LONDON, 22 December 2003 — Saudi economic and financial services policy management has gone into a higher gear in the last few months. In Geneva at the World Trade Organization in the last few days, Dr. Hashem Yamani, minister of industry and commerce, signed bilateral agreements with seven countries, paving the way for the 10th round of negotiations with the last group of WTO member countries with which the Kingdom has yet to sign pacts — the agreement with the United States is the key.

With an insurance law and a capital markets law soon to come into effect, the next few months are going to be busy and perhaps confusing for market and investors.

In the banking sector, the Saudi Arabian Monetary Agency (SAMA) has issued a license to Germany’s Deutsche Bank, the first to be issued to a foreign bank since the late 1970s. Deutsche Bank will focus on both consumer banking and investment banking, especially debt and equity products. Another banking major, HSBC, in conjunction with its local affiliate, Saudi British Bank, has applied for a banking license under the new Capital Markets Law (CML).

HSBC may even get it before the Capital Markets Authority (CMA), the regulator, comes into being in February. The CMA will be appointed in January 2004. Banking sources stress that there are many foreign financial institutions waiting got access to the Saudi market with its estimated SR300 billion private liquidity.

Is there a danger that market sentiment might become overwhelmed?

Saudi economic and financial policy lacks a holistic long-term vision of where the Kingdom will be, say, in twenty years’ time. Apart from the very short-term roll-over five-year development plans, there is nothing akin to Malaysia’s “2020 Vision” — the target year by which Malaysia hopes to become a fully industrialized country.

The government too has no known or published vision for political, social and educational reforms either. It has no coherent policy for Saudi youth employment, for instance, akin to the “New Deal” of the Labor government in the UK. Saudization, too, seems to have been introduced as a knee-jerk policy, which unwittingly blamed foreign workers for taking up the jobs of Saudis. Some Saudi companies, to their credit, want Saudization based on economic and business growth.

At best, Saudi policy-making in the economic, financial, socio-political sectors seems to be piecemeal, with the government reacting to events and its hands forced into reforms and restructuring. While the industrialized countries heap praise on the Kingdom — even piecemeal reforms are better than nothing — with the US, for instance, commending Riyadh for its “outstanding progress” it was making toward a bilateral trade deal with Washington, privately there are misgivings.

Fiscal reform in the Kingdom, for instance, is a key recommendation of the annual Article IV Consultation on Saudi Arabia by the International Monetary Fund (IMF). In fact, the executive board of the IMF published its latest Article IV Consultation on the Kingdom on Dec. 5. As expected, it encouraged the Saudi authorities to continue “to pursue structural reforms, supported by tight demand management policies.”

What a change a year can bring. In last year’s Article IV Consultation on Saudi Arabia, the IMF flayed the Kingdom for its lack of fiscal reforms.

The IMF also encouraged the Kingdom to introduce value added tax (VAT) or sales tax on goods and services. In fact, the Kingdom has since then introduced excises on selected consumer goods, which the IMF board of directors have welcomed and stressed could offset some of the losses in revenue due to the establishment of a GCC Customs Union.

The Article IV Consultation gave the Kingdom a qualified thumbs-up, and forecast that the Saudi economy will continue to improve during 2003 and 2004. The key macroeconomic indicators are projected to rise. The Kingdom’s public debt is expected to decline.