JEDDAH, 18 September 2006 — Although Saudi Arabia is passing through its eight years of current account surplus amounting to over SR340 billion ($90.7 billion) in 2005 along with holdings of net-foreign assets worth SR916.3 billion ($244 billion) by end June 2006, rising imports bill will likely erode some of these surpluses unless there is a corresponding surge in exports earnings.
In the last ten years to 2005, the value of merchandise imports into the Kingdom grew 7.8 percent annually, while growth almost doubled at 14.5 percent annual rate in the most recent five years 2000-2005 periods. Over the same period, domestic banks’ financing of private sector imports grew 10.4 percent annually, suggesting that growth in total merchandise imports were dominated by government and several other institutions, which normally do not seek import financing facilities from the local banks.
If the current 14.5 percent growth in the value of imports were to continue in the next five years through 2010, total imports would expand from around SR223 billion in 2005 to around SR440 billion by 2010. On the trade front, the Kingdom’s imports bill currently consumes nearly 35 percent of its exports earnings.
Financing of Private Sector Imports
There is a direct link between the level of Saudi imports and the amount of private sector imports financed by the domestic banks. The proportion of banks’ financing to the private sector imports ranges between 55 and 65 percent of the actual total imports in any year. In the last five years to 2005, the proportion of bank financing to the private sector imports averaged about 61 percent of the actual total imports into the Kingdom.
In 2005, the amount of private sector imports financed by local banks was 52.2 of the aggregate imports into the Kingdom, which had slid from 57.2 percent in the year before.
In absolute terms, the value of private sector imports financed by local banks rose by 21 percent to SR116.2 billion in 2005, and is expected to grow nearly by 19 percent to SR138 billion by end 2006. With corresponding projected imports bill of SR245 billion for the entire 2006, the proportion of banks’ financing to the private sector imports is expected to edge up to 56.3 percent by year end. If the proportion of private sector imports financing by local banks remains at 55 percent of total imports in the next five years, the banks imports financing business is forecast to reach SR242 billion by 2010.
Financing by Category, Mixed Pattern
Out of the 7 categories tracked by Saudi Arabian Monetary Agency (SAMA), three posted declines while four gained in the first-half of 2006. Commodities included in the foodstuff category which are subject to seasonal demand, accounted for nearly 10.7 percent of total financing, and have declined by 14.4 percent to SR6.66 billion in the first-half of 2006.
In 2005, private sector’s imports of foodstuff financed by local banks represented nearly 40 percent of the total imports of foodstuff into Saudi Arabia. The banks’ financing of the private sector imports of textiles and clothing declined by 4.5 percent to SR1.81 billion in the first-half of this year. Financing this category recorded nearly 22 percent gain last year with total imports sought worth SR4.63 billion. The private sector imports financed by local banks for textiles and clothing accounted for nearly 48 percent of the category’s total imports in 2005.
The more sensitive motor vehicles category, which accounted for nearly 22 percent of the total value of bank’s import financing business in 2005, moderately rose by 3.1 percent to SR14.3 billion in the first six months of 2006, from SR13.9 billion over the same period a year ago. In 2005, Saudi Arabia imported transport equipment worth SR46.7 billion and recorded 30 percent increase over 2004 figures. The private sector imports of transport equipment financed by local banks represented nearly 55 percent of the category’s total import value in the same year.
The demand for imported machinery and building materials is picking up in response to several development projects started by the government and the private sector. In the medium-term 2006-2012, over 419 projects are expected to be accomplished with a total estimated investment of about one trillion Saudi riyals. These projects are spread over five sectors; construction, petrochemicals, oil & gas, water & power and industry. The local banks’ financing of private sector imports of machinery rose by 95 percent to SR4.84 billion in the first-half of 2006, after having expanded by 40.4 percent for the whole of 2005.
Local banks’ financing of building materials, which accounts for nearly 6.3 percent of the banking industry total financing in 2005, rose 34.1 percent to SR4.5 billion in the first six months of this year.
Strong Trend in Opening New LCs
The accumulated value of new letters of credit (LCs) opened by banks for the private sector imports increased by 21 percent to SR51.6 billion during the first six months of 2006, over the figures in the same period a year ago.
For the whole of 2006, new LCs opened by the private sector importers are expected to reach SR115 billion. Again, new LCs for importing motor vehicles, which accounted for nearly 16.7 percent of the total value, increased by 13.2 percent to SR8.63 billion in the first six months of 2006.
The high pace of construction activities in the Kingdom appears to be on track, with private sector opening of new LCs for importing building materials increasing by 42.3 percent in the first-six months of this year.
The private sector continues its expansion as future level of machinery import is on the rise. The new LCs opened by the private sector to import new machinery increased by 74.3 percent to SR5.55 billion in the first six months of this year, from SR3.18 billion in the same period a year ago.
(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank. He is based in Jeddah.)