THE SAUDI ARABIA ECONOMY

 

                                                     Source: The EIU

Political and Economic Brief:

The modern Saudi state was founded in 1932 by Abd Al-Aziz bin Abd al-Rahman Al Saud (Ibn Saud) after a 30-year campaign to unify most of the Arabian Peninsula. A male descendent of Ibn Saud, his son Abdallah bin Abd al-Aziz, rules the country today as required by the country's 1992 Basic Law. To promote increased political participation, the government held elections nationwide from February through April 2005 for half the members of 179 municipal councils. In December 2005, King Abdallah completed the process by appointing the remaining members of the advisory municipal councils.

Formally, the monarchy has absolute executive power, although the King's legislative power is constrained by the need for any legislation to be compatible with Islamic law (usually interpreted according to the Hanbali school of Sunni Islam). Under the 1992 Basic Law, the Quran and the Prophet's sunna (tradition) are the official constitution of the state, and in practice the King therefore requires support from the clerical establishment (the ulema). The King is also prime minister, and appoints the Council of Ministers. In addition, the King chairs the Supreme Economic Council, which advises ministers. The national Consultative Council has only a limited impact on decision-making. Municipal councils are partly elected by male citizens. There are no political parties.

The government is expanding the country's oil and gas industry while also trying to diversify the economy into non-oil sectors, including manufacturing and services. Although the state retains a dominant role in the economy, the government is seeking to encourage the development of the private sector, particularly in services and utilities. Reducing the unemployment rate among Saudi nationals is a main priority, and the government imposes some quotas (which vary by sector) on the employment of expatriates, who nonetheless make up the vast majority of the private-sector workforce.

The country remains a leading producer of oil and natural gas and holds more than 20% of the world's proven oil reserves. The government continues to pursue economic reform and diversification, particularly since Saudi Arabia's accession to the WTO in December 2005, and promotes foreign investment in the kingdom. A burgeoning population, aquifer depletion, and an economy largely dependent on petroleum output and prices are all ongoing governmental concerns. 

                                                    Source: Central Department of Statistics and Information, Ministry of Economy and Planning ‘*’ Preliminary Data

Preliminary data of the Central Department of Statistics and Information (CDSI) indicate that GDP at current prices (including import duties) recorded agrowth rate of 7.1 percent to US$ 381.37 billion in 2007. The non-oil sector GDP grew by 4.5 percent to US$ 224.05 bilion, constituting 45.6 percent of total GDP. The non-oil private sector GDP went up by 8.0 percent to US$ 107.65 billion and that of the government sector by 4.2 percent to US$ 61.02 billion. The oil sector GDP grew by 8.0 percent to US$ 207.52 billion, constituting 54.4 percent of GDP at current prices.

 

                                                    Source: Central Department of Statistics and Information, Ministry of Economy and Planning ‘*’ Preliminary Data

Data on GDP at constant prices (including import duties) shows that it grew by 3.4 percent to US$ 216.75 billion in 2007 compared to US$ 209.63 billion in the preceding year. All major economic activities witnessed continued growth. The manufacturing activity, including oil refining, registered a growth of 6.5 percent. The public utilities activity (electricity, gas and water) grew by 4.7 percent. The building and construction activity grew by 7.1 percent. The wholesale and retail trade, restaurants and hotels activity was up by 6.2 percent. The transport, storage and telecommunications activity increased by 10.6 percent. The finance, insurance, real estate and business services activity depicted a growth rate of 3.7 percent. The community, social and personal services activity rose by 3.5 percent. The government services sector activity grew by 1.3 percent.

On the fiscal front, preliminary data of the actual revenue and expenditure for fiscal year (2007) indicate a decline of 4.6 percent in actual revenue to US$ 171.37 billion compared to US$ 179.61 billion in the preceding year. However, actual expenditure went up by 18.5 percent to US$ 124.29 billion compared to US$ 104.85 billion in the preceding year. Surplus declined to US$ 47.08 billion compared to US$ 74.75 billion in 2006. Oil revenues constituted 87.5 percent of total revenues in 2007, while other revenues constituted 12.5 percent. Capital expenditure accounted for 25.5 percent of total expenditure while current expenditure constituted 74.5 percent. Preliminary estimates of the Kingdom’s balance of payments indicate a current account surplus of US$ 94.99 billion in 2007. The surplus in the current account was due to an increase of 2.9 percent in the balance of trade surplus to US$ 150.79 billion in 2007 compared to US$ 146.6 billion in the preceding year as a result of an increase in oil exports and other exports.

 

                                                    Source: Central Department of Statistics and Information, Ministry of Economy and Planning

Broad money (M3) increased by 19.6 percent to US$ 210.56 billion in 2007 compared to an increase of 19.3 percent in the preceding year. The general cost of living index for all cities (1999=100) registered an increase of 4.1 percent in 2007. The wholesale price index recorded an increase of 5.7 percent in the same year.

 

                                                    Source: Central Department of Statistics and Information, Ministry of Economy and Planning, Inflation measured by CPI

 Future Outlook

§        Saudi Arabia will continue to expand its spare oil production capacity, though in the immediate term it may continue to cut output on         account of falling oil prices and the global recession.

§         Low oil prices and higher public spending, particularly on capital projects, could have an impact on the Government’s fiscal surpluses. These surpluses are projected to decline from an estimated 17.9% of GDP in 2008 to 8.4% of GDP in 2012 as spending rises rapidly.

§         The government will use part of the fiscal surpluses to continue to reduce the central government domestic debt, which is expected to fall from an estimated 19.1% of GDP at end-2007 to about 1.5% of GDP at end-2012.

§         Rapid economic growth and the continued expansion of the money supply—owing mainly to large increases in government spending—together with supply bottlenecks and rising import costs will push inflation well above the levels seen in the historical period (2003-07).  Inflation may rise to an average of 8 to 9 per cent in 2009.

§         Despite high oil export earnings over the forecast period, strong import growth will push down the trade surplus. Coupled with rising invisibles payments, this will lead to a narrowing of the current-account surplus from an estimated 27.7% of GDP in 2008 to 8.4% of GDP in 2012.

§         Real GDP growth is forecast at 5-6% a year in 2008-12. The non-oil private sector will gradually expand its role, although government spending (and the awarding of government contracts) will remain a key driver of growth. Any Saudi oil production cuts would pose a downside risk to Saudi GDP growth.