Saudi Arabia in 2004

Saudi Arabia's economy has recorded moderate growth in the last couple of years. After posting a strong growth in 2000, the growth rate has slowed down in the last couple of years.

Between 2000 and 2002, Saudi Arabia's nominal GDP has remained largely unchanged, while the real GDP grew at a CAGR of 1.2%. Real GDP growth, which reached a peak of 4.9% in the year 2000, has subsequently declined to 1% in 2002.

But with the prices of crude oil remaining firm in the international markets and Saudi Arabia's oil production expected to be significantly higher than the previous year, GDP growth in the current year is expected to be much higher than in the previous year.

In 2004, crude oil production by Saudi Arabia is expected to decline as OPEC countries are expected to cut output to keep oil prices steady. This coupled with the expected softer oil prices should result in the country's GDP growth slowing down to 1.4% in 2004.

The contribution of the oil sector has declined from 40.9% in 2000 to 37.1% in 2002, which was largely on account of the decline in oil prices during the period.

The share of the non-oil sector in Saudi Arabia's GDP has increased to 40.5% in 2002, while the share of the government sector has increased marginally to 21.3% in 2002.

However, the share of the oil sector is larger than the numbers suggest, as a large part of the non-oil sector comprises of the petrochemicals industry, which is dependent on the oil industry.


The government sector too is dependent on the oil sector as the government derives most of its revenues from oil exports. The government also owns a majority stake in many large private sector companies. Thus the non-oil sector and the government sector are dependent on the oil sector to a large extent, which emphasizes the importance of oil for the Saudi economy.

The GDP of Saudi Arabia at current prices has remained relatively stagnant over the last three years. However, the oil sector has declined by 4.8% CAGR during the period, while the non-oil private sector has grown at 3.9% CAGR during the same period.

The industrial sector receives strong support from the government as a part of its policy to reduce dependence on oil revenues. In the last three years, the industrial sector received nearly US$7.5bn in investments.

This sector is expected to witness accelerated growth as the government has relaxed restrictions on foreign investments and private investors. The government is encouraging the establishment of small and medium scale industries.

Foreign investments in infrastructure areas such as the telecommunications, airlines, ports, power generation and water sectors are expected to increase substantially.

The government also plans to invite foreign investments for development of its gas reserves, agriculture and information technology. The government also plans to invest substantial amounts in petrochemical projects. On account of these measures, it is likely that the share of the industrial sector will increase over the next few years.

An analysis of the GDP by expenditures reveals that there was an increase in the capital expenditure (gross fixed capital formation), despite the marginal decline in GDP over the last three years. This is expected to benefit the economy of Saudi Arabia in the future.

The consumption levels of the government and private sector haves largely remained steady during the last three years. The levels of exports declined at a CAGR of 3.4%, while the level of imports declined at a CAGR of 3.9%.

The Saudi economy has witnessed price stability over the last several years. Despite the steady growth in money supply over the years, inflation in Saudi Arabia has been well under control and the consumer price inflation has been negative over the last five years.

Inflation (as measured by the consumer price index) in the last five years has been negative and has varied in the range of -1.6% to -0.4%. This has largely been due to the prudent management of the fiscal and monetary policies and the adequate availability of goods and services.

However, inflation is expected to pick up because of the weakening of the US dollar and other factors such as the reduction in domestic subsidies. The weakening of the US dollar could increase the local currency prices of imported goods. We expect the average annual consumer price inflation to be around 0.5% - 1% in the next two years.