VOL. XLV
No 6
11 February 2002
SAUDI ARABIA
SAMBA’s Chief Economist Looks At
Saudi Government Finances
Given
the structural change in the national budget of Saudi Arabia whereby the
percentage spent on current expenditures has risen to the detriment of capital
expenditures, and cumulative deficits have grown as a result of successive
annual deficits, “realistically, only the imposition of substantial new
domestic taxation and high levels of private sector growth (a tough combination
to achieve) will lessen significantly dependence on oil revenues.” So says the
latest assessment of the domestic economy, The Saudi Economy In 2002,
February 2002, published by Saudi American Bank’s (SAMBA’s) Chief Economist
Brad Bourland. The report says privatizations may contribute to revenue sources
but they are only “one-time injections” and not a sustainable non-oil revenues
source. In addition, it notes that customs duties are “declining in line with
tariff reductions and the government’s bid to join the WTO”.
SAMBA
says government debt (all of which is domestically owned and riyal
denominated), now stands at SR630bn ($171bn) or 99% of 2001 GDP (see Table 1
below). Of this, 19% is owned by the domestic banks, 75% is held by the state
pension funds and a small portion by companies and individuals given special
bonds by the government to settle late payment obligations. The aggregate total
rose by SR11.4bn ($3.04bn) in 2001 “suggesting that the commercial banks
financed about half of the 2001 deficit”. SAMBA estimates that financing the
2002 projected deficit need not be problematic
“assuming that the commercial banks absorb less than half and the
pension funds lend the rest” but notes that future financing of this sort may
be threatened by the funding needs of private sector projects. Hence, SAMBA
says it is “concerned about the magnitude of government debt, continued
substantial budget deficits and declining discretionary spending in the
budget”. All three factors lead to a growing allocation of government revenues
to debt servicing, increased demands on the banks which squeezes sectoral
liquidity, and the loss of flexibility “to add fiscal stimulus to the economy
at times of broader economic weakness”.
SAMBA
notes that the Saudi Government is strengthened fiscally by its $48.67bn worth
of foreign assets (now reported by SAMA on a monthly basis reflecting
“improvement in transparency of fiscal data”) and the additional $33.9bn held
by the government pension funds that are invested conservatively, yielding on average
6% per year. Collectively these allow for investment income of $1.5bn per year
without drawing down on the principal, although SAMBA notes that in years of
low oil income such as 1998 and 1999, a portion of the principal was drawn on
to meet budgetary needs. Moreover, foreign assets of the government pension
funds generally report steady growth and even though in 1999 there was a
reported decline, probably due to a “a loan from one of the funds to the government
to help with revenues for that year”, in general these assets create a varied
source of liquidity for the government and offset any weaknesses in government
finance. Asset strength also helps to maintain the fixed exchange rate of the
riyal in place since 1986. However, despite this strength, SAMBA points out
that it is concerned by the fact that the government enters each oil price
downturn with a smaller cushion, noting that net foreign assets of SAMA fell
from $56.9bn in1997 to $48.7bn in November 2001.
Table
1
Key
Economic Data And Forecasts
($Bn unless noted otherwise)
|
|
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001e |
2002f |
|
Nominal
GDP (SRBn) |
450.03 |
478.65 |
529.25 |
548.44 |
481.20 |
535.02 |
648.96 |
637.28 |
618.16 |
|
$Bn Equivalent |
120.01 |
127.64 |
141.13 |
146.25 |
128.32 |
142.67 |
173.06 |
169.94 |
164.84 |
|
% Change |
1.4 |
6.4 |
10.6 |
3.6 |
-12.3 |
11.2 |
21.3 |
-1.8 |
-3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Real
GDP (% Change) |
0.10 |
0.00 |
1.40 |
1.90 |
1.60 |
0.40 |
4.50 |
1.50 |
-2.0 |
|
Oil |
0.20 |
0.27 |
2.10 |
1.40 |
2.10 |
-2.40 |
8.50 |
-3.60 |
-7.50 |
|
Non-Oil Private Sector |
0.70 |
0.30 |
1.10 |
3.60 |
1.20 |
2.00 |
2.50 |
4.50 |
4.00 |
|
Government |
0.00 |
-0.30 |
1.30 |
2.90 |
0.90 |
1.70 |
1.00 |
1.00 |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Unemployment |
na |
na |
na |
na |
na |
na |
na |
na |
na |
|
(% of Saudi Labor Force) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Population (Mn Persons) |
18.20 |
18.80 |
19.35 |
20.00 |
20.67 |
21.33 |
22.01 |
22.71 |
23.42 |
|
Saudi |
13.14 |
13.60 |
14.08 |
14.57 |
15.08 |
15.66 |
16.20 |
16.75 |
17.32 |
|
Non-Saudi |
5.06 |
5.21 |
5.27 |
5.43 |
5.59 |
5.68 |
5.80 |
5.96 |
6.10 |
|
|
|
|
|
|
|
|
|
|
|
|
GDP/Capita ($) |
6,594 |
6,789 |
7,294 |
7,313 |
6,208 |
6,689 |
7,863 |
7,483 |
7,039 |
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Price ($/B) |
|
|
|
|
|
|
|
|
|
|
West Texas Intermediate |
17.25 |
18.30 |
21.57 |
21.00 |
14.00 |
20.50 |
30.00 |
24.30 |
21.00 |
|
Saudi Average |
14.50 |
15.65 |
19.00 |
18.25 |
11.50 |
17.45 |
27.00 |
21.80 |
18.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Current
Account |
-10.40 |
-5.30 |
0.70 |
0.30 |
-13.10 |
0.40 |
15.60 |
8.30 |
-7.90 |
|
as % of GDP |
-8.67 |
-4.15 |
0.50 |
0.21 |
-10.21 |
0.28 |
9.01 |
4.88 |
-4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
Government
Budget Balance |
-9.28 |
-7.31 |
-5.07 |
-4.21 |
-12.27 |
-9.07 |
6.06 |
-6.70 |
-12.00 |
|
Revenues |
34.40 |
39.07 |
47.76 |
54.80 |
38.13 |
39.20 |
68.82 |
61.30 |
41.80 |
|
Expenditures |
43.68 |
46.37 |
52.83 |
59.01 |
50.40 |
48.27 |
62.76 |
68.00 |
53.80 |
|
Budget Balance as % of GDP |
-7.7 |
-5.7 |
-3.6 |
-2.9 |
-9.6 |
-6.4 |
3.5 |
-3.9 |
-7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Government
Domestic Debt (SR Bn) |
342 |
397 |
445 |
477 |
558 |
625 |
616 |
630 |
675 |
|
as % of GDP |
76 |
83 |
84 |
87 |
116 |
119 |
95 |
99 |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
Official
Foreign Assets |
68.51 |
67.94 |
78.04 |
85.98 |
78.34 |
69.35 |
73.45 |
82.57 |
78.50 |
|
Central Bank |
47.50 |
46.10 |
52.08 |
58.21 |
46.63 |
39.01 |
40.70 |
48.67 |
43.00 |
|
Government Pension Funds |
21.00 |
21.84 |
25.96 |
27.77 |
31.71 |
30.34 |
32.75 |
33.90 |
35.50 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Living (% Change) |
0.60 |
4.80 |
1.30 |
0.00 |
-0.20 |
-1.20 |
-1.00 |
-0.80 |
-0.50 |
Source: SAMBA estimates for 2001, forecasts for 2002, except
government budget figures, which are from Ministry of Finance. Saudi Arabian
Monetary Agency, Ministry of Planning Central Department of Statistics, and Ministry
of Finance for GDP (1994-2001), population, current account, government budget
balance, official foreign assets, and cost of living. US Embassy Riyadh,
Saudi Arabia: 2001 Economic Trends, for government domestic debt. SAMBA estimates
for unemployment, all years.
Commenting
on fiscal policy in the kingdom, SAMBA highlights the now infamous overspend of
18.6% in the 2001 budget leading to a SR25bn deficit ($6.7bn) rather than the
projected balanced budget (see Table 2 below), noting that “no detail was
provided in the year-end announcement as to where this additional spending occurred.”
The report describes the year 2002 budget as “an austerity budget based on a
conservative oil prices and revenue assumption” and suggests that the projected
6% reduction in spending compared to the previous year is likely to come in
“defense and security since this remains the largest spending category and one
where discretionary spending cuts are likely still possible”. (Spending in
these two areas has increased steadily in absolute terms in recent years but
has fallen as a percentage of the total.) SAMBA says that reduced expenditures
“represents a significant fiscal retrenchment, and given the lack of
discretionary spending, raises questions as to whether this low spending target
can be met.” It concludes that given lower oil production and prices in 2002
compared to 2001, “neither government spending nor oil revenues will be drivers
of broad economic growth,” with that burden falling to the private sector,
adding impetus for economic reform and further liberalization. (For the full
text of SAMBA’s analysis of Saudi demographics and employment see D Section.)
Table
2
Fiscal Strength Indicators
|
|
2000 |
2000e |
2002f |
|
|
% |
||
|
Budget Balance |
|
|
|
|
Deficit/GDP |
0.0 |
3.9 |
7.1 |
|
Non-Budgeted Exp/Non-Budgeted Rev |
49.8 |
266.7 |
n.a |
|
|
|
|
|
|
Structure of
Expenditures |
|
|
|
|
Interest Payments/Total Expenditures |
13.6 |
12.6 |
14.6 |
|
Interest Payments/Oil Revenues |
14.9 |
17.1 |
29.2 |
|
Actual Exp/Budgeted Exp |
127.0 |
118.6 |
110.1 |
|
Current Expenditures/Total Expenditures |
88.5 |
90.0 |
95.0 |
|
|
|
|
|
|
Structure of
Revenues |
|
|
|
|
Oil Revenues/Total
Revenues |
83.0 |
81.0 |
74.0 |
|
Actual
Revenues/Budgeted Revenues |
154.0 |
107.0 |
100.0 |
|
|
|
|
|
|
Structure of Debt |
|
|
|
|
Debt/GDP |
96.0 |
102.0 |
107.0 |
|
Foreign Debt/Total
Debt |
0.0 |
0.0 |
0.0 |
|
Short-Term
Debt/Long-Term Debt |
2.0 |
1.9 |
1.7 |
|
Foreign
Debt/Foreign Assets |
0.0 |
0.0 |
0.0 |
Copyright © 2002 Middle East Economic Survey