FES

Saudi Arabia
/ Michael Field. - [Electronic ed.]. - Bonn, 2000. - 18 S. = 54 Kb, Text
. - (FES-Analyse)

Electronic ed.: Bonn : FES Library, 2001

© Friedrich-Ebert-Stiftung

Prince Abdullah’s Government

Recovery of Oil Prices

Budget Deficits

Debt

Unemployment

Reforms Needed for Faster Growth

The Government’s Reaction

[Essentials]

Crown Prince Abdullah is now in control of the Saudi government, and his leadership is accepted by his brothers. He is popular with the Saudi public because he is seen as being against corruption and prepared to confront the Kingdom’s problems.

The Kingdom is quiet politically. Manoeuvrings over the succession and the threat from the Islamist opposition have subsided. The big challenge for Abdullah is the need for economic reform, to provide jobs for the huge numbers of young Saudis who are about to come onto the jobs market.

The last year has seen high oil prices but the government is still running a budget deficit, as it has done for the last 18 years. The state cannot continue to support the Saudi population and business community with subsidies in the way it learnt to do in the 1970s. The government’s debt, almost all domestic, is now equivalent to some $170bn - 125 per cent of GDP. Interest payments last year took 17 per cent of the budget.

A more serious problem is unemployment. The Saudi population has been growing very fast (by 3.5-4 per cent a year) and the numbers of Saudis now aged 15 to 24 greatly exceeds the numbers of jobs being done by those aged 25 to 34. As the new wave of young comes onto the employment market only one in four will find a job.

The government is trying to get companies to employ more Saudis rather than expatriate workers, but it is not having great success. It has to stimulate economic growth. The real growth rate of the economy since 1992 has ranged between zero and 2 per cent.

The government is being urged to privatise and open its doors to foreign investment. Foreigners traditionally have not been allowed to own land, buildings or equity shares, or open wholly owned branches of their businesses. This will change when the Kingdom joins the World Trade Organisation, which may be later this year.

The Saudi establishment does not welcome the prospect of economic reform. The government is moving slowly on privatisation, but it has recently opened the stock market to foreigners investing through mutual funds. It has said it will change the law to allow foreigners to own real estate, and will ease the requirement that foreign investors take local partners or sponsors.

The government needs to get new legislation in place quickly, so that a useful number of new jobs can be created by 2003 or 2004. It may already be too late for this to be possible. The Kingdom is a stronger and more stable society than most foreigners imagine, but the combination of high unemployment and disappointed expectations is dangerous.

Prince Abdullah’s Government

In the past two years Crown Prince Abdullah bin Abdel-Aziz has come to run the government of Saudi Arabia. Major decisions are still announced in the name of King Fahd, who since the mid-1990s has been suffering from the effects of some severe strokes and several less serious ailments. Likewise, it is the King who announces the budget at the beginning of January, who sends greetings to foreign heads of state, and who meets important foreign visitors when he is capable of doing so. But it is Abdullah who normally chairs the Council of Ministers (the cabinet), who makes major policy speeches and who has been responsible for the important political and economic initiatives of the last two years.

Abdullah has no full brothers and only six sons; most of them are in the National Guard, which he has commanded since 1962. This does not give him a very strong or broad power base. Instead of relying on close family members, he has been working with more distantly related princes, ministers from outside the royal family and senior civil servants. This has given his administration a more professional feel.

There has been much talk, especially among members of the opposition abroad and Saudis within the Kingdom who are ill-disposed towards the Al-Saud, of there being tensions within the family between Abdullah and his twenty-five surviving half-brothers. These include an important group, known as the Sudairi Seven, after the name of their mother’s family, or, more properly as the Al-Fahd, which is composed of the King and his six full-brothers - Sultan, the Minister of Defence and Aviation; Abdel-Rahman, his deputy; Turki, who has no government job; Naif, the Minister of the Interior; Salman, who is the very popular Governor of Riyadh and an important source of influence within the royal family; and Ahmed, the well respected Deputy Minister of the Interior. During the reign of King Khaled (1975-82) and Fahd’s active reign, this group was the dominant force in the Saudi government. It appointed some of its sons and many client commoners to important positions. During the 1990s it was speculated that Sultan would have liked to persuade Abdullah to step aside so that he could succeed King Fahd himself. Certainly there was a moment in early 1996, after the King seemed to recover with unexpected speed from his first stroke, when his brothers and sons persuaded Fahd to rescind Abdullah’s regency, granted two months earlier, and resume control of the government himself. The reason was not just that Abdullah stood in the way of Sultan’s ambition, but that Abdullah gaining control of the government would reduce their sons’ and clients’ access to government posts and/or contracts. This would have affected most directly Prince Sultan, who is known as an immensely rich man, whose personal finances are closely bound with those of his ministry. Sultan is very generous. He controls an extensive web of patronage.

Later, in 1998, it is thought that the Al-Fahd may have tried to persuade Abdullah to share power with one or two of its senior members, in some way which would never have been announced but would gradually have become apparent. If there was a form of power struggle at this time - and it is impossible to be sure because the affairs of the royal family are notoriously opaque - it seems that Abdullah won. In the last twelve months or so his half-brothers have rallied behind Abdullah’s leadership.

This is not surprising when one remembers that Abdullah and his older and more important half brothers all entered senior political positions for the first time during the crisis of 1958-64, when Crown Prince Faisal was gradually easing out of power the well-meaning but incompetent and spendthrift King Saud. At the time Saudi Arabia was bankrupt, Gamal Abdel-Nasser was at the height of his power and influence, and republicanism and socialism were the order of the day in the Arab world. It seemed very likely that the Saudi régime would collapse - particularly as it was divided internally. The crisis taught the royal family that if it is to survive its members must work together. This is what they have done since. From 1962, at which point Prince Faisal became Prime Minister, Abdullah has been Commander of the National Guard, Sultan and Salman have had their present positions, and Fahd has been in succession Minister of the Interior, Crown Prince and King. Although from time to time there have been tensions within the family, and although it is known that there are particular friendships and particular rivalries, the senior princes have worked reasonably well together for nearly forty years. It is not likely that they will fall out now.

With the Saudi public Abdullah has been very popular. He is liked, above all, because he is seen as being against the greed and nepotism which have been associated with some of his brothers. He has faced the Kingdom’s problems honestly and, by the very polite and formal standards of Saudi Arabia, he has talked about them bluntly. People have appreciated this. They talk of him as being "young in soul" and wanting change. As he has gained in authority and popularity Abdullah’s self confidence has increased. The stutter for which he used to be known has gone. He is seen as being wise, even if he is not well-educated or conspicuously clever. He has gained people’s respect, in the Kingdom and internationally. Great expectations are being pinned on his government.

Fortunately for Abdullah he has been taking over the reins of power in a period that has been tranquil politically. Several of the difficult issues of the last decade have recently been resolved. Most obviously the succession has been settled - though this was never as awkward a matter as it was made out to be by academics, journalists and other pundits in Europe and America. It is now acknowledged that assuming the princes do not die in an unexpected order, Abdullah (born 1923) will be succeeded by Sultan (born 1924) and that then the succession will pass either to Naif (born 1934) or Salman (born 1936). A decision between the last two will be made by Sultan when he is king. Naif is the older prince, but Salman has been in government longer, is far more popular - Naif is dour and authoritarian - and is far better networked inside the royal family. Salman has a number of able and well-regarded sons, including Fahd, who was a very popular vice-governor of the Eastern Province, Sultan, the former astronaut who is now a leading figure in charitable work, and Abdel-Aziz, who is a Deputy Oil Minister. Salman sometimes gives the impression that in a low key way he is "running for king".

The Islamist threat has subsided. At the time of the Gulf crisis in 1990-91, when it was shown that Saudi Arabia’s enormous defence spending in the previous fifteen years had been largely wasted, with the result that the state had to call on non-Muslim troops for its defence, the government was greatly embarrassed by a wave of criticism by religious leaders. These people had positions as Islamic lawyers, teachers in the universities and prayers leaders (imams) in the mosques. In sermons, lectures and in tapes that were sold in the markets, they attacked the royal family for being corrupt, hypocritical, too secular, too close to the West and incompetent. The attacks were abrasive and personal. They were directed also at non-royal ministers and civil servants - in fact at anyone who could be considered in some way irreligious. In the next three years the agitation spread to conservative and Islamically minded people outside the religious professions. Groups of businessmen and professionals presented petitions to the King, demanding reform in quite assertive terms. They wanted there to be wider consultation by the King, particularly of religious people such as themselves. Young vigilantes, drawn from the vast numbers of half-educated, unemployable graduates turned out by the Kingdom’s religious universities, made it their business to harass any citizen or foreigner who appeared in some way ungodly or too Westernised. In Buraidah, the austere capital of the province of Qassim, north of Riyadh, there were demonstrations, a riot and eventually an attempt to establish a form of autonomous Islamic community.

In 1994 the government, after much urging by the Kingdom’s relatively small liberal intelligentsia, cracked down on the opposition. A handful of the most militant religious leaders in Qassim were put in prison. University teachers were told firmly to remove the political content from their lectures, and the imams, lawyers and academics who preached in the mosques on Fridays were ordered to de-politicise their sermons. The young vigilantes were placed formally under the control of the Committee for the Commendation of Virtue and the Condemnation of Vice, and the Committee itself was brought more strictly under the control of the Interior Ministry. After the government’s action several opposition figures fled abroad and carried on their attacks from Europe and America. Particularly irritating for the government was the Committee for the Defence of Legitimate Rights, which established itself in London, and sent bulletins on corruption and other Saudi scandal to fax numbers in the Kingdom. These numbers were in ministries, government agencies, private houses and all sorts of businesses. The recipients would distribute the bulletins among networks of friends. More extreme and violent opposition elements carried out two bombings - one in 1995 on a National Guard building in Riyadh, and the other, in 1996, on a building housing American servicemen in the Eastern Province town of Alkhobar.

The Saud family is extremely sensitive to criticism, and it has a horror of violence, partly because it sees it as reflecting badly on its claim to be giving its people good - almost flawless - government and a quiet, happy and prosperous life. It was therefore much upset by the faxes and the bombings. It caught those responsible for the first bombing and executed them. It tried to get the British government to close the Committee for the Defence of Legitimate Rights and cancel the residence permits of its members, but the British authorities’ attempts to oblige the Saudis were defeated in the courts. Ironically, at about this time Saudi recipients of the CDLR faxes were noticing that stories of scandal were being recycled over and over again - politics and business move slowly in Saudi Arabia, which makes life difficult for any publication devoted to the Kingdom, be it conventional newspaper or scandal sheet. Then the founders of the CDLR fell out between themselves and lost credibility.

The government gradually realised it did not have much to fear from the opposition. It became more confident. In 1999 it let the religious leaders of Buraidah out of prison. At the same time it has pursued an initiative for better relations with Iran, reasoning that this will neutralise a potential source of backing for religious opposition. It is still thought possible that there was an Iranian hand behind the Alkhobar bombing, though it is just as likely that the deed was done by central Arabian militants. In the longer term it is thought that a reconciliation with Iran will make possible a reduction of the American presence in Saudi Arabia and the Gulf, which is itself a stimulus to opposition.

What will now test Prince Abdullah’s government is the need for economic reform. This pro-

cess has started, but it may not be moving fast enough to provide work for the enormous numbers of young Saudis who are about to pour onto the jobs market.

Recovery of Oil Prices

Nineteen ninety-nine was a good year financially for the Saudi government. At the beginning of the year the Organisation of Petroleum Exporting Countries (OPEC) basket of seven crude oils was selling for a weighted average price of $9 a barrel and it seemed quite likely that the price would fall further. There was talk in the markets of it hitting $5. Then at the end of March the leading members of the Organisation plus Mexico agreed on production cuts of around 15 per cent of their output. More remarkably they made the cuts stick. The result was an immediate recovery of prices, which gathered momentum during the rest of the year. The agreement was one of the rare cases in which OPEC has been able to change the market. For most of the time since the Organisation was founded in 1960, it has either been ineffective or has taken advantage of market developments that have not been of its own making.

For 1999 as a whole the OPEC basket price averaged $17.47, which was a considerable improvement on the 1998 figure of $12.28. The strong market has continued into the new year. The average prices for December 1999 and January and February 2000 have been above $24 a barrel. The OPEC members have been continuing to behave with impressive discipline. Cheating on quota reductions has been running at quite minor levels; in January the average OPEC compliance with the cuts was 73 per cent. In that month the Ministerial Monitoring Committee met in Vienna and repeated that strict compliance would remain essential at least until the end of March, which was the date originally set for a review of the cuts. Indications were that the Organisation might decide on a small relaxation when it met again.

For the medium term the prospect in early 2000 seems to be for continued fairly strong prices - though it is never wise to make forecasts too definite because expectations of high or low prices have a tradition of being self correcting. A belief that prices are going to remain high encourages quota cheating, investment in the development of new fields outside OPEC areas and economies by consumers, all of which weaken the market and bring about a fall in prices. The logic applies in reverse when the expectation is that prices will stay low.

In early 2000 the situation is that there has been a considerable draw-down of stocks, which the International Energy Agency said in December was running at more than 5 million barrels a day - equivalent to more than 20 per cent of OPEC’s production. Demand seems set to continue to rise as the Asian economies maintain their recovery and growth continues in Europe and America. The main threats to the market will be the possibility of OPEC members falling back into their old habits of quota breaking, and the coming on stream of some 1 million barrels a day of new supplies from countries outside OPEC. In the slightly longer term prices will be strengthened by the sharp decline in exploration and development projects that was brought about by the weak prices of 1998 and early 1999.

Budget Deficits

Strong prices greatly help the Saudi government because it draws 75 per cent of its revenues from oil. Yet even with the recovery of last year it still ran a budget deficit. At the beginning of the 1999 financial year, which is the same as the Gregorian calendar year, it expected a deficit of $11.7 billion, and it ran an actual deficit during the year of $9bn. Its oil revenues were $7bn higher than expected, which suggests that part of the windfall went on paying debts outstanding to Saudi contractors and suppliers.

For the current year the government has built higher oil price assumptions - around $18 a barrel - into its revenue calculations, but its spending is expected to be a little higher than it was in 1999 and it still forecasts a deficit, of some $7.5bn. If this is what happens it will mark the eighteenth year in succession in which it has run a budget deficit.

This remarkable fact shows how strong has been the government’s tendency to overspend. Its first deficit in the current series occurred in 1983, only two years after it received its highest ever volume of oil revenues - $110bn in 1981. Since then the government has tried to control its spending, but whenever it has appeared to be succeeding it has been hit by some unexpected adverse development. In the mid-1980s there was a collapse in oil revenues - brought about first by a steady fall in production and then a price collapse in 1986. In 1990-92 there was a period of high spending caused by the Gulf crisis, and in 1998 there was another big fall in oil prices.

The conclusion the government, and most of the Saudi population, draws from the series of deficits is that the state cannot continue to support the people in the way it learnt to do in the golden years of 1973-82.

In that period the government adopted the policy of virtually guaranteeing its citizens jobs in the civil service if they did not want to go into business in the private sector. It also instituted an array of subsidies and a lavish welfare state. It provided free education and health services. If a student could get a place at a foreign university he would be sent abroad to study at the government’s expense. Likewise a person who needed specialist medical treatment would be sent abroad, with one or two members of his or her family to provide moral support, with all expenses paid by the government. Internal telephone calls were free. Gasoline, electricity and water were provided for a nominal charge - in the case of electricity and water way below their production costs. Basic foodstuffs, such as rice and sugar, were subsidised. Businessmen investing in industry benefited from free land on industrial estates and low interest loans. Agricultural investors got free land, interest free loans and an extraordinary array of other subsidies, grants and support prices. House buyers got interest free loans. No direct taxes were levied, other than the small religious tax, zakat, and there were no indirect taxes other than tariffs on some imported goods. Most of this generous financial régime is still in place, though over the years there have been some increases in the charges for utilities and gasoline, and there are now fewer students and hospital patients sent abroad. There has been a big cut in the help given to agriculture. Loans for housing are disbursed much more slowly. Most important, the government has stopped guaranteeing young people jobs in the civil service. Its policy is now to freeze the number of its employees.

At the same time it is looking more carefully at the sums it is allowing to be taken in commissions, particularly by members of the royal family. This economy pre-dated Prince Abdullah taking control of affairs, but it has become more pronounced under his government. In the 1970s and early 1980s the government and the rest of society had so much money that there was little objection to princes and their hangers-on taking commissions of tens or hundreds of millions of dollars on deals - normally through their representing the successful company in the bidding for a government contract. They and other businessmen were allowed to sell land to the government at hugely inflated prices. Now there is much more controversy surrounding royal business because everybody is feeling financial pain, but there is no doubt that the amounts of money going into royal pockets have been reduced.

There are several reasons why the government’s economies have not been enough for it to balance its budget. One is that the population has been growing fast - by nearly 4 per cent a year. The exact size of the population is a matter of conjecture, but most estimates range between 18 and 22 million, including about 7 million expatriates. The government has had to maintain and expand an infrastructure which was built in the 1970s and the first half of the 1980s and is now deteriorating. Most of the money spent here has gone on maintenance rather than new projects. The government releases little information in its budgets, but it is calculated by the Saudi American Bank, which publishes excellent economic analyses, that in recent years less than 10 per cent of expenditure has been going on capital projects. Since the early 1990s a further drain on the government’s finances has been the payment of interest on its growing debt.

Debt

During the years from 1983 to the Gulf crisis the government was able to finance its budget deficits by running down its enormous financial reserves, which at the beginning of the period totalled about $150bn. The Gulf crisis, which cost at least $50bn, consumed what remained of available reserves - reserves not earmarked for backing the currency and covering the normal flow of imports and foreign transfers. It also led the government to make a small foreign borrowing. Since 1992 the deficits have had to be financed by domestic borrowing, a practice which the government initially found very embarrassing. It was sensitive to the fact that borrowing involves the payment of interest, which Islam condemns as usury. More seriously, it was shameful. It showed that the government had been mismanaging its funds and was not able to create for its people a society and economy which were at the same time Islamic, harmonious and rich.

Once it had got into the habit of borrowing, however, the government continued the practice with few qualms. It has now built up a domestic debt of 600bn riyals, which is equivalent to $160bn. It has a further $10bn of foreign debt and some billions owed to contractors and suppliers in the Saudi private sector. Its total debts come to 125 per cent of GDP.

About 80 per cent of the debt is held by two similar government agencies, the Pension Fund and the General Organisation for Social Security, and the rest is with the commercial banks. Although government paper already accounts for more than two thirds of GOSI’s and the Pension Fund’s assets, the two bodies seem to be having no difficulty is absorbing more every year. At present they are receiving a much bigger income from employers’ and employees’ contributions, which run at 14 per cent of employees’ salaries, than they are paying out in pensions. This is in spite of the fact that Saudi government employees generally retire in their fifties.

Servicing the debt cost SR 30bn ($8bn) last year, equivalent to 17 per cent of the budget. To save itself additional embarrassment, the government does not publish a figure for debt service in its budget statement. It is understood that it spreads the cost across the different ministries and other state agencies in proportion to their spending. This ploy has the additional advantage of encouraging the ministries to economise.

Having 17 per cent of its budget going on interest payments is putting a significant burden on the government, and it looks as if this burden is going to get heavier. A total debt of 125 per cent of GDP is a very high figure. The Maastricht guidelines for admission to the European Union call for a debt-to-GDP ratio of 60 per cent or less. If the debt were owed to foreign banks the Saudi government would no doubt be very worried, but as it is owed mainly to two of its own agencies it knows that if necessary it will be able to reschedule quietly and at will. It seems unlikely at present that the government will face a debt crisis. Nor is it likely to be obliged to devalue the riyal in order to increase the local currency value of its oil revenues and decrease its need to borrow. When its oil revenues were falling in January and February 1999 there was a run on the riyal, albeit on a relatively small scale by world standards because the Saudi currency is not held widely abroad. Now that oil prices are strong the threat to the riyal and talk of devaluation have receded.

Unemployment

A much bigger problem for the government is the prospect of very high unemployment among the young. Twenty years ago such an idea seemed inconceivable. Then the Saudi population was small, there were more than enough jobs for nationals in the government and private sector, and the Kingdom’s concern was to think of ways of stopping the expatriate proportion of its population getting bigger as the economy grew. Almost unnoticed at the same time the Saudi population was reproducing itself almost as fast as it is possible for a human society to do. It was helped by the array of subsidies the government provided, which encouraged early marriage and made it possible for couples to have as many children as they liked. Since the mid-1970s the population has been growing by between 3.5 and 4 per cent a year. According to government figures 57 per cent of the Saudi population is aged nineteen or less. The numbers of teenagers and young men in the fifteen to twenty-four age group, most of them still in full time education, vastly exceeds the numbers of jobs being done at present by Saudis aged twenty-five to thirty-four. This suggests that in the next ten years, as the younger group moves to fill the jobs now being done by the older group there is going to be massive unemployment. At present the unemployment rate among Saudis in their twenties is around 15-20 per cent, though no official figures are published. At best this year it is estimated that one in three of the Saudis coming onto the jobs market will find work. A more likely figure would be one in four. In the next few years this proportion is likely to decrease. The situation is potentially explosive.

There is little the government can do to improve the situation except try to stimulate economic growth (discussed below) and encourage the replacement of expatriate workers in the private sector by young Saudis. It has made it the law that private companies should increase the number of their Saudi employees by a figure equivalent to 5 per cent of their total workforce every year. This is not proving easy. There are a great many menial jobs - such as labouring, dirty industrial jobs, domestic service and waiting in restaurants - which Saudis simply refuse to do. These sorts of jobs account for perhaps half of total private sector employment. For the more attractive skilled industrial/technological, clerical and junior management jobs few young Saudis are qualified - partly because they have spent far too much time at school learning religious subjects. Many of those who do take such jobs are not willing to work the hours required by their employers and are inclined to leave their posts an hour or so early. Both those who are married and those who are still single find private sector work does not give them sufficient time with their families. Many resign their jobs after a few months. There are private sector firms which have taken on young Saudis, and have tried to train them and get them to work efficiently, but which now have no Saudis on their payrolls. Some have resorted to taking on a few Saudis and telling them to stay at home - though this can only be a short term expedient.

It could be argued that if young Saudis do not want to work, and are happy to stay at home with their still reasonably affluent families and watch television or play with their younger brothers and sisters, large scale unemployment will have less serious consequences than one might expect. The problem is that the young do not feel at ease in this rôle. They were brought up to expect a better life - prosperity with a job but not much work. Although there is a general acceptance among them that they cannot expect to be as lucky as the generation of the 1970s and 1980s, they still have a sense that they have been let down. They are worried and some are resentful. Quite illogically, many have persuaded themselves that the jobs that should rightfully be theirs have been taken by Americans.

Reforms Needed for Faster Growth

Clearly, if the rise in unemployment is to be checked, and if the standard of living of the Saudi people as a whole is to be maintained - or stopped from falling too quickly - the economy will have to be made to grow faster. This growth will have to come from the private sector, or from productive institutions outside the oil business that are still partly owned by the government. Most of the petrochemicals industry is in this category. The difficulty is that these parts of the economy are not very big. The Saudi economy - although by far the biggest in the Middle East - is much smaller than foreigners imagine. The Kingdom’s gross domestic product - about $140bn - is 60 per cent of Belgium’s and half as big again as Singapore’s. GDP per capita is only $6,500, which is equivalent to that of Argentina and Slovenia.

The weakness of a small and undiversified economic base is that it cannot maintain steady growth. The Saudi economy outside the oil sector grows in short bursts. It is, naturally, stimulated by any general rise in government spending, and it is visibly affected when the government launches a big new construction project - but it is not big enough to provide a motor for its own growth. If there is a perceived shortage of a particular product or service that can be provided from inside the country, that shortage will be quickly filled and a surplus created. Large parts of the Saudi market are extremely competitive, and in many sectors - at present including most of the retailing business - companies are making losses. When they cannot see immediately profitable opportunities at home Saudi businessmen keep their money abroad and wait. It is the lack of domestic opportunities, rather than political worries or a superior rate of return abroad, that causes Saudi businessmen to keep some hundreds of billions of dollars invested in Europe and America. Part of the attraction of domestic investment, when it is possible, is that the profits are tax free.

Most Saudi private sector business is on quite a small scale. Saudi companies, mainly family owned, are in trading, real estate, contracting and minor manufacturing. There are perhaps ten family firms that have launched substantial industrial ventures. The biggest all private industrial venture, a petrochemicals plant at the Gulf port of Jubail, owned by a consortium of private interests and the American oil company, Chevron, began operations at the end of last year.

The consequence of the small scale of Saudi private business combined with the recent lack of stimulus from the government has been a very low rate of real economic growth. If one takes out fluctuations in the price of oil, one sees that Saudi growth since 1992 has ranged from zero to 2 per cent.

The government has to introduce reforms that will stimulate the economy’s productive sectors. Most obviously it needs to privatise businesses which so far have been run virtually as part of the welfare state. These are telecommunications, electricity, water (which is almost entirely desalinated sea water) and the national airline, Saudia. It could also privatise its domestic and export refining operations and the majority state share of the Saudi Basic Industries Corporation (SABIC), which holds the Saudi shares in the Saudi/foreign petrochemical plants. Both the refineries and the petrochemical plants are profitable - the latter very profitable - so in these cases the attraction of privatisation would be more the raising of money for the budget than the stimulation of enterprise. For the longer term there are many other government bodies that might be sold, including the Grain Silos and Flour Mills Organisation, the Railroad Authority and various industrial, hotel, banking and shipping interests.

The government has also to encourage foreign investment. For years the Saudi government, like other Arab governments, has talked about how much it wants foreign investment and has given foreign companies various privileges, such as tax holidays, but it has not been genuinely welcoming. Foreigners and foreign companies have not been allowed to own land or buildings, or equity shares. They have not been able to run their own sales branches for their own products, or work on their own, without a partner/sponsor, as contractors. Foreign banks were forced to turn themselves into local companies and sell majority holdings to local buyers in the late 1970s. Foreign companies cannot generally run service businesses on their own in the Kingdom. They can invest in industry as sole owners of an operation, but if they do this they pay higher tax than foreign companies in joint ventures. Even in joint ventures foreign companies find themselves paying tax at quite a high rate once their tax holidays are finished, whereas Saudi companies pay virtually no tax. Foreign business visitors, and even more foreigners wanting to work in the Kingdom have to go through long visa formalities.

The new idea, being pushed by a body of reformers in government and foreign institutions such as the World Trade Organisation (WTO), is that foreigners should be allowed to do business in the Kingdom on more or less equal terms with Saudis. The idea requires not only changes in the rules on ownership and visas, but also greater transparency in government and changes in the workings of the commercial part of the legal system, so that foreigners can feel more confident of a fair hearing if they get into a legal dispute. Trade and investment would be further encouraged by the removal of tariffs. At present most goods imported into Saudi Arabia attract a tariff of 12 per cent. Items that compete with local production pay 20 per cent.

The opening of the economy will begin when Saudi Arabia joins WTO. The government has been talking to this body for some years, and is reported recently to have made some important concessions, though, typically, there has been no announcement as to what these are. In late 1999 and early 2000 the word in Riyadh has been that the Kingdom will accede to WTO towards the end of this year - but a year ago the same prediction was being made for 1999, and it may well be that accession will slip into next year or beyond. What is causing the government to hold back is not just the difficulty of the negotiations themselves, but the domestic sensitivity of the issue. The biggest and most competent Saudi family businesses will probably gain from the more active environment which will develop as foreign companies invest. Where they are doing straightforward import business, in which they might in theory be replaced by branches of foreign companies, they are generally so well bound to the companies they represent that it is difficult to imagine them being pushed aside. In many cases they already have manufacturing or sales and maintenance joint ventures. The people who will not like losing their ownership and tax privileges are the small and medium sized family firms. Many of these will have to restructure themselves or close.

The changes that will accompany WTO membership are an aspect of a broad change in attitudes that will have to happen if Saudi Arabia is to become a more productive society. For the last thirty years the Saudis and the other Arabs of the Gulf have seen themselves as special, and in some way superior to other societies. The popular belief is that they have a priceless resource - or what should be a priceless resource - bestowed on them by God, which entitles them to enjoy a high standard of living without having to do very much work. According to this view hard, demeaning work is something that is done by foreigners, mainly Asians, and government is the agency through which their oil wealth is distributed to them - not something which they have an obligation to support. Changing these ideas will be difficult, but it will be an essential part of lowering expectations and altering attitudes to work.

The government, particularly since Prince Abdullah has been in charge, has been telling its people that times have changed. In the 1980s and early 1990s, when King Fahd announced a bigger budget deficit or an increase in charges for some subsidised item, he would reassure Saudis that they would continue to enjoy all the "privileges" that were their "proper entitlement".

Now Prince Abdullah is saying that "the good years have gone and will not return" - as he put it in a speech at a Gulf Co-operation Council summit at the end of 1998.

There is talk of further reductions in subsidies - and there has been some action on this front. More subsidy cuts, or increases in charges, will come when privatisation begins. For the slightly longer term there is the likelihood of corporate taxes and value added tax - though as yet there has been no mention of such a sensitive matter as Saudis paying income tax. There have already been some changes in the education system, involving a cut in the religious instruction that children receive - this had reached absurd proportions in the late 1980s - and it is the government’s intention to direct more children towards technical and scientific studies.

There is discussion of women being allowed to play a greater rôle in society. At present they are not allowed to drive, or work - except as doctors, nurses or teachers. A few women quietly run businesses, but it is difficult for them to be open about what they are doing and their premises are liable to be invaded by members of the Committee for the Commendation of Virtue and the Condemnation of Vice, to check that they are not coming into contact with male employees who are not their relations. The feeling among the small Saudi liberal intelligentsia has long been that this is an absurd situation, and this view is now spreading in the upper levels of the civil service and among many in the royal family. The liberals are concerned not just with the rights of women but with the economic loss to Saudi Arabia. The absence of women from the workforce necessitates the employment of hundreds of thousands - perhaps more than a million - foreign male secretaries, receptionists, clerks, computer operators and drivers - the last being used to take Saudi women shopping and their children to school. If some of these jobs could be taken by Saudi women the Kingdom would save a large sum of foreign exchange, which now flows out of the country in the form of workers’ remittances, and, more important, more of its GDP would accrue to Saudis. The standards of living of Saudi families would be raised.

Early in 1999 Prince Abdullah raised the possibility of women being allowed to drive in one of his speeches. There was an immediate outcry from conservative elements, particularly in the religious establishment. Delegations went to call on conservative princes to register their dissent. (It is one of the great strengths of the Saudi regime that among the five thousand odd princes there are people of all shades of political opinion in touch with every element in Saudi society.) Officials quickly said that Prince Abdullah’s speech had been misunderstood, and he has not mentioned the matter since. It is very likely,

though, that economic pressures will cause the subjects of women driving and working to be raised again in the next few years.

The Government’s Reaction

For most people in the Saudi government, in the royal family and outside it, economic reform is not a pleasant prospect. It is quite widely accepted as a necessity, but there is little enthusiasm for it. The people who run Saudi Arabia are mostly of Gamal Abdel-Nasser’s generation. They were students or young men in the 1950s and 1960s and they still hold to most of the Arab nationalist ideas that were popular at the time. They are not republican, but their instincts are for state control, self-sufficiency and for limiting the involvement of foreigners in the economy. The royal family has a further set of concerns about increasing utilities charges and levying taxes. It believes, quite rightly, that if it makes Saudis pay more for what they get from the state, there will be more complaints about corruption and more demands for involvement in the running of government. In practical terms this would mean an increase in the powers of the Majlis as-Shura, the Consultative Council, and the election of some of its members, all of whom at present are appointed.

Much of what the government has done so far has been to talk about change, partly because, in the classic way of Arab monarchies, it has wanted to accustom its people to the idea before it does anything. Also in the 1990s there were from time to time various money saving reforms, particularly in civil service employment and agricultural subsidies. Since the government encountered severe financial problems in 1998 and reform came firmly onto the agenda there have been some further definite steps, but progress has hardly been fast.

Steps are being taken towards the privatisation of the electricity companies, telecommunications and Saudia, but in each case matters have been delayed and complicated by the large subsidies that have been built into these services. Without the government continuing to give subsidies by a different route, which it cannot afford, or prices for the consumer being raised sharply, the companies/government authorities cannot be made attractive to investors. Balance sheets have to be cleaned up. Saudia in particular has borrowed from local banks, which have felt secure lending to a government institution, but has failed to service its debts. Both the banks and the airline have needed to regularise this situation.

Furthest along the road to privatisation is the electricity industry. Eleven regional power companies have been merged into the Saudi Electric Company and higher charges have been introduced, weighted towards the bigger consumers. The Company now has to make sure that it collects the charges, particularly from members of the royal family, many of whom have not paid in the past. At the next stage the idea is to divide the Company into three independent entities dealing with generation, transmission and sales. The first two companies can be made profitable and saleable. The third will continue to receive a government subsidy for some years.

Last year a number of small measures were taken to increase government revenues. Gasoline prices were raised by 50 per cent, to the equivalent of about 24 US cents a litre, which is still far below European levels. An airport departure tax of SR 50 ($13) was introduced and visa fees for foreign workers were doubled to SR 2,000 ($533). Together these measures, and the higher electricity charges, were expected to raise nearly $1bn over a full year.

Towards the end of last year the Saudi stock market was opened to foreign investors - though only for investment through mutual funds. Given that these are bound to be managed by Saudi banks or Saudi/foreign bank partnerships, the restriction means that the market and the Saudi public will continue to be given the impression that their companies are owned by Saudi institutions and individuals. In October Prince Abdullah announced that the government would pass legislation to allow foreigners to own property and ease sponsorship/partnership requirements. The changes, he implied, would be in a new Foreign Direct Investment law. It may be many months, or more than a year, before the law is introduced.

At the end of the year the Gulf Co-operation Council summit announced an agreement on the unification of customs duties in its six members - Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman. The intention is to have a single scale of external tariffs in a range from 5.5 to 7.5 per cent. The schedule set for implementation was quite relaxed; the new rates are to be in force by March 2005.

The initiative launched by Prince Abdullah in September 1998, when he asked seven American oil companies to submit proposals for investment in the Kingdom, has moved very slowly. The proposals were handed in during the early months of the following year, and in due course it was made known that proposals would also be welcomed from other companies, notably Shell, BP and Total. From an early stage it was assumed by the companies, and by Saudis in the government and private sector, that the government would not be enthusiastic about proposals for exploration and production of crude oil - which left open gas exploration and production, oil refining, and most importantly gas distribution and industrial projects, particularly in the power sector. This gradually emerged as government policy. In the spring of 1999 it was being suggested that the government would respond to the companies’ proposals after the summer, saying which proposals it liked and asking for the companies’ further ideas. This might have involved some companies putting forward proposals quite different from those they made originally. In early 2000 it seemed the government had dropped this idea. It was inviting senior company executives to come to Riyadh again, in the spring, to discuss its reaction to the ideas put forward a year earlier.

It has been the traditional Saudi way when launching new policies to feel its way forward. It seeks people’s opinions inside and outside the country, warns its own citizens about what it has in mind, lets its own ideas crystallise - and then acts quite fast. This approach worked very well in the 1970s and early 1980s, but it may be too slow in the present circumstances. The government needs to get new legislation and new policies in place very quickly, so that foreign companies and the Saudi private sector can react, formulate their own policies, and start to implement them within two or three years. Then there is a chance that they will start to create a useful number of jobs for young Saudis coming onto the employment market in say, 2003 or 2004. It could be argued that the present debate and the recent series of policy initiatives should have been launched several years ago.

Foreigners have to be careful in criticising Saudi Arabia because it is a society very different from any in the Western world. It has never been a colony and it does things its own way. Its people are conservative and conformist. Bonds within families are strong. There is an almost universal suspicion of the foreigner. There is much criticism of the royal family, but a strong collective historical memory of the confusion that existed before King Abdel-Aziz established his firm rule in the early decades of this century. Most Saudis find it difficult to imagine any government except that of the Saud family. The Kingdom, in short, is a much happier and more stable society than most Westerners imagine it to be.

It would be unwise to predict disaster for Saudi Arabia on the basis of its reforms coming too late to provide its young people with employment a few years from now. But equally, the conventional wisdom is that societies that experience unemployment on the scale that Saudi Arabia may have by 2005, combined with disappointed expectations among their young people, suffer major upheavals. The Saudi government may soon find itself having to introduce economic reforms much more quickly than it has done so far. And to fend off criticism, it may have to introduce a measure of political reform at the same time.

© Friedrich Ebert Stiftung

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fes-library | Januar 2001