptian pound has resulted in sharp rises in the prices of food commodities. Under the headline "Price fiesta" Al-Ahram Weekly refers to price increases by as much as 40% on some commodities. With imports exceeding exports by $12 billion ($16 billion vs. $4.5 billion) most food commodities have foreign components priced in dollar. As the Egyptian pound depreciates vis-à-vis the US dollar, prices of commodities are likely to continue to increase. Some low-income Egyptians will have to resort to lower quality commodities with potentially harmful health effects. [27]

Egypt: Disagreements with FOREX Agencies Persist
The foreign exchange (FOREX) companies have decided to send an urgent memorandum to President Mubarak regarding the closure of 65 of 120 such agencies on the ground that they were engaged in speculation on the exchange rate of the Egyptian Pound. With the abolition of the ministry of the economy in a recent government reshuffle in Egypt the agencies argue that they have lost a contact point in the government. They maintain that the agencies are an important instrument in the FOREX market, not an "axis of evil" and some would argue.[28]

Subsequently, 30 more agencies have closed down voluntarily because of fear of criminal prosecution and for the absence of business transactions. The agencies are required to trade in foreign currencies, primarily the dollar, in accordance with the exchange rates established by the Central Bank of Egypt which are below the going rates in the black market. In the absence of sellers at the official rate, and with the drying up of new supplies by the Central Bank of Egypt, the FOREX agencies have been squeezed out of business.[29]

U.S. Exempts Egyptian Steel from New Tariffs
The United States has excluded Egyptian steel from the new tariffs it has recently imposed on imported steel from a number of countries. The new tariffs range from 8 to 30%. This exemption will allow Egypt to increase the value of its steel exports to the U.S. from $70 million to $250 million by the end of 2002.[30]

Iranian Tourism to Cyprus Collapses
A once flourishing Iranian tourism to Cyprus has declined by 90% following Cypriot authorities' demand that Iranian tourists must obtain visas prior to their entry to Cyprus. Iran Air is due to cancel its two scheduled flights between Tehran and Larnaka because of loss of business. [31]

Syrian Economy Registers Growth
Syria announced that it GDP has grown by 5.9% in 2001. The announcement did not mention the rate of inflation to determine the real growth rate of the GDP.

The Syrian economy relies heavily on oil and agriculture. Agriculture had a good year in 2001 because of a good amount of rainfall. [32]

Lebanese Lira under Continued Pressure
The Lebanese Lira continues to come under heavy pressure as Lebanese savers and businessmen seek safety in the U.S. dollars. Although the lira is pegged to the dollar, as was the case in Argentina, savers suspect that the declining reserves in the Central Bank of Lebanon and the unwieldy debt will eventually force the government to let the lira float at a much lower rate. These reserves have declined to $4.9 billion, most of it represents deposits by the Gulf countries in support the Lebanese lira.

Some observes attribute the pressure on the Lira to Christian merchants who object to recent government’s decision to eliminate "single dealerships" in such areas as pharmaceuticals and oil which were controlled by the Christians. [33]

In answer to a question at a press conference held in London, Thomas Dawson, Director of the External Relations Department of the IMF, said that the devaluation of the Lebanese Lira alone would not resolve the debt problem of Lebanon, unless such devaluation is accompanied by major structural adjustments in the economy. [34]

Urgent Aid to Palestinians
Libya has decided to extend urgent aid to the Palestinian people [not the Palestinian Authority] and establish an aerial bridge to the closest possible station near the border for carrying foods and medical supplies.[35] The Islamic Bank for Development (in Jeddah) has also announced that it has decided to provide $50 million in support of the Palestinian ministry of finance. It has already transferred $10 million to the Palestinian Authority and another $40 million will be transferred shortly. [36]