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WEEKLY NEWSLETTER
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Saudi Arabia
Index
The government's attempts to deal with the chronic budget
deficits, largely through expenditure retrenchment, depletion of
foreign assets, and the sale of development bonds, generally
helped stabilize its financial situation by the late 1980s (see
table 4, Appendix). It became clear by 1989 that the economy had
weathered some of the other problems, such as the spate of
bankruptcies of private companies, the growth of bad banking
debts, and the massive outflow of private capital to overseas
financial centers that followed the oil-price crash of 1986.
During 1989 and 1990, economic planners had renewed optimism. New
plans were made to put the oil and nonoil sectors of the economy
on a surer footing. The perceived recovery in international oil
consumption and prices provided regional policymakers the
opportunity to resume spending to promote economic growth. As a
result, two major initiatives became the basis of Saudi economic
policy.
First, Saudi Arabia unveiled plans to raise crude oil
production capacity to between 10.5 million and 11 million bpd by
1995. With the restructuring of the General Petroleum and Mineral
Organization (Petromin), the creation of Samarec, which was given
control over most of the kingdom's oil refineries, and the
announcement of major plan to upgrade domestic and export
refineries, a comprehensive picture emerged of the government's
effort to promote oil investments. Another indication of Riyadh's
intentions came in 1989 when Saudi Aramco purchased 50 percent of
Star Enterprises in the United States, a joint venture with
Texaco that signaled Saudi Arabia's pursuit of geographically
diversified downstream projects.
Second, the government was not eager to continue its
expansionist fiscal policies. Despite moderately higher oil
prices, military outlays, oil capacity expansion plans, and
current expenditures accounted for the bulk of total spending and
did not permit a fiscal boost. However, because the nonoil
private sector remained largely dependent on government spending,
the sharp cutbacks in capital outlays hindered economic
diversification. In light of this failure, the government adopted
two policies to reorient and revive the private sector.
Financial sector reform was the government's main option.
Since 1988 SAMA had made great strides in bolstering commercial
bank balance sheets through mergers, debt write-offs, and
injection of funds to prevent failures. Subsequently, banking
regulations and supervision were tightened and compliance with
international capital adequacy requirements enforced. The
authorities also encouraged banks to take a more active role in
financing private sector investments. The idea of opening a
Riyadh stock exchange received renewed interest: the government
sanctioned the establishment of the exchange in early 1990 and
hinted it could be an appropriate venue for selling government
assets.
Protectionism as a policy also gained some popularity during
this period. Partly motivated by the impasse in Gulf Cooperation
Council (GCC) negotiations with the European Economic Community
(EEC), but mainly to protect domestic private investment, Saudi
Arabia began enforcing some restrictive tariff and nontariff
barriers that had been instituted in the mid-1980s. Under the
guise of conforming to GCC-wide levels, Saudi Arabia raised its
tariff rates to 20 percent on most items with certain industrial
items gaining protection at higher rates. The government also
began enforcing nontariff regulations such as preference for
nationally produced commodities and the continued application of
preference for local contractors, as well as quality standards
that favored local production. In addition, the kingdom
assiduously protected domestic banks from foreign competition by
barring the sale of any foreign financial products and services.
The Iraqi invasion of Kuwait halted the miniboom that these
policies had fostered. In the immediate wake of the invasion, the
government faced two tasks. First, it had to deal with the
massive outflow of assets from the domestic banking sector by
liquidating the commercial banks (which lost more than 12 percent
of their deposits within the first month of the crisis),
encouraging a repatriation of private assets, and restoring the
confidence of foreign creditors, who had canceled lines of credit
as a precautionary measure. The monetary authorities reversed
most of the hemorrhage caused by the loss of confidence in the
Saudi riyal. Second, the government was obliged to raise oil
output to levels unseen since the early 1980s. Saudi Aramco had
to respond to a serious crisis without an adequate assessment of
its overall production capacity. It quickly became apparent that
Saudi Arabia had sufficient capacity to replace the bulk of the
4.5 million to 5 million bpd of Iraqi and Kuwaiti oil embargoed
by the UN. Output rose rapidly to 8.5 million bpd, which restored
some calm to the international oil market; however, by the end of
1990, oil prices were nearly double those in June 1990.
Supporting the United States-led multinational forces,
however, placed an enormous burden on the government's budget.
The deficits for 1990 and 1991 reached record levels, so the
fiscal authorities were forced again to engage in further
external asset drawdowns, increased volumes of development bond
sales, and a novel feature: external borrowing from commercial
banks and export credit agencies. Saudi Arabia was a prominent
member of the
World Bank (see Glossary) but because of the
nation's high per capita income, it was not entitled to borrow
from that organization. Most of the major projects envisaged
before August 1990 were preserved, however. But external
borrowing had gained credence as the means to fund not only
budgetary shortfalls but also the capital programs of major
public enterprises. Notably, Saudi Aramco did not scale back its
crude-oil capacity expansion plan. Rather, it appeared that new
ways of financing were being sought from foreign commercial
banks, multinational companies, and the domestic private sector.
Sabic also moved to raise capital overseas, while Saudi
Consolidated Electric Company (Sceco), the electricity
conglomerate, requested foreign suppliers to help finance its
expansion program.
The fiscal crisis did not cause economic problems for the
private sector because the government's reduction of its budgeted
expenditures was slight. Moreover, domestic government spending
in support of the war effort surged, and many Saudi companies
benefited from war-related contracts. Also, as a result of
Operation Desert Shield and Operation Desert Storm, the more than
600,000 troops of the multinational forces increased domestic
spending on consumer goods. This spending offset the effects of
the fall in the number of foreign workers after the government
expelled more than 1 million Yemenis, Palestinians, Sudanese, and
Iraqis because their countries had not condemned the Iraqi
regime. The miniboom, which was interrupted by the Iraqi
invasion, was revived by this increase in government spending,
and then received further stimulus by three other factors. First,
the protection of the kingdom by United States forces and the
perception that this would continue enhanced private sector
confidence in the government. The private sector again
repatriated capital, and the stock market boomed, with share
issues rising to unprecedented levels. Second, changing regional
politics encouraged many firms, which had set up manufacturing
and processing plants for the domestic market, to seek sales in
Iran, Turkey, and Central Asia. Third, the government cut
domestic fees and utility charges almost in half. This increased
subsidy was targeted to lower- and middle-income Saudis but had
the net effect of raising domestic disposable income. As a
result, it was seen by some people as a serious attempt by the
monarchy to head off growing domestic demands for political
participation.
Data as of December 1992
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