SAUDI ARABIA: Saudi economic health
Anthony H. Cordesman

Washington, DC, August 17, 2005

Any one who bothers to read the Saudi Five Year Plan, Saudi budget, and reporting of the Saudi Monetary Agency is also aware that real money is going into structural economic reform, to job creation, and to correcting the past underfunding of infrastructure, education, and medical services.

There is no doubt that the kingdom needs to do more in political reform, but economic reform is at least as important and probably has more real-world priority for most Saudis. These are areas where Saudi Arabia has already taken important steps. In fact, Saudi Arabia has one of the most aggressive economic reform efforts of any country in the Middle East. It is certainly imperfect and slow moving, but it is also very real.

It is also important to note that this discussion focuses on longer-term problems and not on the immediate situation. Saudi disguised unemployment may not be efficient, but it does create jobs and income flow for young men. Many Saudi families also have substantial capital holdings inside and outside Saudi Arabia.

There are no reliable estimates of such holdings, but past US Treasury studies put them well above several hundred billion dollars. (In fact, so much private money is outside Saudi Arabia and other Gulf states that it is impossible to halt private funding of extremists groups.)

The Kingdom is also experiencing a broad economic boom. Saudi oil export revenues sank to only $34.3 billion in 1998, but they rose to $46.8 billion in 1999, $81.7 billion in 2000, $63.9 billion in 2001, $65.5 billion in 2002, $86.1 billion in 2003, $106 billion in 2004, and will probably reach $157 billion in 2005.

Distribution of income is a problem - as it is throughout the world - but Samba reports that the Saudi nominal GDP has risen from only $546.6 billion in 1998 (a year with very low oil revenues) to an estimated $1,185 trillion in 2005. This is more than twice the 1998 figure.

After years of budget deficits, Saudi Arabia is now experiencing a major surplus. The budget has gone from an 8.9 percent deficit in 1998 to a 16.1 percent surplus in 2005. Moreover, official foreign assets have increased from $69.4 billion to $177.5 billion, and government debt has dropped from 119 percent of GDP to 51 percent.

The end result has been a major increase in government investment in all of the areas where underfunding was common in the 1990s. It has also been a massive increase in per capita income. It was $7,437 in 1998, but rose to $8,016 in 1999, $9,161 in 2000, $8,682 in 2001, $8,728 in 2002, $9,604 in 2003, $11,052 in 2004, and will probably reach $13,603 in 2005. These figures do not approach the peak reached in 1980, but this was a freak year driven by the fall of the Shah and Iran-Iraq War. In terms of real annual average per capita income, Saudi Arabia is doing well.

In fact, some aspects of the Saudi economy are doing so well that they may actually be dangerously overheating. The Saudi stock market generally increases in value by about 4-7 percent a year. A combination of repatriation of capital after Sept. 11, 2001, high oil revenue, major growth in the private sector, etc. led the TASI index to go up by 76 percent in 2003 and 85 percent in 2004 - an increase that makes the US IT boom look modest. This increase is sometimes based on a vast overvaluing of bubble stocks, although the problem is far smaller in Saudi Arabia than in places like the United Arab Emirates.

Much of Saudi investment is also in productive areas like government spending on infrastructure and human services, mining and petroleum related industries, and in privatized Saudi companies in areas like petrochemicals.

One key result is that Saudi Arabia has the money to pay for `guns,` `butter,` and `oil.` It can fully fund its counter-terrorism campaign without imposing a strain on the civil economy and can fully fund Aramco`s efforts to maintain Saudi oil production capacity, and expand it to 12.3 million barrels per day. This was not possible during the period of low oil prices in the late 1990s.

It is also important to note that investment rates are high even in lean years. As SAMBA notes, Saudi Arabia has averaged an annual rate of 18.4 percent of GDP since 1990. A large amount of this investment has also gone to human services and to productive areas like ARAMCO. A major amount has gone to business since 2004, after six years of negligible growth in foreign lending.

Finally, it is important to note that Saudi Arabia has a great deal of slack in its economy that is not present in most foreign economies. There are a number of important steps it can take to deal with any major dip in oil revenues, and to ease the mid- and long-term pressures on its economy:

- Following up on the steps King Abdullah took while he was Crown Prince and totally eliminating subsidies to `do nothing` members of the royal family and `loyal families` that have been rewarded since the days of the Ihkwan.

- Taxing middle class and wealthy families at moderate rates.

- Taxing luxuries and non-productive service industries.

- Eliminating all government aid and subsidies to agriculture, none of which currently serve any meaningful economic and strategic purpose.

- Introducing true market prices for water, electricity, gas, and petrol for all of industry and all but Saudi Arabia`s poor. This will sharply reduce the cost of infrastructure services and the growth in demand.

- Sharply reducing labor permits for foreign labor, and removing the de facto state subsidy of vast numbers of foreign servants. Create a labor market based on hiring Saudis, not foreigners. Many of the 6.14 million
foreigners in the Saudi 2004 census were foreign workers, and an extremely large percentage of the 1.93 million foreign women are menials or maids. Most of the develop world now lives without a servant class; so can Saudis.

- Accelerating the `basket` of economic reforms the kingdom already has
underway.

It is all too easy to focus on Saudi Arabia`s very real economic problems, and ignore the fact that it has as yet done little to impose the kind of solutions imposed by virtually every other government.

Like every nation in the world, Saudi Arabia faces major economic challenges. Part of its current success is also a matter of luck. High oil prices may still become moderate or low oil prices in the future. It is not accurate, however, to argue that medium- to long-term structural problems currently have a critical effect on stability, that the government ignores them, and there is no progress in reform.

Anthony H. Cordesman holds the Arleigh A Burke Chair in Strategy at the Center for Strategic and International Studies (CSIS).