RIYADH, 5 September 2005 — For the third year in a row in 2005, Saudi Arabia is witnessing robust growth in oil export revenues, liquidity, and economic activity, thanks to rising oil prices, low interest rates and low inflation. In our earlier reports, we have documented how this massive liquidity-injection has increased the country’s national income and wealth.
The biggest beneficiaries of this growth so far have been the domestic stock market and the real estate sector. In a dynamic economy, domestic business would see this as a golden opportunity to set up new factories and businesses in the country to produce those goods and services. The beauty of the situation is that the increased income and wealth also provides the economy with the savings needed to finance the new investments. In fact, it is the job of financial intermediaries such as banks to channel people’s savings into investments through loans. We see this process already happening in some sectors such as downstream oil, petrochemicals, construction, construction-related sectors and infrastructure projects. What we have not seen yet is a broad-based increase in investment in other sectors. As we noted before, much of the increase in bank loans have been for individuals, not corporate investments.
As a result, the nation’s import bill has increased, in fact, faster than GDP and much faster than non-oil GDP (a measure of total production in the economy excluding oil).
In 2004, Saudi Arabia’s imports totaled SR167 billion, representing 34 percent of the Kingdom’s non-oil GDP. Total imports grew by a whopping 21 percent in 2004 (and by 14 percent in 2003). In contrast, GDP grew 17 percent and non-oil GDP grew only 8 percent in 2004. Growth in real GDP was even lower (5.3 percent and 4.9 percent, respectively). Before the liquidity boom started, imports grew only 3.6 percent in 2002, and were growing at an annual average rate of only 2.1 percent during the period 1997-2001. There are reasons why Saudi Arabia is meeting its increased demand for goods and services by importing, instead of producing more. One reason is that in an open economy such as Saudi Arabia, comparative advantage (or cost effectiveness) determines what the country produces and what it imports. However, comparative advantage can be created in any sector over time by sustained productivity, enhancing investments in worker-skills, new capacity and technology.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)