JEDDAH, 29 December 2003 — The Saudi budget for 2004 envisages total government expenditure of SR230 billion, about 10 percent higher than the original 2003 budgetary outlays of SR209 billion, but apparently projecting a reduction of nearly 8 percent over the actual 2003 expenditures of SR250 billion. As pointed out in the Ministry of Finance release, the 2003 budget included extra-budgetary spending on certain items related to political developments in the region and domestic security situations, besides the settlements of arrear payments. Evidently, the 2004 outlays reflect a contractionary stance if viewed in relation to the actual spending incurred in 2003, but it seems rather expansionary if the extra-budgetary expenses related to non recurrent security conditions and settlement of arrears were excluded.
This, however, doesn’t suggest that the extra-budgetary expenses, particularly payment of settlement, had no value-added impact, but they generated lesser economic activities in the outgoing year, hence their direct impact on raising the value-added have been larger in those years when such liabilities were created. Meanwhile, the economic impact of additional security expenses domestically would have only a small effect on the economy that is likely to be offset by the negative effect due to those attacks. Consequently, the SR230 billion outlays for 2004 look expansionary along with a projected fiscal deficit of SR30 billion.
The year 2004 budget statement projects total state revenues of SR200 billion, about 32.2 percent lower than the year 2003 actual figures of SR295 billion, which itself was around 73.5 percent higher or SR125 billion more than the initial estimation of SR170 billion. However, the SR30 billion fiscal deficit projected for 2004, suggests an expansionary stance, which contradicts overall policy perspective of maintaining a fiscal discipline. Understandably, many national development projects and social programs are awaiting to be implemented, thus reducing fiscal expenditure may be problematic and politically sensitive. In addition, preserving business confidence and promoting economic growth seems imperative for the creation of jobs. Nonetheless, elimination of waste and switching of expenditures into more productive areas is more beneficial in the long term.
Moreover, the five specialized credit institutions would provide extra stimuli to the domestic economy by providing SR10.6 billion worth of financing facilities from their own resources to various projects and services in the Kingdom in 2004. In addition, the newly established Loan Guarantee Fund (LGF) will grant credit to small and medium enterprises (SME’s) at the grass root level that would help to create jobs and stimulate economic activities. The initial market’s reaction to the new budget was neutral to positive, hence was largely perceived of being oriented to human resources development and infrastructure projects.
Meanwhile, no speculative buying was recorded on the Saudi stock market as it has already risen nearly 78 percent on the year to date while the Saudi riyal remained stable in relation to the US dollar.
As in previous years, financing of the SR30 billion projected deficit for the year 2004 will be secured through borrowing, however the royal decree, which authorizes the Ministry of Finance to arrange such funding did not specify the sources of these loans. In addition, the 2004 budget statement did not indicate how much of the SR685 billion domestic debt announced in 2002 was retired in 2003. The rising level of foreign assets of SAMA in the first-ten months of 2003 from SR116.5 billion in December 2002 to SR175.5 billion in October 2003, which shows a net-increase of SR59 billion, obviously vindicating the magnitude of fiscal surplus generated in the outgoing year. Notwithstanding, local commercial banks’ claims on the public sector rose by SR25 billion in the first ten months of 2003 to reach SR175 billion, as banks’ net foreign assets declined by SR11.6 billion during the same period, thereby partially financing an increase in government’s borrowing. Moreover, investment in local securities held by autonomous government institutions, which are mainly in Saudi government development bonds and local stocks, increased by SR27.1 billion to SR281.3 billion up till October 2003. The reading of these figures lead to suggest that the government has yet to retire part of the domestic public debt.
The 2003 Budget Outcome
With the availability of additional resources worth SR125 billion over and above the original revenues estimation of 2003, the government not only was able to eliminate the SR39 billion originally projected deficit but it also increased outlays by SR41 billion to meet expenses related to the security situations regionally and domestically along with settlements of late payments. It was, however, not clear if the entire extra-budgetary outlays were utilized for these two heads of accounts or for additional spending above the original allocations of other sectors. The residual SR45 billion was retained as surplus for the fiscal 2003. This suggests a substantial improvement in the fiscal position of Saudi Arabia in the outgoing year due to the strong recovery of oil prices, which averaged around $28 a barrel for the whole of 2003. With an estimated nominal GDP of SR792 billion for 2003, a budget surplus of 5.7 percent (positive) was achieved in the outgoing year and the ratio of public debt to GDP fell to 86.5 percent.
The Ministry of Finance press release did not provide details on 2003 beyond the overall expenditures and revenues figures, with a notable exception only to mention that the additional expenses made were related to regional and domestic security situations and settlement of arrears. With non-oil revenues estimated at SR48 billion for 2003, the residual SR247 billion are attributed for oil revenues in the outgoing year.
Thus, oil revenues are estimated to have increased by nearly 110.7 percent from the original budgetary estimate of SR122 billion, while no growth in the non-oil revenues was presumed. Although non-oil revenues were gradually increasing over time, they remain small at around 16.3 percent of the total outlays, which clearly do not provide adequate cushion at times of oil price volatility. To address the impact of future lower oil prices and growing public debt, the government may consider a few steps to expand the non-oil revenue base that possibly includes, gradual reduction of subsidies by raising user charges, introducing value-added tax and possible corporate income tax.
On the expenditure side, also no further details were provided beyond overall spending figure of SR250 billion for 2003. However, based on the previous trend, current expenditures are estimated at SR222 billion to account for 88.8 percent, while the remaining SR28 billion are considered being spent on projects, representing nearly 11.2 percent of the actual total. Within current expenditures, the government’s wage bill is estimated to have comprised of nearly half of the total current expenditures, followed by interest payments of around 12 percent, supplies and services at around 10 percent, operation and maintenance at around 10 percent, and subsidies and other transfers comprised the remaining 2.5 percent.
The 2004 Budget : Expenditure Side
The 2004 budget stipulates total expenditures at SR230 billion and outlays for projects of SR41.6 billion, hence the current expenditure will account for the remaining SR188.4 billion. Accordingly, current expenditures represent around 82 percent of the total, or nearly 15.1 percent lower from the likewise outcome estimated for 2003. This, however, suggest a restraint stance on current expenditures as the macroeconomic imbalances are expected to re-emerge on the expectation of lower oil revenues. The outlays on projects, which accounts for nearly 18.1 percent of total expenditures for 2004, are 48.6 percent higher than the estimated actual projects expenditure worth SR28 billion for the outgoing year. Of the SR41.6 billion allocated for projects, nearly SR32.6 billion will be spent on new projects, as the remaining SR9.0 billion will finance the ongoing projects. Higher allocations for new projects in 2004 will likely open up numerous opportunities for construction contractors in the area of health, education, water and sewage, municipal affairs, transportation and communication, and power generation. The construction sector real GDP, which is initially estimated to have grown by 2.8 percent in 2003 as stated in the recent budget statement, is expected to further build on the ongoing momentum as evidenced from the 10 percent growth seen in the domestic sales of cement to 19 million tones during the first ten months of 2003.
Functional Allocations
While the 2004 budget statement provides expenditure details for education & manpower development, health & social development, municipal services, transportation & communication, and infrastructure including industry & electricity, no expenditure details were provided for general administration, defense and security, economic resources and information sectors. The combined budgetary appropriations for the five categories specified in the budget statement totaled SR119 billion for 2004, representing nearly 52 percent of the total outlays of SR230 billion while no breakdown has been mentioned of the residual figure of SR111 billion.
a. Manpower Development Outlays
Expenditure on manpower development, which accounts for 27.7 percent of the total outlays for 2004, will receive SR63.7 billion in the next fiscal year, about 10.8 percent more than the budgetary outlays for the outgoing year. To further strengthen the development of human resources, the 2004 budget allocates SR8.5 billion for universities and colleges including SR611 million outlays for establishing three new universities in Madinah, Qassim and Taif, thus bringing the total number of universities in the Kingdom to eleven. In order to accommodate the growing number of children seeking access to schools, the manpower development outlays includes funds for the construction of 3,030 new schools for boys and girls across the Kingdom. The proposed 2004 budget also encourages the private sector to invest in the education sector as the outlays for manpower development also include funds for lending programs to establish private universities, colleges and schools. The private sector can now play its due role by investing in the education sector and contribute to the manpower development of the country, while getting a fair return on their capital.
b. Health and Social Development
Health and social development sector will receive SR24.3 billion in 2004, nearly 4.7 percent higher than the budgetary outlays of SR23.2 billion in 2003. The 2004 outlays for the health sector would help expand the Kingdom’s healthcare sector by opening up 26 new hospitals in 2004 with a combined capacity of 4,300 hospital beds, thus bringing government hospitals capacity to 32,500 beds by next fiscal year. The outlays for the health sector will include construction of 150 new primary health care centers, furnishing of newly constructed hospitals, and expansion of the existing ones. In addition, 88 new hospitals with combined capacity of around 11,000 beds are in various stages of completion. The imbalance seen in the Saudi health sector in the past is now being addressed. The government is certainly aware of the fact that the hospital dependency ratio had worsened from 2.40 beds per 1000 persons in 1995 to 2.24 beds per 1000 persons in 2000. In order to achieve a target of 2.5 hospital beds per 1000 persons as the Kingdom’s average inpatient hospital admission rate will approach 11 percent, the country would require an additional capacity of 46,800 beds for a total population of 37.34 million by 2020. Meanwhile, the private sector should come forward to avail these potential opportunities in this sector, while government continues its due role of providing better healthcare services to the masses.
c. Infrastructure Development
The allocation to the infrastructure development is the third largest category within the group of five categories for which expenditures have been revealed in the budget statement for 2004. This includes outlays for water, industry and agriculture, which will receive SR15.1 billion in 2004, including SR9 billion for new desalination projects, dams and water and sewage networks.
d. Municipal Services
Municipal Services and Water will get SR8.6 billion in 2004, about 14.7 percent more than the budgetary appropriations of SR7.5 billion in 2003.
e. Transportation & Communication
Transportation and communication will receive SR7.3 billion in 2004, nearly 12.3 percent more than the budgetary outlays of SR6.5 billion in the previous year. Within the transport and communication sector, SR3.5 billion are allocated for the construction of 3,800 km of new highways and roads, including Baha-Abha section, Jeddah-Jizan section, Khamis-Mushayt-Najran section, and Yanbu-Amlay-Dhuba Sharma section.
The 2004 Budget: Revenue Side
On the revenue side for the year 2004, the government gave no separate figures for oil and non-oil revenues. Total revenues in the year 2004 budget were put at SR200 billion, representing a contraction of 32.2 percent on the 2003 total actual revenues of SR295 billion. Assuming no new revenue raising measures in 2004, non-oil revenues are estimated at SR48 billion for 2004. Accordingly, oil revenues have been estimated at SR152 billion, around 38.5 percent down from the actual figure of SR247 billion in 2003. Thus oil revenues would represent nearly 76 percent and the non-oil revenue to account for the remaining 24 percent of the total for next year.
With January-October average oil production amounting to 8.62 million barrels a day, Saudi Arabia produced around 450,000 barrels per day over and above its output quota for its stipulated average quota for the same period. Following OPEC’s decision in October 2003 for the 10-OPEC members to produce 24.5 million barrels a day effective Nov.1, 2003, Saudi output quota is now put at 7.96 million barrels a day. Assuming no further revision in the Saudi oil output quota for the whole of 2004, Kingdom oil exports are expected to average around 6.6 million barrels a day in 2004, suggesting that the government has cautiously assumed an average price of Brent crude at around $21 per barrel. However, actual oil prices in 2004 could turn out to be higher than those stipulated for projecting the revenues for next year and this would give the government more room, as it actually happened in 2003, for maneuvering in terms of spending plans and cutting budget deficit.
Performance of the Domestic Economy in 2003
According to the recent budget statement, nominal GDP is estimated to have grown by 12 percent to SR792 billion for the whole of 2003, while it strongly grew by 6.4 percent to SR678 billion in real terms. The oil sector is stated to have expanded by 22.9 percent amounting to SR321.7 billion while the growth of the non-oil sector is estimated at 6.0 percent to reach SR462.7 billion in nominal terms in the same period. Moreover, the private sector saw a growth of 3.7 percent in current prices over the outgoing year and 3.4 percent in real terms. The non-oil industrial sector GDP is estimated to have grown by 3.9 percent in real terms, construction sector at 2.8 percent, electricity, gas and water together at 6.2 percent, transport & communication sector by 4.3 percent, wholesale, retail, restaurants, and hotels by 4.4 percent in 2003. As in the past, economic growth in the outgoing year was accompanied by relative price stability. Inflation, as measured by the cost of living index, is estimated to have increased by 0.51 percent for the whole of 2003, while the non-oil GDP deflator is estimated to have shown a small increase of 0.29 percent.
Assuming the historical expenditure-GDP multiplier of 3.24, nominal GDP for 2004 is preliminary projected at SR745 billion, reflecting a fall of around 6 percent due mostly to the contraction in oil and government sectors. Based on the average Brent crude price of $21 per barrel and the current Saudi production quota of 7.96 million barrels a day, oil sector nominal GDP is expected to shrink by around 12 percent in 2004. On the other hand, the ongoing positive momentum in the private sector is expected to continue, largely benefiting from its higher profitability growth and the sharp rise in government’s allocation for projects in the next fiscal year.
(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)
