Current high oil prices, and the belief in the markets that they will continue to be at much higher levels than the so-called OPEC price bands of under $30 a barrel, should be a cause both for satisfaction well as a period in which to reflect on what to do with the surpluses. It was only a few years ago that oil prices were under pressure, and Saudi Arabia was running large domestic borrowings to finance government expenditures. There have been encouraging signs that some positive actions are now being taken by the government concerning current budget surpluses.
Firstly, there is consensus emerging that the level of domestic debt, which reached around SR690 billion at one stage, should be considerably reduced.
According to the latest official announcements, the outstanding domestic government debt now stands at around SR490 billion, or nearly 62 percent of real GDP. The reason for debt repayment is simple — to reduce commission payments on these debts, which had averaged around SR35 billion per annum, especially in the face of rising US dollar rates and the resultant rise in Saudi riyal interest rates, since the Saudi riyal is tied to the dollar exchange rate.
The reduction of commission payments will enable the government to operate in a healthier financial environment should oil prices, and hence oil revenues, fall in the future. Secondly, a reduction in the national debt, especially if it also reduces commercial bank lending to the government, will free commercial banks to lend to the private sector and become more involved in the large infrastructure project lending that the country needs over the next 20 years. It is estimated that the Kingdom requires around $400 billion in new infrastructure investment in electricity, water, roads, schools, and the energy sectors over the next 20 years. A financially healthy commercial banking sector would play a leading role if government lending is reduced.
Thirdly, government repayment of national debt makes countries more attractive to international investors and improves their credit ratings from such international rating institutions such as Moody’s and Standard and Poor which raised the Kingdom’s ratings last year as a sign of confidence. This rating could still go higher if the Kingdom continues to repay more of its national debt, which could also assist private sector company ratings, should they wish to borrow internationally in their own name.
However, discussion on oil surpluses should not only be confined to debt repayment. Should a part of these revenues be put aside as reserves for future imbalances in the national budget? Should expenditure be increased for consumption today to ensure that society’s standard of living is maintained, or should investment in capital projects and intangibles, such as education spending be the major emphasis? It was gratifying to note that Custodian of the Two Holy Mosques King Abdullah had decreed that some SR87.3 billion was allocated to education spending for fiscal 2006, and a further SR12.1 billion for vocational training out of the SR214 billion surplus for 2005.
These are the kind of measures that will yield long-term economic growth on a sustainable level, if a technically educated and skilled work force emerges in Saudi Arabia, which starts to generate revenue from a knowledge-based society. This has been the success of India and its IT revolution today. Indian technical knowledge and expertise is competing with the best in the world, irrespective of oil prices, and India is on the threshold of becoming an economic giant in collaboration with China’s manufacturing base.
This took time and planning, on where India wanted to go, what type of educational infrastructure was needed, and how it would achieve this. Singapore, Taiwan and Malaysia did the same. Once again, current oil revenue surpluses are a blessing, but history rarely gives a country more than one chance to get things right.
Saudi Arabia has a second chance today by starting a national dialogue that looks well ahead for future generations’ welfare, and not just meeting current consumption expenditure.
(Dr. Mohamed A. Ramady is visiting associate professor finance and economics at King Fahd University of Petroleum and Minerals.)
