JEDDAH, 26 December 2004 — The Saudi economy is witnessing a period of relatively high growth thanks mainly to the series of reforms adopted by the government, according to a report prepared by Professor John Presley, economic adviser to the Saudi British Bank (SABB).

The economy’s strength and recent changes in the environment for foreign investment in the Kingdom make Saudi Arabia a more attractive place for foreign investment than before, the report said.

This has come about through tax changes, drastically reformed property ownership laws and more incentives for business activity, the SABB’s Prospects for the Saudi Economy: 2005 report said. The climate has been further made conducive by the very proactive measures taken by the Supreme Economic Council.

Recent figures on foreign investment from Saudi Arabian General Investment Authority (SAGIA) have been reassuring. Foreign investors are involved in over 80 percent of all industrial licenses awarded, the report noted.

On the back of this year’s record oil revenues, the Kingdom is to increase its spending and expand its infrastructure and welfare spending to match the growing needs of the rising Saudi population, The non-oil private sector is feeding off this activity in the public sector — government debt is falling, allowing greater liquidity for the private sector, business and consumer confidence is flourishing and the stock market continues on a strong upward trend as corporate profits soared to a record high.

New national accounting figures show nominal growth of gross domestic product (GDP) in 2003 at 13.7 percent, boosted by a 28.1 percent growth in the oil sector. The growth rate has only been surpassed in 2000 and during the Gulf War period (1990). In real terms growth in 2003 was equally impressive at 7.2 percent, the report said.

The non-oil sector, which now constitutes around 60 percent of total GDP, is sustaining historically high growth rates alongside the buoyant oil sector; in 2003 nominal non-oil private sector growth was 4.4 percent and in real terms 4.0 percent; despite volatile growth rates in the oil sector over the last five years, the non-oil private sector has been able to achieve annual growth rates within the range of 3.8 percent and 4.4 percent.

The fiscal situation has also improved dramatically, although the government expected a fiscal deficit last year, the outturn was much more robust; a fiscal surplus of SR45 billion was achieved as total government revenues rose to SR295 billion allowing government spending to go above fiscal target levels to SR230 billion. Now, instead of public debt rising annually to support fiscal deficits, by end-2003 debt growth was curtailed.

The strength of the oil sector translates into a very favorable trading position for the Kingdom. The surplus of SR44.5 billion in 2002 on the current account, has been followed by an even bigger surplus of SR111.2 billion in 2003. One of the main beneficiaries has been the riyal exchange rate which was subjected to huge devaluation pressures in the 1990s. This pressure no longer exists.

The SABB report said Saudi Arabia is almost in a unique position worldwide; prices have actually fallen since 1995; by June 2004 the general cost of living index for all cities was down 1.4 percent on its 1999 level.

All of this amounts to a very healthy economy at the beginning of 2003 with oil revenues and government spending at robust levels, the non-oil sector enjoying a period of relatively rapid growth, the fiscal situation as impressive as it has ever been, inflation continuing at record lows and the current account surplus above SR100 billion a year.

The only downside, which the government is tackling, is the level of unemployment which for the Saudi work force has grown from 8.1 percent in 1999 to 9.7 percent by end-2002, out of a total labor force of 6.2 million.

It would be difficult for 2004 and 2005 to compete with or sustain the high levels of growth in 2003, but early indications are that 2004 will be equally impressive in its outturn:

• The oil sector is expected to increase its value-addition by upward of 15-18 percent in 2004, with oil export prices well above $30 a barrel. Oil production also, which averaged 8.8 million bpd in 2003, is likely to average around 9 million bpd in 2004, perhaps coming down slightly in 2005.

• The government sector is likely to maintain high levels of spending in 2004.

• The “knock-on” effects for the non-oil private sector are very positive in 2004 and 2005; the non-oil private sector to grow by 5.0 percent in 2004 and by at least 4.7 percent in 2005.

• There is every possibility that inflation rates will be below 1 percent/annum in 2004 and 2005, with the government, through the Saudi Arabian Monetary Agency (SAMA), exerting strict control over money supply growth and the cost of credit; the economy is very competitive and further moves toward World Trade Organization (WTO) membership will work to enhance efficiency and competitiveness; this should have a beneficial effect on domestic prices.

• With the economic environment as predicted above, the balance of payments should see a current account surplus again above SR130 billion in 2004, possibly falling back to around SR110 billion in 2005.

Saudi oil production will average approximately 9.1 million bpd in 2004, 3 percent higher than in 2003, the report said.

The fiscal situation in Saudi Arabia is healthier than it has been for over 20 years. The windfall of oil revenues from both high oil prices and export levels will generate a fiscal surplus in 2004 well above expected levels, the SABB report added.