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Something will turn up.

SAUDI ECONOMIC policy makers are caught between the advocates of government-led expansion and the sceptics who warn that the resultant succession of budget deficits is something the country can only afford for so long. At the heart of the veiled debate is the issue of how quickly the government can disengage from actively directing the course of the economy.

Both sides agree that the future must lie with private sector initiative. But the interventionists are worried that there is still a long way to go before the kingdom can boast of a self-sustaining free enterprise system, while the more enthusiastic free marketeers are concerned about the country's persistent and growing debt problem.

The 1993 budget demonstrated that the government is still wedded to the idea that deliberate stimulation of the economy is a priority. Increased government spending -- up 8.8% from last year's SR181bn ($48.3bn) to SR197bn ($52.5bn) -- is intended to maintain general confidence, keep the stock market buoyant and create demand for private sector services and contractors. The expansionists regard the problem of forecasting revenues (largely dependent on the state of the world oil markets) and the inevitable recurring deficits as an unavoidable price to be paid.

The cost is certainly mounting. This year's budget deficit is projected at SR28bn ($7.5bn), only slightly below the $R30bn ($8bn) forecast for 1992. Saudi Arabia has now been running budget deficits consistently since the early 1980s. Until 1988, these were financed by drawing down on foreign reserves accumulated during the boom years of the 1970s. Alarmed by the rate at which reserves were declining, the government has since then resorted to borrowing on the domestic market (chiefly from local banks) at a rate of SR25-30bn a year by issuing Treasury bonds and bills.

This has started to worry fiscal purists in the kingdom, the IMF (fairly discreetly) and some foreign creditors (rather less discreetly). They argue that the budget stimulus is becoming increasingly unnecessary. Expansion programmes undertaken by the Saudi Basic Industries Corporation (Sabic) and Aramco are adequate to inject funds into the economy, supplemented by the re-lending programmes of the Saudi Industrial Development Fund (SIDF) and the Real Estate Development Fund (REDF). The government does not have to boost demand even further, they say, and by doing so is creating a borrowing problem to bridge deficits which are simply not needed.

Not surprisingly, it is Saudi banks which are the most nervous. Between 1990 and the end of 1991, domestic bank claims on the government and the public sector have leapt from SR19bn to SR41bn. The larger part of this is in the form of government securities. While the banks will more or less grudgingly go on buying treasury issues to finance the budget deficit, they are worried at the amount of public debt they are accumulating for their own account. In their eyes, the government will have to show some acknowledgement of the need for fiscal prudence.

But how can the budget be brought back into balance? Tighter control on project-related spending is the most obvious answer, provided the government can be persuaded that growth will be maintained without it. Less easy will be a cutback in social welfare programmes and extensive subsidisation of services. With a rapidly growing and increasingly youthful population, the government will find it difficult to contain expenditure on health and education, while the announcement of extra subsidies on basic goods and services last year implies that it is unwilling to move towards charging market prices for electricity, fuel and telephone costs.

As a result, everything is left to a hoped-for upturn in oil revenues. Following the example of Dickens' eternally optimistic debtor, Mr Micawber, this has been dubbed the "something will turn up" attitude. Maybe it will. The kingdom obstinately insists on maintaining oil output at over 8m b/d. If oil prices grow only slowly over the next few years, the budget deficit may start to shrink.

Just as important, so should the chronic current account shortfall which has persisted for the last ten years. Costs incurred through the Gulf war plunged the current account nearly $26bn into the red in 1991. Those bills have now been paid and a steady improvement is now expected. One important factor will be the level of cash payments for imported weapons, which shows no signs of abating. Outlays to the United States totalled $2.5bn in 1992 and are projected to exceed $3bn this year and $4bn next year.

Nonetheless, most forecasts look on the optimistic side. The narrowing of the current account deficit will mean that net foreign reserves should be stable into the late 1990s. However, it will all come down to oil revenues over which the kingdom has scant control. The problem with the Micawber approach is that reliance on expectations from oil flies in the face of the government's stated policy of diversifying away from oil dependency.
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Title Annotation:Business & Finance; Saudi Arabia's economic policy
Publication:The Middle East
Date:Jul 1, 1993
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