Saudi Arabia, which hold the world’s largest proven crude oil reserves and is going through political and economic reforms, enjoys a strong trade surplus largely due to its oil exports. Buoyed by improving macroeconomic parameters, the Saudi Market TASI index has outperformed most other global indices. The Kingdom has been recording a current account surplus since 1999. The monetary policy regulated by the Saudi Arabian Monetary Agency (SAMA) has been yielding fruitful results. The Kingdom has also witnessed price stability over the last several years, as inflation is well under control. These are among the highlights of the Kuwait-based Global Investment House’s (GIH) second report on the Economic & Strategic Outlook of the Kingdom, which Arab News has been serializing from Monday. The report’s second part appears today and the concluding part will be published tomorrow.

Government Debt

In order to contain the government debt which is currently estimated to be around SR650 billion, the government will have to focus on enhancing its revenue base and speed up the privatization process whose proceeds can be used to retire debt. The Seventh Five-Year Plan focuses on the need to increase non-oil revenues, eliminate budget deficit and reduce government debt. The government is exploring various options such as imposing income tax and introduction of Value Added Tax, which would broaden the revenue base and improve government revenues in the medium to long term.

Current Account

Saudi Arabia enjoys a strong trade surplus largely due to its large oil exports. Exports of oil and refined products amounted to around $63.3 billion in 2002 out of the total exports, which stood at $71.7 billion during the year. The total imports of the country stood at $29.6 billion in 2002, resulting in a merchandise trade surplus of $42.1 billion for the year. In 2002, the current account surplus stood at $11.7 billion. The Kingdom has recorded a current account surplus since 1999.

Total exports are expected to be much higher in 2003 on account of higher prices and export volumes of crude oil. We expect the Kingdom to record strong trade surplus as well as current account surplus in 2003 due to higher exports of oil. However, trade surplus and consequently current account surplus is expected to decline in 2004 as oil prices are forecasted to ease next year.

Saudi Arabia is the 19th largest exporter and the 20th largest importer in the world. The United States is the top trading partner of Saudi Arabia. The top four importers from Saudi Arabia in 2002 by value were the United States, Japan, South Korea and Singapore, who among them accounted for about half of the Kingdom’s total exports. The United States, Japan, Germany and the UK were the main origin of imports.

Monetary

The Saudi Arabian Monetary Agency regulates the monetary policy of the country. SAMA has maintained the long-held peg between the riyal and the dollar at SR3.75 to the dollar since 1986. The bank is expected to continue to maintain the exchange rate over the medium term despite the expected decline in oil revenues and the consequent current account deficit expected in 2004.

Interest rates in Saudi Arabia closely track the interest rates in the United States on account of the currency peg. SAMA is expected to continue adjusting its discount rate in line with the Fed rates. As a result, we don’t foresee any increase in interest rates in the short term since the US interest rates are expected to remain at current levels in the near future.

SAMA controls the money supply through traditional monetary instruments such as the Statutory Reserve Requirement, which is currently at 7 percent for demand deposits and 2 percent for savings and time deposits. With the emergence of the government securities market to finance budgetary deficits, SAMA uses instruments such as Repo facility on government development bonds, floating rate notes and treasury bills to meet its monetary policy objectives.

Inflation

The Saudi economy has witnessed price stability over the last several years. Despite the steady growth in money supply over the years, inflation in Saudi Arabia has been well under control and the consumer price inflation has been negative over the last five years. Inflation (as measured by the consumer price index) in the last five years has been negative and has varied in the range of -1.6 percent to -0.4 percent. However, inflation is expected to pick up because of the weakening of the dollar and other factors such as the reduction in domestic subsidies. In 2002, apart from the housing segment most of the other segments saw a deflation in their prices. The biggest decline in the prices was in the transport and communications segment, which saw its price index decline by 1.8 percent.

The negative inflation trend has continued in the current year also with the consumer price index declining by 1.4 percent in the first six months of 2003.

Marginal Decline in Wholesale Price Index

The wholesale price index (WPI) of the Kingdom measures movement in the average price of 160 sample items of various commodities and services sold in the wholesale market. The general WPI registered a marginal decline of 0.1 percent every year from 116.3 in 2000 to 116.1 in 2002. In 2002, out of the 10 segments of WPI, five segments registered inflation in their prices while three segments saw a deflation in their prices.

Population and Labor Force

The Kingdom’s population has grown rapidly at a CAGR of 4.8 percent during 1998-2002 and the population as of mid 2002 stood at 23.36 million as per estimates by Euromonitor. About 40 percent of the population of the Kingdom is in the 0-14-year age group. The literacy rate as of the year 2000 stood at 76.2 percent. As per the official data for 1999, the total labor force of the Kingdom (excluding expatriate workers) stood at 2.82 million, of whom 2.6 million were employed.

The overall unemployment rate among Saudi nationals was 8.1 percent of the labor force, with the unemployment rate for Saudi males at 6.8 percent and for Saudi females at 15.8 percent. The total population of expats was 5.02 million in 1999, of whom 3.02 million were employed.

The Kingdom’s labor force is growing faster than the growth in available jobs and hence the unemployment rate is expected to increase over the next few years.

(To be continued)