The annual Saudi Arabian budgetary announcements for actual 2006 and budgeted 2007 seemed to have been well received by most professional commentators. And why not? From all accounts, 2006 seems to have been a bumper year in terms of record budget surpluses (SR265 billion, five times more than the budgeted amount), and expenditures were also at an all time high of SR390 billion, compared with budgeted SR 335 billion.
Domestic debt had been reduced significantly to a low of SR366, with prospects of a further reduction in 2007 to around SR200 billion, and the Kingdom’s foreign assets had risen to $216 billion — surpassing the peaks of the early 1980s.
Medium — to long-term capital project expenditures stood around 11% of GDP, another all-time high of SR140 billion, and Saudi inflation continues to be one of the lowest in the Arab Gulf countries at under 2%, despite some reservations that the current Saudi Consumer Price Index basket has not been adjusted enough to take account of changing lifestyle and consumer expenditure patterns.
And yet something remarkable happened. The Saudi stock market, instead of celebrating this good news and the prospects of more solid achievements in 2007, reacted by falling around 4.1% the day following the budget announcement. Instead of being a barometer of a “feel good” factor similar to other markets around the world reacting to such positive economic indicators, the Saudi market seemed to react as though the announced budget results and forecasts were either not enough, or that the Saudi investor market was still traumatized by the 2006 crash in stock market prices.
A serious national economic debate needs to take place, that fundamental economic adjustments are now under way in the Kingdom, which might not necessarily bring some immediate individual gains, but are laying the foundation of a longer term sold economic base for the country. The Kingdom seems to have moved on in economic terms, but some sections of the population have stood still.
Bonanza oil revenues in the Gulf countries are often a blessing and a curse. They are a blessing in the sense that governments can implement short- and long-term economic restructuring goals to ensure a diversified and more sustainable economic base for future generations, and away for oil dependency. The Saudi 2006 and 2007 budget announcements stressed the right macro-economic objectives by focusing on long-term qualitative improvement in education, health and public infrastructure. The benefits however, derive in the long term.
This is where higher oil revenue dependency can also be a curse, whereby some segments of the population still seem glued to the belief that they are entitled to a full range of free services, handouts and entitlements from the state from the cradle to the grave. For many citizens who lost out in the speculative frenzy of the Saudi stock market roller coaster ride of 2006, the lack of announcement of major “free” handouts in the 2007 budget might have come as a disappointment, but the message must now be reinforced that the “golden days” of past oil boom eras has gone for good. National economic emphasis must now focus on infrastructure and education skill building.
The belief in an inalienable right to free state handouts is not exclusive to Saudi Arabia. How else can one explain the almost ludicrous recent proposition in the Kuwaiti Parliament, (which was rejected), for outright forgiving of the outstanding debt of the private sector to banks amounting to around $22 billion? The reason? Kuwait has once again amassed large international reserves. As one Kuwaiti parliamentarian noted, what kind of signal would this send to all those who had met their debt obligations?
The one-off 10% salary increase to Saudi government employees in 2006 was just that - a one off adjustment to compensate for past years’ salary freeze, and inflationary erosion in real wage levels. Then Qatar followed suit, with a 40% salary adjustment and citizens in Saudi Arabia held their breath and expected another free handout round in this year’s budget. This did not materialize, and what the 2007 budget unfolded was a long-term capital expenditure of SR 140 billion. This is the true blessing of the forecasted Saudi budget - viable projects at all levels and sectors of the economy for Saudi private sector companies to execute and benefit from.
A more open and transparent dialogue needs to take place to ensure that the public is in line with, and accepts the need for the current long-term structural evolution of the Saudi economy. This is being laid in the current series of budgets, aided by relatively high oil revenues, and which might not last. The Saudi 2007 budget is based on a more conservative assessment of world oil prices and slower international economic growth. It is because of the Saudi government’s inability to exactly predict its major revenue source from oil, that one constantly notes an underestimation of potential revenues in the Saudi budget announcements.
Nonoil revenue has remained static at around SR55-60 billion. With US interest rates probably under pressure to fall in the near term, Saudi investment income from international reserves will also decline, and there is little room for any further increases in indirect taxes, such as government fee services.
On the expenditure side, one also notes a tendency to overshoot budget forecasts, and both 2005 and 2006 are no exception. It is most probable that the 2007 budgeted SR380 billion expenditure will end up at around the SR395-400 billion level, given that actual 2006 expenditure was SR390 billion, compared with budget estimates of SR355 billion.
The situation is simple - while hoping for stricter fiscal expenditure discipline, the Kingdom is faced by internal constraints. The Saudi population is still a young one, with around 65% of the population under the age of 30 years. If the current emphasis on health and educational infrastructure is not maintained to provide opportunities for future generations, then a golden chance will have been irredeemably lost, come the day when oil prices do not play such a significant role in budget revenues.
This is not a fantasy, as Saudi Arabia had been running a chronic budget deficit from 1983 until 2001 when its revenue fortunes reversed. The government is to be congratulated on sticking to its policy of debt reduction, infrastructure development, international reserve building and emphasis on quality education. Only in this manner will real, long-term and sustained better-off economic days come to the Kingdom.
—Dr. Mohammed A. Ramady is visiting associate professor, Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.