Saudi Arabia to grow by 3.8 per cent

The Saudi Arabian economy performed well in 2002 with 1% growth in real terms, and is set for 3.8 per cent growth this year, according to the latest bulletin from Saudi American Bank chief economist Brad Bourland whose commentaries are well respected around the world.

'We expect the strong liquidity conditions to continue,' he says. 'Oil prices are poised to stay firm well into 2003 and interest rates, which closely parallel rates in the US, are likely to remain low.

'We believe Saudi oil production will rise to 8 million barrels per day in 2003, roughly where it ended 2002. Thus we forecast 5% real growth in the oil sector in 2003, 4% growth in the private sector and 1% growth for the government'.

However, Mr. Bourland is critical of the familiar good-news/bad news story of the Saudi economy, with high oil prices and low interest rates being the present situation.

'The bad news aspects of the story are two-fold. First, Saudi Arabia has limited control over both global oil prices and domestic interest rates (since the currency is pegged to the dollar). And second, the periods of strong liquidity conditions have tended to last two to three years while periods of low liquidity and sub par GDP growth have lasted many years'.

He points out that not enough has been done to date to create a private sector engine of growth that is independent of oil. This means that if oil prices fall and interest rates rise then the kingdom will see GDP growth rates drop below organically sustainable rates.

'The past three years have been the best for oil revenues of the past 20 years,' notes the bulletin. 'Of concern to us, the government did not use this period to reduce its debt or significantly grow central bank foreign reserves.

'Thus the government enters the next downturn, should it occur soon, with less of a financial cushion than in the past. Government debt has grown to $173 billion or 94 per cent of 2002 GDP. The Central Bank's foreign assets declined in 2002 through November by $7.1 billion to $41.2 billion, near the lowest point in a decade.

The report also highlights lack of progress in discussions to join the WTO, and the stalled $25 billion Saudi Gas Initiative project. However, stock market reform, the GCC customs union and the successful privatization of Saudi Telecom show that the situation is far from hopeless.

On the other hand, the fear long expressed in some quarters that a high oil price would be used as an excuse to delay economic reform, and not to speed it up, does seem to have come true.

Saudi Arabia desperately needs to open its economy to foreign investment and economic reform if it is to accommodate the hopes and aspirations of an expanding population. To remain stuck in the sort of autarkic, state-dominated economic system that impoverished Eastern Europe for four decades is surely not a wise solution for anyone.

Yet if Mr. Bourland is right that window of opportunity may close again before long and the kingdom will struggle to maintain its national income in the face of falling oil prices and greater non-Opec oil supplies.

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