Fruits of financial surpluses

This holy country is blessed with its record volumes of oil wealth. This wealth is the main factor that led the transition of the Kingdom from a country with a population suffering from extreme poverty and destitution to a country of prosperity, security and stability.
The oil revenues that began flowing at the end of the 1930s of the last century have contributed immensly to the prosperity of Saudi citizens and started a development movement. The strong rise in oil exports at the end of the 1960s led to the increase of the government’s oil revenues, which account for most government revenue and exports.
The prudent fiscal policy at that time helped the Kingdom achieve fiscal surpluses despite the lack of government revenues; the fiscal surplus for the first time exceeded billion riyals in 1970. The Arab oil embargo in October 1973 led the Kingdom to start the first phase of raising oil prices, where it quadrupled at once. This increase in prices led to a doubling of oil revenues in similar proportions.
A big increase in oil revenues resulted in a strong rise of fiscal surpluses and reached record levels in that period. The fiscal surplus reached over SR 65 billion in 1974, a huge sum at current prices and maybe even larger in the real terms of the current fiscal surpluses.
The fiscal surpluses have been used for creating government reserves in the Saudi Arabian Monetary Agency, which in turn invests these reserves in highly liquid and safety assets. At the same time, the growing oil revenues encouraged the increase of government spending at high rates. The increased spending resulted in lower levels of fiscal surpluses in 1976 and 1977 and led to the government becoming accustomed to large spending and the growth levels to bring about fiscal deficits in the next two years.
The second wave of oil price increases in 1979 led to a strong rise in oil revenues and accordingly, a rise in fiscal surpluses. The fiscal surpluses exceeded SR 111 billion in 1981— the year that crude oil production reached its peak. The oil prices exceeded $ 40 per barrel at the time, which is a high price by the current values.
In the early 1980s, the United States pursued a tight monetary policy to control inflation, which at the time was high. This policy, in turn, led to the slowdown in the global economy. The economic slowdown led to the decline in the growth of global demand for commodities, including oil, causing pressure on prices and its collapse in the mid-1980s. The decline in oil prices at that time led to a significant decline in oil revenues and this decline led to large budget deficits.
Government spending was cut somewhat, but it was not possible to reduce it to the low levels of revenues at the time in order to avoid a much stronger economic downturn than the country could afford. Government fiscal deficits were recorded for nearly 19 years of the 20-year period stretching from 1983 to 2002 (the Kingdom has achieved a fiscal surplus of $ 22 billion riyals in 2000).
The total governmental fiscal deficits in that period were about SR 851 billion. Those deficits were financed initially from state reserves accumulated in the past 10 years, but the erosion of these reserves after only four years led to the start of financing such deficits by issuing government bonds.
Luckily, the Kingdom did not resort to borrowing before the 1980s, and therefore, it was able to finance the fiscal deficits, which were sometimes large for a period of time. Continuing deficits for a long time led to the strong growth in national debt levels until they exceeded 100 percent of gross domestic product (GDP) and amounted to about SR 650 billion in the beginning of the millennium.
The strong growth in Asia over the past two decades, especially in China, led to a rise in the demand for oil and abolished the effect of policies to reduce consumption of the Organization for Economic Cooperation and Development (developed countries) of oil. From the beginning of the third millennium came the third wave of high oil prices, which helped lift the Kingdom’s oil revenues and return of surplus funds.
The increase in oil revenues saved the Kingdom of financial dilemmas that were looming on the horizon as a result of the size of the national debt exceeding the safe limits at the beginning of the millennium. The large financial surpluses in the past 10 years led to a significant improvement in the Kingdom’s financial position.
The total fiscal surpluses in the past 10 years (including estimates for the year 2012) are about SR 2 trillion. These surpluses have gone into building the country’s financial reserves and paying the national debt, although in local currency. The data of SAMA indicates that the total government deposits with the institution arrived at SR 1,515 billion in October of 2012, and this means that the government deposits rose at the Saudi Arabian Monetary Agency by an estimated SR 1,450 billion during the 10 years, ending in year 2012.
Based on the domestic surplus data during the past 10 years and the change in the size of government deposits during the same period, it seems that the government paid about SR 550 billion from its domestic debt during the past 10 years, and this is expected to bring the volume of domestic debt to around SR 100 billion by the end of 2012.
The current government fiscal status is distinct and puts it in the list of the best countries in the world in terms of financial prudence. It has reserves of more than a trillion and a half riyals, and the ratio of government debt is very low and represents less than 4 percent of GDP. In addition, the interest of the national debt costs only a small fraction of the total revenues of the current government revenue.
The government in 1981 stood at the center of a financial situation similar to the excellence situation at the moment, but later, there has been a decline in the financial position due to the surge in spending, which has been getting used in the days of economic booms, and because of the heavy dependence on oil revenues and the limited non-oil revenues. So, will there be a new cycle of oil prices going down again or will the exported quantities fall and the fiscal deficits return again? Will we act the same way or will we benefit from the past experience?
Developments in the spending in recent years suggest that we behave almost the same way, and lead the last wave of high oil revenues to raise large government spending and bringing them to record huge levels. The large growth rates in spending raises fears for the inability to control the growth of exchange, thus threatening a quick return to fiscal deficits. Here it must be noted that there is strong pressure from public opinion and a lot of government departments to increase spending, in which officials are finding extremely difficult to restrain. It is possible to respond to these urgent demands of higher levels of spending, but there should be control of the strong growth rates to make it less severe than has been the case in the past few years.
We must learn from what happened in the old days and not get carried away with largely increasing spending during oil booms and avoiding depletion of government reserves during falling oil revenues. We should also be very careful of unsecured borrowing rates. Oil prices and markets are surrounded by many dangers and the volumes of oil exports could fall as a result of multiple factors. There is no guarantee that oil prices will remain high forever, as falling prices can occur at any time due to supply and demand factors.
The decline in prices to below $ 80 a barrel will cause fiscal deficits. On the other hand, the rising incomes from oil create strong pressures to increase spending; this accelerated the pace of spending in recent years, as happened in the 1970s. This requires the provision of more financial resources in the coming years. It would also require the rapid rise in expenses to maintain oil prices above elevated levels that exceed $100 after several years.
On the other hand, a rise in domestic consumption of petroleum products will result in the pressure on oil exports. The rise in consumption of petroleum products by 5 percent annually will double domestic consumption in 14 years and will reduce exports by almost one third unless domestic production is increased by at least the anticipated increase in domestic consumption.