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.