Saudi Arabia / Michael Field. - [Electronic ed.]. - Bonn, 2000. - 18 S. =3D 54 Kb, Text . - (FES-Analyse) Electronic ed.: Bonn : FES Library, 2001 =A9 Friedrich-Ebert-Stif= tung

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FES

Saudi Arabia / Michael Field. - [Electronic ed.]. - Bonn, 2000. - 18 S. =3D 54 Kb, Text . - (FES-Analyse)
Electronic ed.: Bonn : FES Library, 2001

=A9 Friedrich-Ebert-Stiftung

=3D"INHALT"

[Essentials]

Crown Prince Abdullah is now in control of the Saudi governme= nt, 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 t= o confront the Kingdom=92s 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 job= s 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 governmen= t 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 com= munity with subsidies in the way it learnt to do in the 1970s. The governme= nt=92s debt, almost all domestic, is now equivalent to some $170bn - 125 pe= r cent of GDP. Interest payments last year took 17 per cent of the budget.=
A more serious problem is unemployment. The Saudi popul= ation 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 employmen= t 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 allowe= d 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 mutua= l funds. It has said it will change the law to allow foreigners to own rea= l estate, and will ease the requirement that foreign investors take local p= artners or sponsors.
The government needs to get new legislation in place qui= ckly, 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 stron= ger and more stable society than most foreigners imagine, but the combinati= on of high unemployment and disappointed expectations is dangerous.

Prince Abdullah=92s Government

In the past two years Crown Prince Abdullah bin Abdel-Aziz has come to r= un 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 c= hairs the Council of Ministers (the cabinet), who makes major policy speech= es and who has been responsible for the important political and economic in= itiatives 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, minister= s from outside the royal family and senior civil servants. This has given = his administration a more professional feel. =20

There has been much talk, especially among members of the opposition= abroad and Saudis within the Kingdom who are ill-disposed towards the Al-S= aud, of there being tensions within the family between Abdullah and his twe= nty-five surviving half-brothers. These include an important group, known = as the Sudairi Seven, after the name of their mother=92s family, or, more p= roperly as the Al-Fahd, which is composed of the King and his six full-brot= hers - Sultan, the Minister of Defence and Aviation; Abdel-Rahman, his depu= ty; Turki, who has no government job; Naif, the Minister of the Interior; S= alman, who is the very popular Governor of Riyadh and an important source o= f influence within the royal family; and Ahmed, the well respected Deputy M= inister of the Interior. During the reign of King Khaled (1975-82) and Fah= d=92s active reign, this group was the dominant force in the Saudi governme= nt. It appointed some of its sons and many client commoners to important p= ositions. During the 1990s it was speculated that Sultan would have liked = to persuade Abdullah to step aside so that he could succeed King Fahd himse= lf. Certainly there was a moment in early 1996, after the King seemed to r= ecover with unexpected speed from his first stroke, when his brothers and s= ons persuaded Fahd to rescind Abdullah=92s regency, granted two months earl= ier, and resume control of the government himself. The reason was not just= that Abdullah stood in the way of Sultan=92s ambition, but that Abdullah g= aining control of the government would reduce their sons=92 and clients=92 = access to government posts and/or contracts. This would have affected most= directly Prince Sultan, who is known as an immensely rich man, whose perso= nal 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 per= suade Abdullah to share power with one or two of its senior members, in som= e 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 notori= ously opaque - it seems that Abdullah won. In the last twelve months o= r so his half-brothers have rallied behind Abdullah=92s leadership. =20

This is not surprising when one remembers that Abdullah and his olde= r and more important half brothers all entered senior political positions f= or the first time during the crisis of 1958-64, when Crown Prince Faisal wa= s gradually easing out of power the well-meaning but incompetent and spendt= hrift King Saud. At the time Saudi Arabia was bankrupt, Gamal Abdel-Nasser= was at the height of his power and influence, and republicanism and social= ism were the order of the day in the Arab world. It seemed very likely tha= t the Saudi r=E9gime would collapse - particularly as it was divided intern= ally. The crisis taught the royal family that if it is to survive its memb= ers must work together. This is what they have done since. From 1962, at = which point Prince Faisal became Prime Minister, Abdullah has been Commande= r of the National Guard, Sultan and Salman have had their present positions= , and Fahd has been in succession Minister of the Interior, Crown Prince an= d 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 togeth= er for nearly forty years. It is not likely that they will fall out now. <= /b>=20

With the Saudi public Abdullah has been very popular. He is like= d, above all, because he is seen as being against the greed and nepotism wh= ich have been associated with some of his brothers. He has faced the Kingd= om=92s problems honestly and, by the very polite and formal standards of Sa= udi 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=92s self confidence has in= creased. The stutter for which he used to be known has gone. He is seen a= s being wise, even if he is not well-educated or conspicuously clever. He = has gained people=92s respect, in the Kingdom and internationally. Great e= xpectations 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 i= ssues of the last decade have recently been resolved. Most obviously the s= uccession has been settled - though this was never as awkward a matter as i= t 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 i= n an unexpected order, Abdullah (born 1923) will be succeeded by Sultan (bo= rn 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 Sul= tan when he is king. Naif is the older prince, but Salman has been in gove= rnment longer, is far more popular - Naif is dour and authoritarian - and i= s far better networked inside the royal family. Salman has a number of abl= e and well-regarded sons, including Fahd, who was a very popular vice-gover= nor of the Eastern Province, Sultan, the former astronaut who is now a lead= ing 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 "runni= ng for king".=20

The Islamist threat has subsided. At the time of the Gulf cr= isis in 1990-91, when it was shown that Saudi Arabia=92s enormous defence s= pending in the previous fifteen years had been largely wasted, with the res= ult that the state had to call on non-Muslim troops for its defence, the go= vernment was greatly embarrassed by a wave of criticism by religious leader= s. These people had positions as Islamic lawyers, teachers in the universi= ties 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 incompe= tent. The attacks were abrasive and personal. They were directed also at = non-royal ministers and civil servants - in fact at anyone who could be con= sidered in some way irreligious. In the next three years the agitation spr= ead to conservative and Islamically minded people outside the religious pro= fessions. Groups of businessmen and professionals presented petitions to t= he King, demanding reform in quite assertive terms. They wanted there to b= e 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=92s religious universiti= es, made it their business to harass any citizen or foreigner who appeared = in some way ungodly or too Westernised. In Buraidah, the austere capital o= f the province of Qassim, north of Riyadh, there were demonstrations, a rio= t and eventually an attempt to establish a form of autonomous Islamic commu= nity.

In 1994 the government, after much urging by the Kingdom=92s rela= tively small liberal intelligentsia, cracked down on the opposition. A han= dful of the most militant religious leaders in Qassim were put in prison. = University teachers were told firmly to remove the political content from t= heir lectures, and the imams, lawyers and academics who preached in the mos= ques on Fridays were ordered to de-politicise their sermons. The young vig= ilantes were placed formally under the control of the Committee for the Com= mendation of Virtue and the Condemnation of Vice, and the Committee itself = was brought more strictly under the control of the Interior Ministry. Afte= r the government=92s action several opposition figures fled abroad and carr= ied 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 ot= her Saudi scandal to fax numbers in the Kingdom. These numbers were in min= istries, government agencies, private houses and all sorts of businesses. = The recipients would distribute the bulletins among networks of friends. M= ore 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 Alkh= obar.

The Saud family is extremely sensitive to criticism, and it has a ho= rror of violence, partly because it sees it as reflecting badly on its clai= m 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 th= e bombings. It caught those responsible for the first bombing and executed= them. It tried to get the British government to close the Committee for t= he Defence of Legitimate Rights and cancel the residence permits of its mem= bers, but the British authorities=92 attempts to oblige the Saudis were def= eated in the courts. Ironically, at about this time Saudi recipients of th= e 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 con= ventional newspaper or scandal sheet. Then the founders of the CDLR fell o= ut between themselves and lost credibility.

The government gradually realised it did not have much to fear fr= om 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 ini= tiative for better relations with Iran, reasoning that this will neutralise= a potential source of backing for religious opposition. It is still thoug= ht possible that there was an Iranian hand behind the Alkhobar bombing, tho= ugh it is just as likely that the deed was done by central Arabian militant= s. In the longer term it is thought that a reconciliation with Iran will m= ake possible a reduction of the American presence in Saudi Arabia and the G= ulf, which is itself a stimulus to opposition.

What will now test Prince Abdullah=92s government is the need for ec= onomic reform. This pro-

cess has started, but it may not be moving fast enough to provide wo= rk 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 govern= ment. At the beginning of the year the Organisation of Petroleum Exporting= Countries (OPEC) basket of seven crude oils was selling for a weighted ave= rage price of $9 a barrel and it seemed quite likely that the price would f= all 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 the= y made the cuts stick. The result was an immediate recovery of prices, whi= ch 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 be= en 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 marke= t has continued into the new year. The average prices for December 1999 an= d January and February 2000 have been above $24 a barrel. The OPEC members= have been continuing to behave with impressive discipline. Cheating on qu= ota reductions has been running at quite minor levels; in January the avera= ge OPEC compliance with the cuts was 73 per cent. In that month the Minist= erial Monitoring Committee met in Vienna and repeated that strict complianc= e would remain essential at least until the end of March, which was the dat= e originally set for a review of the cuts. Indications were that the Organ= isation might decide on a small relaxation when it met again.
For the medium term the prospect in early 2000 seems to be for co= ntinued fairly strong prices - though it is never wise to make forecasts to= o definite because expectations of high or low prices have a tradition of b= eing self correcting. A belief that prices are going to remain high encour= ages quota cheating, investment in the development of new fields outside OP= EC areas and economies by consumers, all of which weaken the market and bri= ng about a fall in prices. The logic applies in reverse when the expectati= on is that prices will stay low.=20
In early 2000 the situation is that there has been a considerable dr= aw-down of stocks, which the International Energy Agency said in December w= as running at more than 5 million barrels a day - equivalent to more than 2= 0 per cent of OPEC=92s 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 OP= EC members falling back into their old habits of quota breaking, and the co= ming on stream of some 1 million barrels a day of new supplies from countri= es outside OPEC. In the slightly longer term prices will be strengthened b= y the sharp decline in exploration and development projects that was brough= t 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, w= hich 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 oi= l revenues were $7bn higher than expected, which suggests that part of the = windfall went on paying debts outstanding to Saudi contractors and supplier= s.
For the current year the government has built higher oil price assum= ptions - around $18 a barrel - into its revenue calculations, but its spend= ing is expected to be a little higher than it was in 1999 and it still fore= casts 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=92s te= ndency to overspend. Its first deficit in the current series occurred in 1= 983, only two years after it received its highest ever volume of oil revenu= es - $110bn in 1981. Since then the government has tried to control its sp= ending, but whenever it has appeared to be succeeding it has been hit by so= me unexpected adverse development. In the mid-1980s there was a collapse i= n oil revenues - brought about first by a steady fall in production and the= n 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 p= rices.
The conclusion the government, and most of the Saudi population, = draws from the series of deficits is that the state cannot continue to supp= ort 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 guaran= teeing its citizens jobs in the civil service if they did not want to go in= to business in the private sector. It also instituted an array of subsidie= s and a lavish welfare state. It provided free education and health servic= es. If a student could get a place at a foreign university he would be sen= t abroad to study at the government=92s expense. Likewise a person who nee= ded specialist medical treatment would be sent abroad, with one or two memb= ers of his or her family to provide moral support, with all expenses paid b= y the government. Internal telephone calls were free. Gasoline, electrici= ty and water were provided for a nominal charge - in the case of electricit= y and water way below their production costs. Basic foodstuffs, such as ri= ce 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 fre= e loans. No direct taxes were levied, other than the small religious tax, = zakat, and there were no indirect taxes other than tariffs on some i= mported goods. Most of this generous financial r=E9gime is still in pla= ce, though over the years there have been some increases in the charges for= utilities and gasoline, and there are now fewer students and hospital pati= ents sent abroad. There has been a big cut in the help given to agricultur= e. 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 allo= wing to be taken in commissions, particularly by members of the royal famil= y. This economy pre-dated Prince Abdullah taking control of affairs, but i= t 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 w= as little objection to princes and their hangers-on taking commissions of t= ens or hundreds of millions of dollars on deals - normally through their re= presenting 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 n= o doubt that the amounts of money going into royal pockets have been reduce= d.
There are several reasons why the government=92s economies have not = been enough for it to balance its budget. One is that the population has b= een growing fast - by nearly 4 per cent a year. The exact size of the popu= lation is a matter of conjecture, but most estimates range between 18 and 2= 2 million, including about 7 million expatriates. The government has had t= o maintain and expand an infrastructure which was built in the 1970s and th= e first half of the 1980s and is now deteriorating. Most of the money spen= t here has gone on maintenance rather than new projects. The government re= leases little information in its budgets, but it is calculated by the Sa= udi American Bank, which publishes excellent economic analyses, that in rec= ent years less than 10 per cent of expenditure has been going on capital pr= ojects. Since the early 1990s a further drain on the government=92s fi= nances 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 reserve= s, which at the beginning of the period totalled about $150bn. The Gulf cr= isis, which cost at least $50bn, consumed what remained of available reserv= es - reserves not earmarked for backing the currency and covering the norma= l flow of imports and foreign transfers. It also led the government to mak= e a small foreign borrowing. Since 1992 the deficits have had to be financ= ed by domestic borrowing, a practice which the government initially found v= ery embarrassing. It was sensitive to the fact that borrowing involves the= payment of interest, which Islam condemns as usury. More seriously, it wa= s shameful. It showed that the government had been mismanaging its funds a= nd was not able to create for its people a society and economy which were a= t the same time Islamic, harmonious and rich.
Once it had got into the habit of borrowing, however, the governm= ent 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 $10= bn of foreign debt and some billions owed to contractors and suppliers in t= he 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 agen= cies, the Pension Fund and the General Organisation for Social Security, an= d the rest is with the commercial banks. Although government paper already= accounts for more than two thirds of GOSI=92s and the Pension Fund=92s ass= ets, 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= =92 and employees=92 contributions, which run at 14 per cent of employees= =92 salaries, than they are paying out in pensions. This is in spite of th= e fact that Saudi government employees generally retire in their fifties.
Servicing the debt cost SR 30bn ($8bn) last year, equivalent to 1= 7 per cent of the budget. To save itself additional embarrassment, the= government does not publish a figure for debt service in its budget statem= ent. It is understood that it spreads the cost across the different minist= ries and other state agencies in proportion to their spending. This ploy h= as the additional advantage of encouraging the ministries to economise.
Having 17 per cent of its budget going on interest payments is putti= ng a significant burden on the government, and it looks as if this burden i= s 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 cal= l 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 pr= esent 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, al= beit on a relatively small scale by world standards because the Saudi curre= ncy is not held widely abroad. Now that oil prices are strong the threat t= o the riyal and talk of devaluation have receded.

Unemployment

A much bigger problem for the government is the prospect of very high un= employment among the young. Twenty years ago such an idea seemed inconceiv= able. Then the Saudi population was small, there were more than enough job= s for nationals in the government and private sector, and the Kingdom=92s c= oncern was to think of ways of stopping the expatriate proportion of its po= pulation getting bigger as the economy grew. Almost unnoticed at the same = time the Saudi population was reproducing itself almost as fast as it is po= ssible for a human society to do. It was helped by the array of subsidies = the government provided, which encouraged early marriage and made it possib= le for couples to have as many children as they liked. Since the mid-19= 70s 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 t= o 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-fiv= e 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 go= ing to be massive unemployment. At present the unemployment rate among Sau= dis 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 wo= uld be one in four. In the next few years this proportion is likely to dec= rease. The situation is potentially explosive.
There is little the government can do to improve the situation ex= cept try to stimulate economic growth (discussed below) and encourage the r= eplacement 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 tota= l workforce every year. This is not proving easy. There are a great many = menial jobs - such as labouring, dirty industrial jobs, domestic service an= d waiting in restaurants - which Saudis simply refuse to do. These sorts o= f jobs account for perhaps half of total private sector employment. For th= e more attractive skilled industrial/technological, clerical and junior man= agement jobs few young Saudis are qualified - partly because they have spen= t far too much time at school learning religious subjects. Many of those w= ho do take such jobs are not willing to work the hours required by their em= ployers and are inclined to leave their posts an hour or so early. Both th= ose 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 efficien= tly, 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 wa= tch television or play with their younger brothers and sisters, large scale= unemployment will have less serious consequences than one might expect. T= he problem is that the young do not feel at ease in this r=F4le. They were= brought up to expect a better life - prosperity with a job but not much wo= rk. Although there is a general acceptance among them that they cannot exp= ect to be as lucky as the generation of the 1970s and 1980s, they still hav= e a sense that they have been let down. They are worried and some are rese= ntful. Quite illogically, many have persuaded themselves that the jobs tha= t should rightfully be theirs have been taken by Americans. =20

Reforms Needed for Faster Growth

Clearly, if the rise in unemployment is to be checked, and if the standa= rd of living of the Saudi people as a whole is to be maintained - or stoppe= d from falling too quickly - the economy will have to be made to grow faste= r. This growth will have to come from the private sector, or from producti= ve 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 Sa= udi economy - although by far the biggest in the Middle East - is much smal= ler than foreigners imagine. The Kingdom=92s gross domestic product - abou= t $140bn - is 60 per cent of Belgium=92s and half as big again as Singapore= =92s. GDP per capita is only $6,500, which is equivalent to that of Argent= ina and Slovenia.
The weakness of a small and undiversified economic base is that i= t 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 launch= es a big new construction project - but it is not big enough to provide a m= otor for its own growth. If there is a perceived shortage of a particu= lar product or service that can be provided from inside the country, that s= hortage will be quickly filled and a surplus created. Large parts of the S= audi market are extremely competitive, and in many sectors - at present inc= luding most of the retailing business - companies are making losses. When = they cannot see immediately profitable opportunities at home Saudi business= men keep their money abroad and wait. It is the lack of domestic opport= unities, 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 in= vestment, 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 a= nd minor manufacturing. There are perhaps ten family firms that have launc= hed substantial industrial ventures. The biggest all private industrial ve= nture, a petrochemicals plant at the Gulf port of Jubail, owned by a consor= tium of private interests and the American oil company, Chevron, began oper= ations at the end of last year. =20
The consequence of the small scale of Saudi private business comb= ined with the recent lack of stimulus from the government has been a very l= ow rate of real economic growth. If one takes out fluctuations in the pric= e of oil, one sees that Saudi growth since 1992 has ranged from zero to 2 p= er cent.
The government has to introduce reforms that will stimulate the econ= omy=92s productive sectors. Most obviously it needs to privatise busine= sses which so far have been run virtually as part of the welfare state. Th= ese are telecommunications, electricity, water (which is almost entirely de= salinated sea water) and the national airline, Saudia. It could also priva= tise its domestic and export refining operations and the majority state sha= re 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 t= erm there are many other government bodies that might be sold, including th= e Grain Silos and Flour Mills Organisation, the Railroad Authority and vari= ous 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 variou= s privileges, such as tax holidays, but it has not been genuinely welcoming= . Foreigners and foreign companies have not been allowed to own land or bu= ildings, 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/sp= onsor, as contractors. Foreign banks were forced to turn themselves into l= ocal companies and sell majority holdings to local buyers in the late 1970s= . Foreign companies cannot generally run service businesses on their own i= n 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 ve= ntures. Even in joint ventures foreign companies find themselves paying ta= x at quite a high rate once their tax holidays are finished, whereas Saudi = companies pay virtually no tax. Foreign business visitors, and even more f= oreigners wanting to work in the Kingdom have to go through long visa forma= lities.
The new idea, being pushed by a body of reformers in government a= nd 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 cha= nges in the workings of the commercial part of the legal system, so that fo= reigners can feel more confident of a fair hearing if they get into a legal= dispute. Trade and investment would be further encouraged by the remo= val 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 pe= r 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, typicall= y, there has been no announcement as to what these are. In late 1999 and e= arly 2000 the word in Riyadh has been that the Kingdom will accede to WTO t= owards 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 o= r beyond. What is causing the government to hold back is not just the diff= iculty of the negotiations themselves, but the domestic sensitivity of the = issue. The biggest and most competent Saudi family businesses will probabl= y gain from the more active environment which will develop as foreign compa= nies invest. Where they are doing straightforward import business, in whic= h they might in theory be replaced by branches of foreign companies, they a= re generally so well bound to the companies they represent that it is diffi= cult to imagine them being pushed aside. In many cases they already have m= anufacturing 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 b= ecome 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 wa= y superior to other societies. The popular belief is that they have a pric= eless resource - or what should be a priceless resource - bestowed on them = by God, which entitles them to enjoy a high standard of living without havi= ng to do very much work. According to this view hard, demeaning work is so= mething that is done by foreigners, mainly Asians, and government is the ag= ency through which their oil wealth is distributed to them - not something = which they have an obligation to support. Changing these ideas will be diff= icult, but it will be an essential part of lowering expectations and alteri= ng attitudes to work.
The government, particularly since Prince Abdullah has been in charg= e, has been telling its people that times have changed. In the 1980s and e= arly 1990s, when King Fahd announced a bigger budget deficit or an increase= in charges for some subsidised item, he would reassure Saudis that they wo= uld continue to enjoy all the "privileges" that were their "proper entitlem= ent". =20
Now Prince Abdullah is saying that "the good years have gone and wil= l not return" - as he put it in a speech at a Gulf Co-operation Council sum= mit 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 cha= rges, will come when privatisation begins. For the slightly longer term th= ere is the likelihood of corporate taxes and value added tax - though as ye= t there has been no mention of such a sensitive matter as Saudis paying inc= ome tax. There have already been some changes in the education system, inv= olving a cut in the religious instruction that children receive - this had = reached absurd proportions in the late 1980s - and it is the government=92s= intention to direct more children towards technical and scientific studies= .
There is discussion of women being allowed to play a greater r=F4= le in society. At present they are not allowed to drive, or work - exc= ept as doctors, nurses or teachers. A few women quietly run businesses, b= ut 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 Comme= ndation 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 f= eeling 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 emp= loyment of hundreds of thousands - perhaps more than a million - foreign ma= le 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 sav= e a large sum of foreign exchange, which now flows out of the country in th= e form of workers=92 remittances, and, more important, more of its GDP woul= d accrue to Saudis. The standards of living of Saudi families would be rai= sed.
Early in 1999 Prince Abdullah raised the possibility of women being = allowed to drive in one of his speeches. There was an immediate outcry fro= m conservative elements, particularly in the religious establishment. Dele= gations went to call on conservative princes to register their dissent. (I= t is one of the great strengths of the Saudi regime that among the five tho= usand odd princes there are people of all shades of political opinion in to= uch with every element in Saudi society.) Officials quickly said that Prin= ce Abdullah=92s speech had been misunderstood, and he has not mentioned the= matter since. It is very likely,=20
though, that economic pressures will cause the subjects of women dri= ving and working to be raised again in the next few years.

The Government=92s Reaction

For most people in the Saudi government, in the royal family and outs= ide it, economic reform is not a pleasant prospect. It is quite widely acc= epted as a necessity, but there is little enthusiasm for it. The peopl= e who run Saudi Arabia are mostly of Gamal Abdel-Nasser=92s generation. Th= ey 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-suffic= iency and for limiting the involvement of foreigners in the economy. T= he royal family has a further set of concerns about increasing utilities ch= arges and levying taxes. It believes, quite rightly, that if it makes Saud= is 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 govern= ment. 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 abou= t change, partly because, in the classic way of Arab monarchies, it has wan= ted to accustom its people to the idea before it does anything. Also i= n the 1990s there were from time to time various money saving reforms, part= icularly in civil service employment and agricultural subsidies. Since the= government encountered severe financial problems in 1998 and reform came f= irmly onto the agenda there have been some further definite steps, but prog= ress has hardly been fast. =20
Steps are being taken towards the privatisation of the electricit= y companies, telecommunications and Saudia, but in each case matters have b= een delayed and complicated by the large subsidies that have been built int= o these services. Without the government continuing to give subsidies = by a different route, which it cannot afford, or prices for the consumer be= ing raised sharply, the companies/government authorities cannot be made att= ractive to investors. Balance sheets have to be cleaned up. Saudia in par= ticular has borrowed from local banks, which have felt secure lending to a = government institution, but has failed to service its debts. Both the bank= s 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 bigg= er consumers. The Company now has to make sure that it collects the charge= s, particularly from members of the royal family, many of whom have not pai= d in the past. At the next stage the idea is to divide the Company into th= ree independent entities dealing with generation, transmission and sales. = The first two companies can be made profitable and saleable. The third wil= l continue to receive a government subsidy for some years.
Last year a number of small measures were taken to increase governme= nt 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. A= n airport departure tax of SR 50 ($13) was introduced and visa fees for for= eign 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 fo= reign investors - though only for investment through mutual funds. Given t= hat these are bound to be managed by Saudi banks or Saudi/foreign bank part= nerships, the restriction means that the market and the Saudi public will c= ontinue 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, wo= uld be in a new Foreign Direct Investment law. It may be many months, or m= ore than a year, before the law is introduced. =20
At the end of the year the Gulf Co-operation Council summit annou= nced 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 relaxe= d; the new rates are to be in force by March 2005.
The initiative launched by Prince Abdullah in September 1998, when h= e asked seven American oil companies to submit proposals for investment in = the Kingdom, has moved very slowly. The proposals were handed in during th= e early months of the following year, and in due course it was made known t= hat proposals would also be welcomed from other companies, notably Shell, B= P and Total. From an early stage it was assumed by the companies, and by S= audis in the government and private sector, that the government would not b= e enthusiastic about proposals for exploration and production of crude oil = - which left open gas exploration and production, oil refining, and most im= portantly gas distribution and industrial projects, particularly in the pow= er sector. This gradually emerged as government policy. In the spring of = 1999 it was being suggested that the government would respond to the compan= ies=92 proposals after the summer, saying which proposals it liked and aski= ng for the companies=92 further ideas. This might have involved some compa= nies putting forward proposals quite different from those they made origina= lly. 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=92s opinions inside and outside the= country, warns its own citizens about what it has in mind, lets its own id= eas 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 circum= stances. The government needs to get new legislation and new policies i= n place very quickly, so that foreign companies and the Saudi private secto= r can react, formulate their own policies, and start to implement them with= in two or three years. Then there is a chance that they will start to crea= te a useful number of jobs for young Saudis coming onto the employment mark= et in say, 2003 or 2004. It could be argued that the present debate and th= e recent series of policy initiatives should have been launched several yea= rs 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 neve= r been a colony and it does things its own way. Its people are conservativ= e and conformist. Bonds within families are strong. There is an almost un= iversal suspicion of the foreigner. There is much criticism of the royal f= amily, but a strong collective historical memory of the confusion that exis= ted before King Abdel-Aziz established his firm rule in the early decades o= f this century. Most Saudis find it difficult to imagine any government ex= cept that of the Saud family. The Kingdom, in short, is a much happier and= more stable society than most Westerners imagine it to be. =20
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 societ= ies that experience unemployment on the scale that Saudi Arabia may have by= 2005, combined with disappointed expectations among their young people, su= ffer 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 refo= rm at the same time.
=A9 Friedrich Ebert Stiftung | t= echnical support | net edition=20 fes-library | Januar 2001

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