Extra oil income may delay reforms in Saudi Arabia

Oct 16, 2004 02:00 AM

by Jasim Ali

The Saudi Arabian treasury is poised to generate an extraordinary income as a result of firm oil prices in the international market.
In turn, the extra oil income provides the kingdom with the opportunity to address outstanding economic challenges, such as reducing the debt burden. There is one drawback: It is feared that the exceptional oil proceeds could further delay economic reforms, such as privatisation.

Projected figures for the fiscal year 2004 called for revenue of $ 53.3 bn (Dh 195.824 bn) and expenditure of $ 61.3 bn leaving a deficit of $ 8 bn. Fresh estimates put income in the region of $ 100 bn. In turn, this would help the authorities to more than cover the projected shortage, such as reducing public debt and increasing spending on social programmes.
The Saudi government calculated a price of $ 19 per barrel yet the price averaged about $ 35 a barrel during the first eight months of the year. At the same time, Saudi oil production averaged about 9.3 mm bpd in the first nine months of the year, which is at least 1 mm above its normal production level. This reflected the kingdom's commitment to raise output to meet demand and thus help check oil price growth.

To be sure, any change in oil price leaves its imprint on the Saudi economy. Such is the case because the petroleum industry is uniquely special to the Saudi economy because it constitutes more than 70 % of income, 85 % of exports and 35 % of GDP.
Fortunately, the Saudi authorities are determined to use part of the extra oil income to trim down the outstanding debt burden. The public debt is estimated at $ 177 bn, representing a hefty 84 % of GDP. This is still an improvement over 1999 when the debt was higher than the GDP.

Additionally, Crown Prince Abdullah Bin Abdul Aziz has revealed that the government would spare $ 11 bn of extra oil proceeds for development projects, such as water and transport as well as social services, notably education and training.
Spending on both education and training is of paramount significance to the government, in the light of the problem of unemployment. The unemployment rate, which by one report is as high as 18 %, is an acute challenge for the Saudi economy. Strong representation of expatriate workers is partly blamed for the high unemployment rate.

Saudi nationals comprise less than 15 % of employees in the private sector. Saudi Arabia's total workforce is estimated at 8.13 mm, of which two-thirds, or 5.36 mm, are expatriates. Still, private sector firms complain that many nationals simply lack the necessary skills to be employed. Hence, the urgency of investments in improving educational output and equipping nationals with needed skills.
The unemployment headache can only get worse with the new entrants to the job market. More than 40 % of the population is younger than 15 and there is 3.6 % population growth. The government's seventh five-year plan, which covers the period 2001-2005, calls for creating some 817,000 jobs for Saudis.

There is oneclear drawback for the enhanced oil income, as it provides a fresh reason for at least temporarily delaying structural changes in the economy. Earlier, the authorities had revealed an ambitious plan to invigorate the economy through privatisation and liberalisation. Thus far, the government has allowed for competition in the mobile service of the telecommunications sector.
But the authorities had hoped to involve the private sector in running electricity, industrial zones, ports, airlines, airports, hospitals and schools. Historically, the call for restructuring the economy was boosted by repetitive projected budget deficits, but there is no such urgency for the moment.

Jasim Ali is assistant professor at the University of Bahrain's College of Business Administration

Source: GCC Insights
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