Saudi Arabian planners say that there is no export subsidy program for industrial projects. Because feed stock prices are relatively low in Saudi Arabia, industrial production in petroleum and related downstream products is comparatively attractive. The government argues that this is simply a reflection of the low cost of domestic oil production. In October 1997, the Minister of Petroleum and Mineral Resources announced a 50% across-the-board increase in natural gas prices from $.50/million btu to $.75/million btu. The government has reduced subsidies to agriculture, which has resulted in reduced agricultural production available for export.

1. General Policy Framework

Saudi Arabia prides itself on being a free market economy. Government policies tend to encourage commercial enterprise, but a strict interpretation of Islamic mores limits the range of policy options as well as that of commercial endeavors. Since about 1970, Saudi Arabia has published a series of five-year development plans, focusing on infrastructure and industrialization. Development plans, however, are presented as planning tools, not as centralized controls, and the government takes pains to exhort that its development plans rely on heavy private sector involvement. The oil and government sectors are the engines of the economy. Parastatal enterprises (e.g., Saudi Aramco, Saudi Basic Industries Corporation (SABIC), Saudi Arabian Airlines (SAUDIA)) tend to dominate the corporate economy, and spending decisions taken by these few large companies reverberate throughout the economy. Concerned with the security challenges posed by neighbors such as Iran and Iraq, Saudi Arabia seeks sufficient military and security resources to protect its territory and the pilgrims who visit the two Islamic holy cities of Mecca and Medina. These requirements have made the kingdom a large buyer of advanced military technology, as manpower resources are limited. In 1996, oil sector revenues comprised an estimated 40% of GDP, and an estimated 75% of budget revenues. Other government revenues, including items such as customs duties, investment income, and fees for services, are to a large degree indirectly tied to oil, as capital available for consumption and investment is generally derived from oil receipts. In addition, the manufacturing and services sectors are largely dependent on petroleum and petrochemical activities. Starting with the oil boom of the early 1970s, Saudi Arabia maintained annual budget surpluses until 1983, when the decline in oil prices led to the first budget deficit. These deficits have continued for the past 14 years. Initially, the deficits were financed by a draw down of foreign exchange reserves. Starting in 1987, the government began financing deficits by issuing government bonds, and taking loans from domestic banks. The government has also accrued substantial arrearages to the private sector over the past decade, though these were paid down substantially in 1996 with unanticipated oil revenues. After this run of budget deficits, Saudi Arabia experienced an increase in oil revenues in 1996. Spending in 1996 exceeded the budget by $12 billion, but because of high oil revenues, the government achieved its deficit target of 4.5 billion. Oil revenues appear higher than anticipated for 1997 as well.  

Money supply is regulated through the Saudi Arabian Monetary Agency (SAMA), which has statutory authority to set monetary reserve requirements for Saudi Arabian banks, impose limits on their total loan portfolio, and regulate the minimum ratio of domestic assets to their total assets. It also manages the bond market, and can repurchase development bonds and treasury bills on a modest scale to provide liquidity. SAMA oversees a financial sector consisting of eleven commercial banks. The Ministry of Finance oversees five specialized credit banking institutions.  

2. Exchange Rate Policy

The exchange rate for the Saudi Arabian riyal (sr) is sr 3.75 = $1.00. This rate has been consistent since 1986. Officially, the riyal is pegged to the IMF's special drawing rights (SDR) at sr 4.28255 = sdr 1. There are no taxes on the purchase or sale of foreign exchange. Generally speaking, there are few foreign exchange controls for either residents or nonresidents, in keeping with the government policy to encourage an open economy of the few restrictions, the most noteworthy are: Commercial transactions with Israel and Israeli-registered corporations are prohibited, as are transactions with Iraq; local banks are prohibited from inviting foreign banks to participate in riyal-dominated transactions without prior SAMA approval; gold is freely traded, held, and shipped, except that gold of 14 karats or less is prohibited.

3. Structural Policies

The government maintains price controls for basic utilities, energy, and many agricultural products. Water and electricity, for most consumers, are believed to be subsidized, with consumer prices often below the cost of production (especially for potable water). Petroleum products and feedstocks for petrochemical industries are provided at below world pricing, reflecting discounts for efficiencies in production and transport. The government maintains that local petroleum prices that are below world average (e.g., a gallon of gasoline sells for $.67 at the pump) reflect the low costs of production. Nonetheless, the effect of these low prices is that petroleum products, including many petrochemicals, are sold in Saudi Arabia at prices that effectively eliminate competing imports. Agricultural subsidies were dramatically curtailed in the early 1990's and have been reduced in the two most recent budgets, in line with the government's deficit reduction plans. The Saudi Arabian Government imposes few taxes, relying on oil revenues, customs duties, and licensing fees for most government revenue. Saudi Arabian nationals pay no income tax, but are obliged to pay "zakat," a 2.5% Islamic assessment based on wealth (not income). Zakat is designed to support the Islamic community (e.g., to pay for hospitals, schools, support for the indigent). Foreign companies and self-employed foreigners pay an income tax, but do not pay zakat. Business income tax rates range from 25% on profits of less than $26,667 to a maximum rate of 45% for profits of more than $266,667. Some foreign investors avoid taxation either in part or totally, by taking advantage of various investment incentives, such as 10-year tax holidays for investments in approved projects meeting specified requirements. Import tariffs range around 12% ad valorem (CIF), with the exception of products imported from other member states of the Gulf Cooperation Council, which pay no tariff. Certain specified essential commodities (e.g., defense purchases) are not subject to custom duties. Saudi Arabia also levies a maximum 20% tariff on products that compete with local "infant" industries.  

4. Debt Management Policies