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Saudi Arabia
Economic Policy in the 1990s
The government's attempts to deal with the chronic budget deficits,
largely through expenditure retrenchment, depletion of foreign
assets, and the sale of development bonds, generally helped stabilize
its financial situation by the late 1980s (see table 4, Appendix).
It became clear by 1989 that the economy had weathered some of
the other problems, such as the spate of bankruptcies of private
companies, the growth of bad banking debts, and the massive outflow
of private capital to overseas financial centers that followed
the oil-price crash of 1986. During 1989 and 1990, economic planners
had renewed optimism. New plans were made to put the oil and nonoil
sectors of the economy on a surer footing. The perceived recovery
in international oil consumption and prices provided regional
policymakers the opportunity to resume spending to promote economic
growth. As a result, two major initiatives became the basis of
Saudi economic policy.
First, Saudi Arabia unveiled plans to raise crude oil production
capacity to between 10.5 million and 11 million bpd by 1995. With
the restructuring of the General Petroleum and Mineral Organization
(Petromin), the creation of Samarec, which was given control over
most of the kingdom's oil refineries, and the announcement of
major plan to upgrade domestic and export refineries, a comprehensive
picture emerged of the government's effort to promote oil investments.
Another indication of Riyadh's intentions came in 1989 when Saudi
Aramco purchased 50 percent of Star Enterprises in the United
States, a joint venture with Texaco that signaled Saudi Arabia's
pursuit of geographically diversified downstream projects.
Second, the government was not eager to continue its expansionist
fiscal policies. Despite moderately higher oil prices, military
outlays, oil capacity expansion plans, and current expenditures
accounted for the bulk of total spending and did not permit a
fiscal boost. However, because the nonoil private sector remained
largely dependent on government spending, the sharp cutbacks in
capital outlays hindered economic diversification. In light of
this failure, the government adopted two policies to reorient
and revive the private sector.
Financial sector reform was the government's main option. Since
1988 SAMA had made great strides in bolstering commercial bank
balance sheets through mergers, debt write-offs, and injection
of funds to prevent failures. Subsequently, banking regulations
and supervision were tightened and compliance with international
capital adequacy requirements enforced. The authorities also encouraged
banks to take a more active role in financing private sector investments.
The idea of opening a Riyadh stock exchange received renewed interest:
the government sanctioned the establishment of the exchange in
early 1990 and hinted it could be an appropriate venue for selling
government assets.
Protectionism as a policy also gained some popularity during
this period. Partly motivated by the impasse in Gulf Cooperation
Council (GCC) negotiations with the European Economic Community
(EEC), but mainly to protect domestic private investment, Saudi
Arabia began enforcing some restrictive tariff and nontariff barriers
that had been instituted in the mid-1980s. Under the guise of
conforming to GCC-wide levels, Saudi Arabia raised its tariff
rates to 20 percent on most items with certain industrial items
gaining protection at higher rates. The government also began
enforcing nontariff regulations such as preference for nationally
produced commodities and the continued application of preference
for local contractors, as well as quality standards that favored
local production. In addition, the kingdom assiduously protected
domestic banks from foreign competition by barring the sale of
any foreign financial products and services.
The Iraqi invasion of Kuwait halted the miniboom that these policies
had fostered. In the immediate wake of the invasion, the government
faced two tasks. First, it had to deal with the massive outflow
of assets from the domestic banking sector by liquidating the
commercial banks (which lost more than 12 percent of their deposits
within the first month of the crisis), encouraging a repatriation
of private assets, and restoring the confidence of foreign creditors,
who had canceled lines of credit as a precautionary measure. The
monetary authorities reversed most of the hemorrhage caused by
the loss of confidence in the Saudi riyal. Second, the government
was obliged to raise oil output to levels unseen since the early
1980s. Saudi Aramco had to respond to a serious crisis without
an adequate assessment of its overall production capacity. It
quickly became apparent that Saudi Arabia had sufficient capacity
to replace the bulk of the 4.5 million to 5 million bpd of Iraqi
and Kuwaiti oil embargoed by the UN. Output rose rapidly to 8.5
million bpd, which restored some calm to the international oil
market; however, by the end of 1990, oil prices were nearly double
those in June 1990.
Supporting the United States-led multinational forces, however,
placed an enormous burden on the government's budget. The deficits
for 1990 and 1991 reached record levels, so the fiscal authorities
were forced again to engage in further external asset drawdowns,
increased volumes of development bond sales, and a novel feature:
external borrowing from commercial banks and export credit agencies.
Saudi Arabia was a prominent member of the World Bank (see Glossary)
but because of the nation's high per capita income, it was not
entitled to borrow from that organization. Most of the major projects
envisaged before August 1990 were preserved, however. But external
borrowing had gained credence as the means to fund not only budgetary
shortfalls but also the capital programs of major public enterprises.
Notably, Saudi Aramco did not scale back its crude-oil capacity
expansion plan. Rather, it appeared that new ways of financing
were being sought from foreign commercial banks, multinational
companies, and the domestic private sector. Sabic also moved to
raise capital overseas, while Saudi Consolidated Electric Company
(Sceco), the electricity conglomerate, requested foreign suppliers
to help finance its expansion program.
The fiscal crisis did not cause economic problems for the private
sector because the government's reduction of its budgeted expenditures
was slight. Moreover, domestic government spending in support
of the war effort surged, and many Saudi companies benefited from
war-related contracts. Also, as a result of Operation Desert Shield
and Operation Desert Storm, the more than 600,000 troops of the
multinational forces increased domestic spending on consumer goods.
This spending offset the effects of the fall in the number of
foreign workers after the government expelled more than 1 million
Yemenis, Palestinians, Sudanese, and Iraqis because their countries
had not condemned the Iraqi regime. The miniboom, which was interrupted
by the Iraqi invasion, was revived by this increase in government
spending, and then received further stimulus by three other factors.
First, the protection of the kingdom by United States forces and
the perception that this would continue enhanced private sector
confidence in the government. The private sector again repatriated
capital, and the stock market boomed, with share issues rising
to unprecedented levels. Second, changing regional politics encouraged
many firms, which had set up manufacturing and processing plants
for the domestic market, to seek sales in Iran, Turkey, and Central
Asia. Third, the government cut domestic fees and utility charges
almost in half. This increased subsidy was targeted to lower-
and middle-income Saudis but had the net effect of raising domestic
disposable income. As a result, it was seen by some people as
a serious attempt by the monarchy to head off growing domestic
demands for political participation.
Data as of December 1992
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