Saudi Arabia's new investment law has altered the manner in which business is conducted and should provide a boost to the Kingdom's bid to gain membership in the World Trade Organization. The legislation's primary goal is to allure increasing flows of international capital, yet analysts warn that several details remain ambiguous and predict that large foreign inflows will not arrive immediately.
In April, the Saudi cabinet approved a bill that grants foreign investors the right to 100 percent ownership of industrial projects and related property. Additionally, the bill promises to strengthen judicial protection for investments, foster greater public disclosure in financial dealings and lower corporate taxes (from 45 percent to 30 percent) on multinationals with profits exceeding $26,000.
Until now, international investors have had to contend with numerous legal and bureaucratic intricacies if desiring to conduct business in the Middle East's largest economy. For example, they were required to locate a local partner who held at least a 51 percent stake in any joint venture. Due in large part to such obstacles, between 1984-1997 Saudi Arabia attracted merely $4 billion of private foreign investment, one-twelfth the amount that flowed to Singapore or Malaysia. Of the capital that did arrive, only 20 percent was directed to the Saudi private sector.
The Kingdom's economic prospects will be tied to the new law's ability to augment capital inflows. Revised forecasts put this year's economic expansion at over 4 percent. Nevertheless, the local population is swelling at roughly 4 percent per year, and university graduates are pouring into the labor market. With real GDP growth below 2 percent in each of the past four years, it is crucial that foreign investors employ more Saudis. The objective of attracting a larger number of Saudis to the private productive sectors of the economy now underpins all policy goals. By alluring greater and better quality FDI flows, the country aims to secure a new source of private capital to generate growth.
In early June, Saudi Arabia’s General Investment Authority (GIA) started accepting applications for foreign investment licenses as part of the drive to open up the Kingdom’s economy. The GIA was established in April to provide the investment mechanism for the country’s new foreign investment law.
© 2000 Mena Report (www.menareport.com)