Saudi Arabia, a golden opportunity

By just about any stretch of the imagination, the figures involved are massive. Rocketing oil prices and production lifted way over the OPEC quota have combined to give Saudi Arabia,
the world's dominant oil exporter, a colossal and unexpected revenue windfall.

The big question is: How can the money be best spent to help the country overcome some of the problems that have mounted up over recent years? Out of the window has gone the projected deficit of $8 billion for the kingdom's 2004 budget. a conservative prediction that was based on an oil price that would be less than half of the current level.

Saudi Arabia posted a budget surplus of $12 billion in 2003 on the back of oil revenues of some $86 billion, and independent forecasts suggest that revenues are likely to go even higher this year.

Samba Financial Group (formerly the Saudi American Bank) recently forecast total oil export revenues for 2004 at $100 billion, based on an average oil price of $31.50 per barrel and average production of 8.7 million barrels a day, and revised up its forecast for the budget surplus to $29.9 billion.

But both the price of oil and the level of Saudi production have increased significantly since those assessments were made. More recent projections have put the budget surplus as high as $34.9 billion.

In past eras of surging oil prices one might have seen the Gulf states splashing out on lavish prestige projects. But not these days. Saudi Arabia's Finance Minister Ibrahim al-Assaf said recently that the expected budget surplus in 2004 would be used to pay off some of the country's debt, which is estimated at 660 billion riyals ($176 billion).

The minister added that the surplus would not be used primarily to fund extra development projects, which would benefit indirectly from repaying the public debt. There are still four months to go before the budget is completed. We should keep in mind uncertainty in oil prices, Assaf pointed out in early September.

While the government is very concerned about placing funds in the right areas, it is also keen to develop projects whenever the opportunity is available. Directing the surplus amount towards offsetting the public debt will certainly have a positive impact on development projects. Any reduction in the loan will provide more flexibility to spend on these projects.

That said, the priority in the kingdom is now clearly debt reduction Ð and job creation. According to Capital Intelligence, 75 percent of Saudi Arabia's debt is held by other government institutions, such as pension funds that are expected to generate structural surpluses for the foreseeable future, meaning that sovereign creditworthiness is likely to remain stable over the medium term, even if the government were to post small budget deficits.

Nevertheless, Capital Intelligence says, the kingdom's ratings are constrained by a weak budget structure (including overdependence on oil) and the longer-term demographic challenges associated with a young and rapidly growing population. The kernel of Saudi Arabia's longer-term economic and social problems is contained in that last statement - an environment of increasing demographic pressures and moderate economic growth, as consultants PFC Energy described it in a recent report on the kingdom.

Unemployment among young people is now recognized by the Saudi government as one of the major difficulties that it will have to tackle in the years ahead. An indicator of this was the cabinet reshuffle last April that saw Water and Electricity Minister Ghazi al-Qusaibi (a former Saudi ambassador to Britain) being appointed the country's first minister of labor.

Previously, labor and social affairs had been handled jointly by one minister. The creation of a labor ministry is a reflection of the concern of the Saudi authorities over rising unemployment and the urgent need to create new jobs for nationals.

The separation of the labor and social affairs portfolios amounts to a recognition of the shortcomings of the previous joint ministry, which was hamstrung by bureaucratic procedures and a reluctance to introduce reform and up-to-date measures for the benefit of the population at large.

Qusaibi, who has been prominent in public life since 1975, has developed a reputation as a government troubleshooter, ready to confront problems in public institutions Ð and this is clearly the logic behind his appointment to the ministry of labor.

The kingdom has long talked of the necessity of moving more nationals into the workforce, and this time around everyone appears to be taking the push seriously. Consider an August headline in the Times of India: Saudization to hit Indians.

In the story, the author warned that Indians, Pakistanis and other job-seekers may find fewer opportunities in Saudi Arabia as the kingdom's government is drawing on a multibillion-dollar windfall to place hundreds of thousands of its young nationals in jobs traditionally held by foreigners.

Exactly how many people in Saudi Arabia are out of work is a matter of debate. According to Qusaibi, the official figure is 9.6 percent. Samba says the figure for Saudi males is 11.9 percent.

Whatever the true assessment, beyond dispute is the fact that the number of young Saudis coming onto the job market and failing to find employment is increasing every year.

To cope with this issue, it could be argued that some of the budget surplus at this time of exceptionally high oil revenue levels should be plowed into labor-intensive industrial projects, into the creation of colleges that are geared to the workplace rather than to the pursuit of abstract academic subjects, and into a campaign to encourage Saudis to take over the hundreds of thousandsof jobs that are being carried out by foreigners.

Once again, figures speak volumes. Fewer than 15 percent of the jobs in the Saudi private sector are held by citizens of the kingdom. Remittances from the estimated 8-9 million foreign workers in Saudi Arabia amount to a staggering $20 billion a year. Some important steps are already being taken to remedy matters.

For example, the state oil company, Saudi Aramco, in September announced a new initiative to partner with vocational and industrial colleges and private-sector institutes to help create jobs for Saudis. The aim is to align the skills of graduates with the needs of the company and its contractors so that future members of the workforce will have the qualifications to be directly hired.

Much more could be done by the government in the form of financial incentives to encourage public- and private-sector employers to hire from the indigenous workforce.

Meanwhile, evidence on the ground Ð in hotels, shopping centers and retail outlets Ð makes plain that young Saudis are increasingly accepting jobs previously held by foreigners. They are doing this, at least in part, because the government is subsidizing their salaries to make working that much more attractive. Back to school.

Recently, Crown Prince Abdallah announced plans for a series of national forums exploring youth aspirations, and government officials insist that a large portion of the current budget surplus will be allocated to the Human Resource Development Fund, which subsidizes the salaries of up to 30,000 Saudis annually.

At the same time, the government has announced plans to build 59 new technical and vocational-training institutes this year, with the aim of doubling the number of graduates in fields like computer programming, cosmetology and plumbing. A period of high oil prices is certainly an ideal time to introduce such incentives.

But switching on the financial tap in this way will not necessarily be easy because of what Capital Intelligence has called significant expenditure rigidities, by which it means expenditure on politically sensitive and mandatory items such as wages, security/defense and interest payments accounting for the bulk of total spending.

Cutting the debt will help to eliminate interest payments. And focusing on the education and training national will have a payoff of another kind in the longer term.