JEDDAH, 2 August 2005 — The reign of King Fahd was marked by a period of prosperity followed by years of economic strains due to major increases and drops in the price of oil, the main of revenue for Saudi Arabia. It ended on a positive note as the country now has a vibrant economy as a result of the new policies of industrialization, privatization and diversification.
The oil boom years of the late 1970s and early 1980s witnessed an unprecedented construction activity, creation of industrial cities, development of integrated road network and implementation of giant infrastructure projects that provided the solid foundation for economy to take off in later years. The period during and after the boom stand testimony to King Fahd’s vision of turning the Kingdom into one of the most modern and developed nations in the world.
The effect and presence of King Fahd on local and international economy was immediately felt when his death was announced early yesterday. Following the announcement, crude oil prices soared past $61 a barrel, but analysts did not expect his death would have any effect on oil supply from the Kingdom and the impact of the news would be temporary. A source working in the Saudi oil industry confirmed that the Kingdom would continue with its oil policy that aims at supplying enough oil to the world market to ensure price stability.
Sources at the Saudi stock exchange market (Tadawul) said that the market would not halt trading and would not cancel the transactions that took place yesterday morning. The market opened at a decline yesterday morning and was stopped for almost an hour following the announcement of the king’s death but it resumed trading on a rebound. Although some traders expected the market to close at least for one day and feared that the king’s death might cause the market to drop, the source said that generally around the world the stock market of a country does not close at the death of its leader and is not affected by the death.
Secretary-General of the Jeddah Chamber of Commerce and Industry Mohammed Al-Sharif said that King Fahd’s influence on the Kingdom’s development began when he was crown prince. “He was the main mover of the economic boom period after the war of 1974 when he focused on establishing the country’s infrastructure.
His reign also witnessed the most important events of the country’s recent history including the three Gulf wars and the crisis of the drop in oil prices that hurt its economy. Throughout this period the king was unifying efforts diplomatically,” he said.
The deputy secretary-general of JCCI, Saud Ounallah, pointed out that the king’s vision and strategy of using the high oil revenues to strengthen the Kingdom’s economy contributed to making Aramco an international company of significance and to putting the basis of the petrochemical industry at the Industrial Cities of Yanbu and Jubail.
Mazen Batarji, vice chairman of JCCI, pointed to the king’s support for the Kingdom’s chambers of commerce paving the way for them to play an important role in the country’s economic development.
Although the foundations of the Saudi economy were laid in the seventies when massive infrastructure projects were undertaken, the outlines of a diversified economic policy took concrete shape in the 1980s with the launch of the Third and Fourth Five Year Plans.
The first two Five-Year Plans (1970-75 and 1975-80) were mainly directed at building the economic infrastructure when the national economy began to benefit from oil exports.
Though oil was discovered in the in 1936 and in the next few years the Kingdom appeared on the international scene as a major oil exporter - production touched two million barrels per day in the mid-1940s - there was little direct impact on the economy due to depressed world prices. It was only in the 1970s that the oil prices shot up from $3-$4 range to around $30 a barrel.
The higher oil prices and rising oil production was reflected in the Second Five-Year Plan (1975-80) with an outlay of SR700 billion, almost a nine-fold increase from the First Plan outlay of SR80 billion. Although the world economy’s thirst for oil seemed insatiable then, Saudi policy planners had realized early on that oil revenues could not be solely relied upon to fuel economic growth indefinitely.
As a result, the Third Five-Year Plan incorporated measures to begin diversification of economy away from oil with special emphasis on industrial and agricultural projects.
This diversification process was a major factor in helping the Kingdom cushion the oil shock of the mid-1980s better than others when the prices plunged from a high of $34 to less than $10 a barrel.
Against this economic backdrop, King Fahd took over the reins of the government in 1982.
He was instrumental in shaping many of these policies during his tenure as the crown prince. It was under his guidance and leadership, along with that of then Crown Prince Abdullah and Prince Sultan, second deputy premier and minister of defense and aviation, that the Saudi economy took such major strides which have enabled it today to meet the challenges of globalization.
The Kingdom’s impressive economic performance under the leadership of King Fahd can be broadly divided into three aspects. First, diversification - where there was a move away from total reliance on oil and development of industrial projects, joint ventures in the non-oil sector and help the inflow of high technology from industrialized countries.
Second is the increased role of private sector by implementing such policies as cutting back on the government’s role in planned development, allowing five semi government financial institutions to provide soft loans to businesses and the creation of a vibrant stock market.
The third aspect for the strong economic rebound of the Kingdom during the past decade is the move toward globalization with the Kingdom actively pursuing joining the World Trade Organization. The entry into WTO, which is expected soon, will mean a major shift for Saudi industries from protection to competition.
In order to prepare the national industry for the big change and streamline the economic policy, the government created three supreme councils in the past two years: The Supreme Petroleum Council, The Supreme Economic Council, and The Supreme Tourism Authority. The Kingdom has liberalized investment rules allowing 100 percent ownership of foreign-owned projects. The real estate sector has been opened up and foreign investors can own real estate in the Kingdom except in the holy cities of Makkah and Madinah. The gas sector has been liberalized, and more sectors are to be privatized such as water and electricity.
The government also set up the Saudi Arabian General Investment Authority (SAGIA) to coordinate and oversee foreign investment projects in different economic sectors and to facilitate and promote the Kingdom as an attractive and stable investment location.
“During his reign, there were many challenges that included the Gulf wars and the 9/11 terrorist attacks. There were also economic challenges in the form of oil revenue reduction and the fluctuations in oil prices as well as the instability of the region due to wars, which all affected the general budget,” said Dr. Ihsan Bu-Hulaiga, economist and Shoura Council member. “During the oil boom of the seventies, many ambitious development plans were implemented. Following that, King Fahd focused on three approaches toward the economy,” explained Dr. Bu-Hulaiga.
The first was adopting an oil policy that aimed at stabilizing the oil market in the long run.
The second approach was managing the budget deficit through internal loan sources rather than depending on external sources that liberated the Kingdom from any external pressures and ensured its independence.
The third approach, explained Dr. Bu-Hulaiga, was adopting a strategy of economic diversification and this took the form of restructuring the public sector and establishing SABIC (Saudi Basic Industries Corporation) among other steps.
“The Kingdom’s share now of the world’s petrochemical industry is over 6 percent. SABIC alone represents a third of the Saudi stock market share. The non-oil manufacturing sector is achieving an average growth of more than 10 percent. These are all indications of the success in this strategy of diversification,” said Bu-Hulaiga.
The focus on increasing the role of the private sector began in the Fifth Five-year Plan and continued through the Eighth. “His reign ended on a positive note as we see a continued growth, a budget surplus, a greater role by the private sector and more confidence in national investments,” he said. He expects that this growth and development would continue within a consistent framework. “There are current challenges and issues like poverty and unemployment but a strategy has been put for both and are being implemented. The economy in 2005 saw a growth of 6 percent and 2006 is expected to see a growth of at least 3 percent.
This marks a decade of uninterrupted economic growth. The next five-year plan presents an economic strategy for the next 20 years on par with the OECD,” he said.
