There is cause for quiet satisfaction in this week’s announcement that in 2006, Saudi Arabia recorded its largest ever budget surplus of SR290 billion ($77.5 billion). This must not however induce feelings of complacency. It is an ironic economic truth that such prosperity, if not properly managed carries with it very real risks, not least that of inflation. In 2006 this stood at 2.2 percent but by July this year had reached 3.8 percent.
Supply and demand mismatches, not just in the property and stock markets but in construction equipment and even in some consumer products, are edging up prices. With the vast program of public works currently under way, every project manager is struggling to ensure that his enterprise obtains the equipment and materiel it needs in a timely fashion. Supply bottlenecks plus the inevitable market mechanism of rationing by price mean that to meet tight project schedules, managers are more willing to pay whatever it takes to get the work done.
SAMA is wisely seeking to control inflationary pressures by limiting the amount of money in circulation — thus the likelihood that little or no government debt will be retired this year to avoid injecting further liquidity into the market. The challenge of liquidity management will however remain because of the risk of a credit crunch if it is too rigidly controlled. The alternative of re-valuing the riyal and breaking the peg to the US dollar is an option that should not be rejected out of hand. It is true that the Kingdom’s major exports are priced in dollars. But that does not require our currency being held hostage to the volatilities of another.
From a noneconomic point of view, the feel-good factor of such a budget surplus — in part generated by the continuing conservative estimating of oil pricing — is likely to boost confidence, not least in the private sector. Last year Saudi businesses saw a 6.4 percent growth, the highest in a quarter of a century. This is a testament both to the more hardheaded approach of many concerns and also to their more far-sighted involvement with foreign investors. The World Bank’s latest “Ease of Business Report”, which ranks the Kingdom as the best place in the Middle East to do business, also puts it ahead of advanced economies such as France and Austria. This reflects a remarkable change in commercial and regulatory attitudes.
Nevertheless as the Kingdom continues its extraordinary program of brand new industrial cities, schools, universities, hospitals, ports, railways and roads, it must be hoped that existing infrastructure will benefit from adequate investment in its maintenance. Nor must the issue of unemployment be neglected. To outsiders it might seem extraordinary that with a booming economy, massive public works and a well-defined Saudization policy, there should be a single Saudi without a productive and fulfilling job.
