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General Policies
Saudi Arabia generally sets a framework for 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, including Saudi ARAMCO (oil) and Saudi Basic Industries Corporation (SABIC), among others, tend to dominate the corporate economy. Spending decisions taken by the few large state 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. The Saudis also protect 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 1997, oil sector revenues comprised an estimated 42 percent of GDP, and an estimated 75 percent 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 a renewed deficit. These deficits have continued for the past 15 years. Initially, the deficits were financed by a drawdown 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 and 1997 with unanticipated oil revenues from these years. Spending in 1996 exceeded the budgeted target by $12 billion, but because of high oil revenues, the government achieved its deficit target of $4.5 billion. Oil revenues were higher than anticipated for 1997 as well, allowing the government to end the year with a small $1.6 billion deficit. However, the collapse in oil prices in late November 1997 brought this favorable fiscal trend to an end. Saudi oil revenues are expected to drop by one-third in 1998. The government's hopes of achieving a balanced budget by 2000 appear problematical. 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 as required. There is a limit to the amount of bonds that can be repurchased. SAMA oversees a financial sector consisting of 11 commercial banks. The Ministry of Finance oversees five specialized credit institutions. 2. Exchange Rate Policy The exchange rate for the Saudi Arabian Riyal is SR 3.75 = US$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 most transactions with Iraq; and, local banks are prohibited from inviting foreign banks to participate in riyal-denominated transactions without prior SAMA approval.
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