Tax is dropped from Saudi economic agenda

News that the Saudi Arabian Shura Council has voted strongly against the introduction of income and corporation tax in the kingdom will be music to the ears of residents. This part of the economic agenda laid out by the IMF last October proved just too much to stomach for the region's biggest economy.

But 2003 has got off to a good start with the successful privatization of Saudi Telecoms with a heavy oversubscription and $4 billion raked in to pay down state debts. And proof that privatization will be more than a balance sheet entry came this week with reports that Internet access may soon become free in the kingdom.

Saudi Arabia badly needs economic reform to free up its arthritic economy and create new jobs for a rapidly growing, youthful population. However, reforms have been bungled in the past, such as the 1985 move to introduce taxation on expatriates which had to be reversed after a wave of resignations by key staff. And this appears to be why the Shura Council axed the tax plan this week.

The IMF's report last October said that the kingdom needed to expand non-oil revenues, impose taxes and cut spending to restore its budget equilibrium. For in only one of the past 20 years has Saudi achieved a budget surplus, and the cumulative budget deficit since 1990 is $115.7 billion.

In any industrialized economy the size of Saudi Arabia the levying of tax would hardly be controversial, though there is no sign yet of the sales tax suggested by the IMF.

The other side of economic modernization is the opening up of the Saudi economy to foreign direct investment. Over the past two years the Saudi Arabian General Investment Authority has done sterling work, attracting $11 billion in commitments but has stalled since September 11 for obvious reasons.

However, the next big hope of the economic modernizers is the $25 billion Saudi Gas Initiative. Economists do not expect much progress in negotiations this side of a war in Iraq. But once the post-Saddam situation is clear, things could move quite fast.

Energy is the one economic sector where Saudi Arabia has a clear competitive advantage, with some of the lowest production costs in the world, and it makes good economic sense to develop these assets fully. The expertise and investment capital of eight of the world's biggest energy companies is the best way to exploit this potential, although some factions still believe Saudi Aramco should do the whole job.

Yet the omens are good for 2003 with foreign investment and privatization high on the agenda. Success with the SGI would really put the Saudi economy on a growth track.