RIYADH, 12 September 2005 — Imported products are a ready market for import-substituting investment opportunities in Saudi Arabia. The true private sector market potential can be gauged by comparing how much the Kingdom imports and how much it produces domestically (the latter is measured by non-oil private sector GDP which excludes oil and government services but includes public sector enterprises such as Saudi Basic Industries Corp. and Saudi Telecom Co.).

In 2004, a full 52 percent of what the Kingdom produced domestically was imported from abroad. This figure has risen in recent years — it was 46 percent in 2003, compared to an average of 42 percent in the previous four years (1999-2002).

For a broader perspective, the highest this figure ever reached was 70 percent in 1982, at the height of the second oil boom; the lowest was 32 percent in 1975 just before the Kingdom started on its first oil-driven import binge. Over the entire period from 1968 to 2004 for which Saudi Arabian Monetary Agency (SAMA) provides data, the Kingdom’s imports totaled 50 percent of what it produced domestically.

Imports are a leakage from the domestic economy, just like remittances and capital outflows. Clearly, if the imported products were made at home, the Kingdom would be able to provide more employment, skills and income to its own citizens.

Just to give an illustration, if the Kingdom produced at home the entire amount that it imported, its total GDP (or national income) would have been 18 percent larger (SR1.1 trillion vs. SR940 billion) in 2004. Analyzing the kinds of products the Kingdom imports, we can identify the top importing sectors that we believe offer significant potential for domestic investment and production (total value of imports in parentheses):

1. Machinery, mechanical appliances, electrical equipment (SR37 billion)

2. Transport equipment (SR36 billion)

3. Base metal & articles of base metals (SR17 billion)

4. Chemical products & allied industries (SR15 billion)

5. Textiles and textile articles (SR8 billion)

6. Prepared foodstuffs, beverages, spirits, vinegar & tobacco (SR7 billion)

7. Artificial resins and plastic materials, rubber & synthetic rubber (SR6 billion)

8. Optical, measuring, checking, precision, medical & surgical instruments & apparatus, clocks & watches, musical instruments, etc (SR5.5 billion).

Investing in these sectors is a win-win situation for local businesses for many reasons.

First, there is a ready market for them as these are the Kingdom’s top imports. Second, many of these industries are capital intensive, so, in a double stroke of luck, not only will labor availability not be a big issue, financing will also not be an issue (banks can help in this), given the Kingdom’s high liquidity.

Finally, many of these are consumer products, which have steady demand and are among the first sectors to be established in emerging economies.

Typically, local companies join hands with foreign firms to invest in branded products that are familiar to consumers. Investing in consumer products makes sense for Saudi Arabia with a booming consuming population and rising income

— (Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)