JEDDAH, 22 December 2003 — The Saudi budget was announced last week by the minister of finance, with a projected surplus of SR45 billion and nominal GDP growth of 12 percent for 2003. Actual expenditures of this year surged by 20 percent owing to higher security expenses amid geopolitical uncertainties, the war on Iraq, and anti-terrorism actions. This led to a GDP multiplier of 3.2 for this year which is slightly higher than its level a year ago reflecting higher proportion of money was spent into the domestic economy despite all political and economic incidents surrounded the Middle East and the Kingdom in particular. Meanwhile, the statement expected a deficit of SR30 billion for 2004, attributed to expected lower oil prices with the Iraqi oil coming to the upstream of the world oil production; which indicates that there is no really structural change to the budget. As amply demonstrated it is highly dependent on oil revenues and its volatile prices, and according to the total and breakdown of the budget there is no real structural change in it or a long-run strategy toward continuous reduction in the public debt which is higher than 90 percent of GDP.
The fiscal policy that is adapted in the Kingdom of generating economic growth upon debt is known as “Debt-Led Growth” in economic terms. There is an urgent need to provide new directions. No longer can reliance be placed either on the strategies of the 1980s and 1990s or debt-led growth. Neither can the present problem of economic development be resolved through Keynesian consensus and unsustainable welfare economics, nor by simplistically resorting to monetarist and neoclassical economics, tempered by a “human development”. Eventually, however, the level of the Saudi public debt became high enough for the government to hit the “debt wall”. This policy can not lead to a sustainable economic growth in the future, unless the debt is spent on investment and increasing economic capacity in order to generate income in the future that exceeds the debt. Unfortunately, current government expenditures in this year’s projected budget represent 82 percent of total expenditures while project expenditures counts for the remaining 18 percent only. Moreover, investment grew in a very low pace to average at 2.6 percent annually only in the last 20 years, while the public debt accumulated to reach SR650 billion with an annual average growth of 5 percent for the same period signaling that investment is likely to have remained considerably much below debt expansion, specially as average GDP growth is near 4 percent for the same 20 years including periods of above-average growth due to high oil revenues such as 2000 and 2002.
With the negative outlook of oil prices and Saudi share in global oil supply, government revenues are likely to shrink in the medium-long term. Given the size of unemployment and high population growth rate in the Kingdom, the economy not only needs to be a growing economy, it needs to grow at a pace and pattern that is consistent with its labor market needs and the material and non-material needs of its population. As an engine of growth, it is strongly recognized that the socio-economic goals of sustainable development cannot be met in the absence of the physical infrastructure for transportation, health, energy and water provision, telecommunications, and waste management, as an essential element to improve investment climate for locals and attracting foreigners to the Kingdom. It is also obvious that there are complexities involved in meeting the above challenges, with elaborating on the constraints to aggregate and sectoral growth and issues related to the Saudi labor absorption capacity of different growth scenarios.
Based on the premise that production is a social activity and that an economy’s growth performance reflects the sum-effect of diverse forces, in structuring the Saudi budget it should examine the relationship between state, capital and labor in influencing the production pattern and growth of the economy. The analysis of Saudi production patterns and expected growth for potential sectors must be conducted in the context of the globalization processes and the challenges they impose on Saudi’s private and public sector initiatives.
In this regard, coordination between fiscal and monetary policies is an essential requirement for effective execution of economic growth strategies. As increasing government borrowing from Saudi banks through issuing government bonds has a crowding out effect on the private sector by limiting its chances of financial resources that is vital for business expansion. This public debt also had a negative impact on current account balances, as government borrowing led to gradual depletion of both SAMA and banks’ foreign reserves abroad, while investment has been almost stagnant. However, the macroeconomic implications of high fiscal debt must be considered in all directions. While the role of monetary policy had a clear role in generating liquidity to meet government expenditures, the effects of fiscal policy depend on whether the income multiplier effect outweigh confidence and crowding out effects. Since the growth is slow in the Saudi economy, then further consolidation efforts would be needed to keep public debt under control. Therefore, the government authorities should consider ways of improving control over expenditures and the budget process, so as to achieve better fiscal outcomes and achieve sustainable economic growth. This could be through setting up priorities, accelerating privatization and economic reforms, and reducing the role of state whenever is possible.
(Dr. Nahed M. Taher is a senior economist at the National Commercial Bank, Jeddah)
