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As if there was no tomorrow.

SHARE PRICES ON THE SAUDI stock market jumped on the announcement of this year's government spending plans at the beginning of January. The business community was evidently encouraged by a growth budget which forecasts spending almost 9% higher than the planned figure for last year. Whatever worries may be felt abroad about the kingdom's chronic budget deficits, the government evidently has no intention of embarking on a deflationary strategy. The Finance Ministry says growth was 5% last year; it is likely to be the same or higher in 1993.

The kingdom has some reason to be pleased with itself. Saudi budgets tend to be rather fuzzy affairs, but it looks as if 1992 worked out roughly as planned. Spending may have exceeded expectations, while cuts in items such as utility charges and petrol prices during the year will have reduced revenues. But the gap was probably made up from greater than projected oil income, itself due to the high level of crude production during the year. All in all, the budget deficit will have come in around the planned SR30bn ($8bn) level.

This year's figures predict a similar result. The increase in spending is set against an expected 6% rise in revenues (of which over two-thirds is reckoned to come from oil export earnings). At SR27.8bn, the deficit will be slightly below last year's shortfall. The hoped-for SR169bn in revenues can probably be attained even if oil prices sag in 1993 as they are likely to do.

If they were to fall drastically, as some analysts fear, Saudi Arabia has shown itself prepared in the past to boost production. Current output is around 8.4m b/d and no-one doubts that the kingdom can produce more than that (though how much more is a matter of debate). In fact, Saudi oil policy has never been determined by budgetary considerations. If the government finds itself suffering from spending constraints as the year progresses, it will simply resort to payments delays and (possibly) the occasional, discreet loan on the international capital markets.

There should be enough room, therefore, to accommodate the big spending items in the budget which indicate where the government's priorities lie, Significantly, defence outlays are up 14% over last year, taking 31% of total expenditure. Expect a lot of new orders for military hardware in 1993. Subsidies show the biggest increase, up by nearly a third on 1992, testifying to the government's concern about mollifying the public by keeping up living standards.

Once again, the deficit will be financed by the sale of Treasury bonds and bills as in the past few years. This should not present any problems. Most of the local banks have raised their capital and can easily meet the government's borrowing requirements. At present, Treasury issues offer the best return for Saudi riyals.

So all is well with the kingdom's finances? Probably, at least for 1993. Another way of looking at the budget, however, is to ask not what it does so much as what it does not do.

Most important, it fails to address the issue of relentless annual deficits. While the banking community will meet the shortfall without hesitation, it is understood to be uneasy about the government's reluctance to make any concrete plans to achieve a balanced budget. The IMF has also expressed its concern, although it has reportedly been told that eliminating the deficit is the government's goal.

It is hard to see how this can be accomplished on the revenue side. Deriving income from any form of taxation is simply unthinkable; the increase in subsidies last year indicates that the government is moving in precisely the opposite direction to making demands on the public. Nor is a large boost to oil revenues feasible. Prices may rise slowly over the next decade, but any attempt by the kingdom to boost revenues by exploiting its favourable position as one of the world's few producers with spare production capacity would be likely to prove counter-effective.

Cutting expenditure is just as problematic. A sensible observer might advise reducing the huge expenditure on armaments, for example. The kingdom may have a voracious appetite for weapons, but it certainly cannot digest all the material it buys. As the Kuwait crisis demonstrated, furthermore, when the kingdom's security is called into question, it promptly turns to the United States. But the Saudi armed forces are a symbol of national pride and not likely to be asked to go short.

Meanwhile, spending on education, health and social welfare (taking up a quarter of this year's budget) will climb inexorably in coming years to meet the demands of a population growing by over 3% per annum. As more children are born and more young people need (free) education and training, the government will be unable to keep a lid on expenditure requirements.

For the time being, Saudi Arabia can carry on as it is. There is enough liquidity to finance deficits from personal savings, even if deficits continue to run at 5% of gross domestic product. But ultimately this will take its toll on lending to the private sector. At the same time, an ever-larger proportion of government resources will have to be devoted to servicing growing official debt.

It will be far from easy to break out of the self-perpetuating circle. Uncomfortable choices will have to be made at some stage. The alarming things is that the government seems to display no interest in tackling the issue. Prevarication will only make the problem worse.
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Title Annotation:Saudi Arabia's economy
Publication:The Middle East
Date:Feb 1, 1993
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