RIYADH, 29 July — Higher oil prices, a deep tariff cut and economic reforms are set to give the Saudi economy a second year of strong growth, an economic report said yesterday.
The report by the Saudi American Bank (SAMBA) said that the Saudi economy, which grew by 4.5 percent in real terms last year, was expected to achieve a one percent gross domestic product (GDP) growth in 2001.
“The outlook for 2001 is bullish — positive GDP growth even after a year of exceptional growth in 2000, another budget surplus and a trade surplus, all with low inflation, low interest rates and the riyal strengthening against the euro, yen and pound,” the report said.
“We forecast negative growth and a small budget deficit in our last report in February 2001.... We now forecast real GDP growth of one percent this year and nominal GDP growth of one percent,” it added.
Saudi Arabia has been pushing ahead with economic reforms aimed at opening up its economy and attracting foreign investment.
In a report issued earlier this year, SAMBA forecast a $22 a barrel oil price in 2001 and said that weaker crude prices were likely to give Saudi Arabia a two-percent negative economic growth and rob the Kingdom of its deficit-free budget in nearly two decades. But the average price for Saudi oil during the first half of the year was $24 a barrel. “The government budget balance, which we forecast to have a slight deficit in our last report, is likely to have a surplus of SR7 billion ($1.86 billion) instead, given the strength of oil revenue at mid-year,” the report said.
It said that a combination of factors had contributed to the revised economic outlook. “These include deep tariff reductions, lower local interest rates, significant progress in the opening of gas development to foreign companies and other economic reforms,” the report said.
Saudi Arabia in May cut tariffs on imported goods to five percent from 12 percent as part of economic reforms aimed at attracting foreign investments and maintaining economic growth.
In June, the Kingdom signed preparatory agreements with eight international oil companies that are expected to attract at least $20 billion in investments in the gas sector.
SAMBA said that work on the gas development, which was expected to begin in 2002, “will have a significant impact on economic growth for several years to come”.
With growth in the world’s three major regions in decline for the first time in 25 years, the IMF now projects that one of the world’s fastest growing regions in 2001 will be the Middle East. In the case of the Kingdom, the growth is not dramatic, but it is quality growth, and unlike in 2000, it is not driven by oil revenues, the bank stated in its mid-year update on the Saudi economy.
“To have any positive growth in 2001 after the strong growth of 2000 will be a significant achievement,” the report said.
In 2000, oil production rose almost nine percent from an average of 7.66 million bpd in 1999 to 8.34 million bpd. This accounted for 3.5 percentage points of the 4.5 percent real growth in the economy. This oil sector growth occurred in the context of already installed oil production capacity, so the growth was largely a result of a productivity gain of existing assets in the oil sector. It was not a job-creating growth, according to the bank.
Meanwhile, the rest of the economy — the government and non-oil private sectors — had a business-as-usual year, adding another one percent to real GDP growth to account for the total 4.5 percent overall GDP growth. The absence of job-creating growth was a weakness of the Saudi economy throughout the 1990s, and a driving force of the economic reform agenda that began in the mid-1990s and continues today, the report said.
It is the job creation challenge that Saudi Arabia faces. Non-job creating growth, such as occurred in 2000 from an increase in oil production from an already installed base, is not adequate to meet today’s economic needs. The need to stimulate private sector job creation is well understood in the Kingdom, which is why economic reforms to invigorate the private sector are occurring regardless of oil prices.
“The key reason that we’ve become more bullish about the Saudi economy, even though growth will only be around one percent in 2001, is that the change occurring in the quality of growth. Beneath the overall growth figure of one percent is a picture of more broad-based and stronger GDP growth in the non-oil private sector than occurred in 2000, and good prospects that this will continue,” the report added.
On economic reforms, the bank stated that several new laws affecting the economy had been passed or were about to pass, all aimed at spurring private sector growth. Those enacted included a new foreign investment law, telecommunications law, real estate law and others. Legislation in draft includes a tax law, labor law, insurance law, capital markets law, and others.
