The 2002 budget announced on Saturday poses a number of challenges to economic planners and to the reform program currently under way.
Though the Kingdom is known for its conservative estimates as far as revenues are concerned, but next year’s revenues pose a serious challenge. The hectic oil market stability that has prevailed over the past three years is all but gone, paving the way for a more tumultuous road ahead.
Despite the Russian announcement of a cut in output by 150,000 bpd, seen a prerequisite for a concerted effort by producers inside and outside OPEC to shore up oil prices, it remains to be seen what actually happens on ground.
There are worries that Russia will not deliver on its promise when time comes, given its past record, and that a price war may be in the offing. Budget projections and figures will become meaningless if that scenario comes into play.
Though the expected deficit of SR45 billion seem bigger than had been originally anticipated, it falls within the general budget performance of the past few years. The 1999 budget forecast a SR44 billion deficit, while that of the following year had a SR45 billion surplus, while last year’s budget was balanced at SR215 billion. Again, it is yet more proof of the fluctuation of oil prices has such effects on the Saudi economy.
However, the Ministry of Finance has been authorized to finance the deficit. It’s expected that such finance will be done through traditional ways of treasury and development bills and bonds or tapping institutions with high liquidity, a move that is manageable but it is bound to increase the volume of domestic debt.
Servicing that debt with a financial commitment of roughly SR30 billion annually adds to the general commitment by the government in areas of wages, operation and maintenance that is estimated to stand at SR140 billion. That leaves a very little room to finance social development in areas of health and education so as to cater for some 700, 000 people in population growth every year.
One of the main aims of the drive for economic reform is to diversify the economic base and encourage non-oil exports.
The budget said these had amounted last year to SR25.9 billion, or 56.5 percent of next year’s forecast deficit. From a peak of SR60 billion four years ago, non-oil exports have shown the same pattern of fluctuation.
Another area that will be of major concern is the growth in the GDP. Barely growing by 2.2 percent to SR615 billion this year, it’s likely going to drop next year with the expected decline in Saudi oil output to around 7 million bpd, one million bpd less than has been produced on average last year and at a price that is $4 a barrel less than what has prevailed on average for the whole year. All will have their negative impact on the per capita income.
With the ever growing population, increase in public debt and fluctuation in oil prices, the way out seems more diversification and encouragement of foreign investment.
In its first year of operation, the General Investment Authority has managed to conclude agreements with potential investors amounting to SR32 billion.
What is needed is to turn these agreements into a reality and open the way for more. That’s the main challenge for 2002 and after.
