Overview: In terms of revenues and trade surpluses, Saudi Arabia has a robust economy, but it remains largely dependent on the production and export of oil. Saudi Arabia produces more oil and natural gas liquids than any other country in the world, more than 9 million barrels per day. The production of oil is conducted almost exclusively through the massive Saudi Arabian Oil Company (Saudi Aramco), which became a fully nationalized entity in 1988 by royal decree. The challenge for Saudi Arabia, even as the price per barrel and the demand for oil remain comparatively high, is to diversify both the oil industry and the nation’s economy as a whole.
The Saudi government, largely encapsulated by the Al Saud family, exerts strong influence over the economy. Attempts in the past decade to encourage private investment, from both foreign and domestic sources, have been hampered by the many vested interests of the royal family. Government revenues have been strong, but analysts note a long-term decline in national living standards. Compared to some other oil-dominant economies, such as the United Arab Emirates and Kuwait, Saudi Arabia has a relatively low per capita gross domestic product (GDP). Additionally, rising unemployment has created some instability among the country’s young, male population. Thus, the challenge for Saudi Arabia continues to be converting oil-based revenues into a vibrant, diversified economy.
Using five-year development plans, the Saudi government since the 1970s has sought to make its economy less susceptible to fluctuations in oil prices. Currently at the close of the seventh such five year plan (2000–2004), the Saudi government has goals of achieving modest, but consistent growth of GDP, increasing the role of private companies in the economy, and creating significant numbers of new jobs for Saudi citizens. The Supreme Economic Council, created by King Fahd in 1999, heads the effort to direct reforms in the economy.
Gross Domestic Product (GDP): Experts estimated Saudi Arabia’s gross domestic product (GDP) to be US$188.5 billion in 2002. With estimated real GDP growth rates of 7.2 percent and 3.3 percent for 2003 and 2004, Saudi Arabia’s GDP for 2003 and 2004 was projected to reach US$202.1 billion and US$208.8 billion, respectively. Even with stable oil prices and a weak U.S. dollar, forecasters predict a GDP growth rate of 2.3 percent in 2005. Estimates for Saudi Arabia’s 2005 GDP range from US$210 billion to US$296 billion. Per capita GDP was estimated at US $10,275 in 2002. Estimates for 2003, 2004, and 2005 are US$10,720, US$11,110, and US$11,530, respectively.
GOVERNMENT Budget: Since 2002, when oil revenues began to increase dramatically, Saudi Arabia has produced budgetary surpluses. Before that time, high defense spending and government subsidies, coupled with low oil production rates and prices, generally yielded significant budgetary deficits. Government revenues are tied closely to oil production and prices because the government controls the oil industry through the Saudi Arabian Oil Company. Oil prices increased in 2004 by 23 percent over the previous year. Coupled with a 3 percent increase in production, high oil prices led to high revenues in 2004—up nearly 6 percent to US$83.2 billion. Although expenditures also are expected to rise by about 15 percent to US$76.9 billion in 2004, the projected surplus of more than US$6 billion would be the largest in 20 years—nearly 7 percent of the gross domestic product (GDP). Saudi Arabia’s public debt has decreased proportionately to the size of the GDP in recent years, from 107 percent of GDP in 2003 to an expected 91.5 percent in 2004.
Because of the significance of oil revenue, Saudi Arabia has only minimal income taxes. There is, however, a 9 percent payroll tax to fund social insurance programs. Saudi businesses and individuals are also responsible to the Ministry of Finance for the zakat (almsgiving), the Islamic tithe of 2.5 percent of one’s net worth. Non-Saudi individuals and businesses are taxed up to 20 percent, except in the hydrocarbon sector, where they can be taxed at rates up to 85 percent. Joint ventures between Saudis and non-Saudis are taxed at varying rates. Saudi Arabia does not have the equivalent of a capital gains or value-added tax.
Inflation: Saudi Arabia controls internal inflation through a series of price subsidies. Externally, however, the weak U.S. dollar continues to drive up the cost of imported goods. Nevertheless, inflation remains very low in the kingdom. Estimates put the consumer price inflation rate at 0.6 percent, 0.4 percent, and 0.3 percent for 2003, 2004, and 2005, respectively.
Agriculture, Forestry, and Fishing: Agriculture employs about 6 percent of Saudi Arabia’s working citizens. The agriculture sector made up an estimated 5.1 percent of the GDP in 2002. Water scarcity determines what crops can be grown, and generally limits production. The principal crop in recent years has been wheat. In 2002 Saudi farmers produced more than twice as much wheat as any other agricultural commodity. Other significant crops include dates, potatoes, tomatoes, watermelons, and sorghum. Saudi Arabia is self-sufficient in the production of most dairy products. Saudi agriculturalists annually produce a surplus of eggs and broiler chickens. Nearly 40 percent of land is still used for low-grade grazing of livestock, rather than for cultivation. Thus, even with the vast oil wealth that has come to Saudi Arabia, the nomadic, pastoral lifestyle persists.
Forests cover 4.5 million hectares in Saudi Arabia. This area is not large enough to sustain a forestry industry. Rather, the government has taken measures in recent years to conserve existing forests. It set up nurseries to cultivate seedlings and produce fertilizers and planted tree barriers along the edges of selected forests in order to guard against creeping sanding and desertification. The fishing industry, through capture and aquaculture, produces an annual catch of nearly 50,000 tons of fish.
Mining and Minerals: The quest to extract minerals from Saudi soil is focused, as would be expected, on petroleum and natural gas. Saudi Arabia has proven oil reserves of more than 250 billion barrels, which will allow continued production at present rates for nearly 90 years. In order to control prices and guard against glutting the world market, Saudi Arabia adheres to the quotas set by the Organization of the Petroleum Exporting Countries (OPEC), of which it is a member. It is estimated that Saudi oil production could be upped by nearly one million barrels per day, if not for the quota. In addition to oil, Saudi Arabia has large deposits of metallic and non-metallic minerals, including nearly 4 percent of the world’s natural gas reserves. In 2002 construction was completed on the world’s largest natural gas plant, located in Hawiya. Saudi officials hope that the plant will increase production by up to 30 percent. Iron ore, gold, and copper also are major mining industries. On a smaller scale, the extraction of limestone, gypsum, marble, and clay augment the mining industry’s annual output.
The contribution of the mining sector to the economy has increased by an average of 1.4 percent annually from 1990–2002. The sector accounted for nearly 33 percent of the gross domestic product (GDP) in 2002, but it employed only 1.5 percent of the working population. As the world’s largest producer of petroleum, the Saudi Aramco Company dominates the mining industry. Its size and influence cannot be overstated. As a governmentally controlled entity, Saudi Aramco plays a significant role in the country’s economic planning and performance.
Industry and Manufacturing: Manufacturing in 2002 provided employment to 8.1 percent of the Saudi workforce and contributed 10.2 percent of gross domestic product (GDP). Experts project an industrial production growth rate of 7.7 percent for 2004. Most manufacturing jobs are tied in some manner to the minerals sector. Refining petroleum continues to be the most important activity. Additionally, the manufacturing of cement, fertilizer, and steel contribute significantly to the country’s economy.
Energy: Most of the country’s electric energy comes from thermal power stations, which use the country’s petroleum resources. Additionally, electricity produced through the desalinization of seawater has become increasingly important in the past decade. Saudi Arabia produced 122.4 billion kWh of electricity and consumed 113.8 billion kWh in 2001. Like many countries, Saudi Arabia will be forced to expand its electricity production in the coming years in order to meet increasing demand.
In the 1970s, the government pushed for consolidation in the energy sector, and small, private companies were merged to create the Saudi Consolidated Electricity Companies (SCECOs). In 1998 the Saudi government consolidated the producers of electricity even further, creating a public company, the Saudi Electric Company, with shares for purchase on the stock market. This move completed the dismantling of all small and independent electric companies in existence at the time. In order to expand the energy grid to include all regions of the country (currently 20 percent of Saudis are not served by the national grid) and to meet future needs, the Saudi government is encouraging private investment. In July 2002, the Supreme Economic Council created a system that would allow the private sector to invest in independent water and power projects. The recently completed Ghazlan II power project was the first in Saudi history to receive a significant portion of its funding from an international commercial loan. The US$500 million loan contributed to the overall US$1.7 billion total cost of the project.
Services: The services sector produced 44.1 percent of the gross domestic product (GDP) in 2002 and employed 73 percent of the workforce. According to a 2002 sampling of the services sector, 16 percent of Saudis worked in retail, 12 percent in education, 10 percent in domestic service, and 9 percent in construction.
Banking and Finance: The Saudi government closely regulates and administers the country’s banking sector, which includes 10 commercial banks. Saudi investors wholly own three of these banks, one of which is run based on Islamic principles that forbid the payment of interest. Saudis and foreigners own the seven other banks in the country jointly. Since 1982, no foreign banks have been allowed to operate in Saudi Arabia. Some experts believe that the existing banks are inadequate to meet the needs of the economy but that the government is unlikely to permit the opening of any new banks.
In addition to commercial banks, which meet general banking needs, four specialized credit institutions are designed to meet private and corporate financing needs. The Real Estate Development fund, established in 1974, provides loans for real estate purchases by private citizens. Saudi businessmen are encouraged to use the Saudi Industrial Development Fund to obtain financing for industrial projects and building. In most instances, businessmen must raise 50 percent of the capital necessary for a project before obtaining financing. The Saudi Arabian Agricultural Bank, which was founded in 1964, targets the employers and employees of the agricultural sector, providing loans to purchase equipment and other necessary items or to cover miscellaneous expenses. The Saudi Credit Bank, established in 1971, makes personal loans to low-income Saudi citizens for marriage expenses, vocational training, and building projects.
The Saudi stock market, known as the Tadawul, is the largest stock market in the Arab world, with a total market capitalization of approximately US$157 billion. Established in 1990 by the Saudi Arabian Monetary Agency, the stock market is now partially open to foreign investors, but the percentage of shares traded versus total market value has been estimated at only 5 percent, a low percentage by international standards. Because of this low public investment, most Saudi companies are forced to look either to wealthy individuals or the government for capital investment.
Tourism: In order to increase tourism, which would help diversify the country’s economy, the Tourism Higher Authority has embarked on an aggressive expansion of tourist facilities. The task of growing the tourism sector, like most economic developments in Saudi Arabia, has been driven by government mandates, with the desire that private investors eventually join in. Prince Sultan ibn Salman ibn Abd al Aziz, Secretary General of the Tourism Higher Authority, has pledged to cooperate with both public and private sectors in order to rapidly expand the tourist industry. He optimistically predicted that Saudi Arabia would host 45 million tourists annually by 2020. An estimated 4.8 million tourists came to Saudi Arabia in 1999, generating receipts of more than US$1.4 billion. The World Tourism Organization estimates that 7.5 million tourists visited Saudi Arabia in 2002.
The hajj, or pilgrimage, is the bedrock of Saudi tourism. In 2004 nearly 2 million pilgrims came to Saudi Arabia to make the hajj. Additionally, nearly 500,000 Saudis take part in hajj activities each year. Currently, expansion projects are underway in order to increase the number of pilgrims that can be accommodated each year. Outside of the hajj period, visitors performing the omra, or minor pilgrimage, visit Mecca and Medina. Until recently, these pilgrims were restricted to the primary religious cities. However, in 2000 the Saudi government approved tourist visas that would allow further travel in the kingdom, and travel companies are now allowed to conduct group tours, although restrictions on who can enter the country remain in effect.
Labor: Labor is a significant problem in Saudi Arabia. The unemployment rate has risen to nearly 25 percent (estimates vary from 14 percent by the Saudi government to 25 percent by the U.S. government), and the economy remains dependent on the skills and expertise provided by the 5 million foreign nationals residing in the country. Current estimates place the workforce in Saudi Arabia at 6.4 million, with foreign workers constituting nearly two-thirds of that total. Resolution No. 50, passed in 1995, required that any company with more than 20 employees employ Saudis for at least 5 percent of its workforce. This bar was raised to 10 percent in 1999. Additionally, the Saudi government mandated in 2001 that no government contract would go to companies not complying with Saudiization, and that foreign workers applying to change jobs would be charged a fee.
Saudi Arabia does not have a minimum wage, but most workers earn a wage adequate to meet their family’s basic needs. Overtime must be paid for those hours worked above the federally mandated 48-hour workweek. The government prohibits the formation of labor unions and collective bargaining, although it has begun to allow the establishment in larger companies of “labor committees,” whose members must be approved by the Ministry of Labor and Social Affairs.
Reports of workers being maltreated in Saudi Arabia are cited. Charges include forced labor, martial punishment of laborers, and using trafficking victims to meet labor needs. Foreign workers are particularly vulnerable to exploitation because contracts generally favor employers, and reporting a grievance to the labor courts often takes a period of months. The government offers arbitration services between workers and employers in cases were there are alleged instances of abuse.
Foreign Economic Relations: Saudi Arabia is one of the world’s major exporters and importers. Because of its massive oil revenues, Saudi Arabia regularly enjoys a significant trade surplus. Its major trade partners are Japan, the United States, and the European Union. Saudi Arabia maintains memberships in most of the region’s economic organizations, including the Cooperation Council for the Arab States of the Gulf, Islamic Development Bank, Organization of Arab Petroleum Exporting Countries, and Organization of the Petroleum Exporting Countries. Additionally, Saudi Arabia is seeking membership in the World Trade Organization (WTO).
Saudi Arabia maintains a close economic relationship with the United States and other oil-consuming nations. The United States, followed by Japan, South Korea, and China, receives the majority of Saudi exports. In 2002 the United States was both the leading market for Saudi Arabian exports and the leading supplier of Saudi imports. In addition to trade connections, the Saudi Arabian Monetary Agency pegs the Saudi Arabia riyal to the U.S. dollar. When U.S. officials adjust monetary or fiscal policy, Saudi leaders typically follow suit.
The economic climate for foreign investments and imports is improving. It is expected that Saudi Arabia will lower its 20 percent tax rate on foreign companies, except in the energy sector. Additionally, in 2003 the tariff on most imports coming into the kingdom was reduced from 12 percent to 5 percent. Acceptance into the WTO, a priority of the Saudi government for 2005, will bring further codification of free-market laws, including those addressing corporate tax rates, labor policies, and insurance. The result of such changes likely will be an increase in foreign trade and foreign investment in Saudi Arabia.
Imports: Increasing demands for consumer goods in Saudi Arabia have driven up overall imports in the kingdom, a trend that is expected to continue for the foreseeable future. The total value of imported goods in 2005 is expected to increase from the estimated total of US$36.2 billion in 2004. The largest categories of imported goods are machinery and vehicles, which make up more than 50 percent of all imports, as well as appliances, electrical equipment, sound and television apparatus, aircraft, and cars. The United States continues to be Saudi Arabia’s leading source of imports. Imports from the United States include military equipment, machinery, foodstuffs, and transport equipment. European countries, including Germany, France, and Britain, are other leading suppliers.
Exports: Nearly 90 percent of Saudi exports are related to oil. In addition to oil, petrochemicals, plastics, construction materials (cement especially), and agricultural products make up the remainder of Saudi exports. Merchandise exports (composed mainly of oil and petroleum products) totaled an estimated US$104.3 billion in 2004. The value of exports is expected to increase in 2005, as increased production likely will offset any reduction in the price of oil. In 2003 more than 20 percent of Saudi exports went to the United States, making it the kingdom’s leading market. Other primary destinations include Japan, France, South Korea, Singapore, the United Kingdom, the Netherlands, Germany, India, Taiwan, and Italy.
Trade Balance: Saudi Arabia annually produces a significant trade surplus. Even in the wake of the 1973 oil shock, revenues from exports exceeded the cost of imports. Estimates for the 2004 trade surplus ranged from US$68 billion to US$75.7 billion. This result stems largely from increased oil revenues.
Balance of Payments: Saudi Arabia’s significant trade surplus in goods is offset by deficits in the exchange of services and investment. In contrast to the goods sector, Saudi Arabia annually experiences a trade deficit in the services sector. On average, Saudi Arabia spends about four times as much on importing foreign services as it receives from foreign entities desiring Saudi services.According to the Saudi Arabian Monetary Agency (SAMA), the current account registered a record surplus of US$51.5 billion in 2004.
External Debt: In 2004 Saudi Arabia’s external debt was estimated to be US$39.2 billion, or approximately 14 percent of gross domestic product. Saudi Arabia maintains about US$23 billion in reserves of foreign exchange and gold.
Foreign Investment: The Saudi government hopes to increase foreign investment in the kingdom. Since 2000, the inflow of foreign direct investment, which totaled about US$300 million in 2004, has been less than the outflow of Saudi investment, but a net surplus of foreign direct investment is considered possible for 2004. In 2000 Saudi Arabia established the Saudi Arabia General Investment Authority and made a significant step toward garnering more foreign investment when it ruled that foreign companies would no longer be required to have a Saudi partner or sponsor. However, foreign investors have been hesitant to participate in Saudi ventures because of the long tradition of government interference in the marketplace, bureaucratic nuisances, and concerns about instability and terrorism. Moreover, the government continues to ban foreign investment in certain sectors, such as health and pilgrimage services, that have religious significance.
Restrictions on the Saudi stock exchange have reinforced the government’s prominent role in economic development and discouraged foreign investors. The stock market has been opened only intermittently to the Saudi public and to foreign investors. Citizens of nations belonging to the Gulf Cooperation Council were allowed to purchase shares from the Saudi stock market in 1994, 1997, and 1999. Even in these years, however, shares were only available through a closed-end mutual fund. The Saudi stock exchange is now partially open to foreign investors, but trading remains limited.
With the collapse of the Saudi government’s National Gas Initiative, which sought to free up crude oil for export by locating new gas supplies to meet domestic needs, a distinct opportunity has emerged for foreign investors in the gas sector. International oil companies, including the U.S. firm Chevron Texaco, have been allowed to pursue a number of “upstream” gas development sites. Additionally, the Saudi government has recently opened the insurance, education, pipeline services, and mobile telephone sectors to foreign investment. The government has tried, with limited success, to force its largest foreign investors to disperse their money more widely in the Saudi economy. The Saudi offset program mandates that companies with large military and, in some cases, commercial contracts invest a portion of their profits in Saudi industries.
Foreign Aid: Saudi Arabia gives aid to less affluent nations, primarily Arab and other Muslim states. In 1974 a royal decree established the Saudi Fund for Development (SFD), which provides grants and loans to developing countries. Specifically, the SFD supports the export of non-crude-oil commodities by providing the financing to get such operations underway. According to the Saudi government, 68 different nations have been party to 369 SFD loan agreements.
Currency and Exchange Rate: Saudi Arabia’s currency is the riyal (SAR), which is valued at SAR3.75 per US$1.
Fiscal Year: Saudi Arabia’s fiscal year coincides with the calendar year.