Saudi economy affected by oil revenue drop
Overall real growth in Saudi Arabia slowed down substantially in 2001, reported the Executive Board of the International Monetary Fund (IMF). Oil output dropped following OPEC-mandated production cuts, and growth of real non-oil gross domestic product (GDP) fell to 2.9 percent from 3.9 percent in 2000 as private investment slowed.
According to the IMF’s Article IV Consultation with Saudi Arabia, the country’s macroeconomic position weakened as oil export receipts fell. The overall central government budget shifted to a deficit of about four percent of GDP as oil revenues fell, non-oil revenues remained sluggish, and expenditures increased.
The world economic slowdown, together with the effects of the September 2001 events seemed to have temporarily affected confidence in 2001. Inflation, however, remained negative, the article stated.
The increased borrowing to finance the deficit led to resumption in the buildup of government domestic debt, which rose to 92 percent of GDP by mid-2001. However, the external position remained comfortable. The external current account registered a large surplus equivalent to about eight percent of GDP as the fall in oil export receipts was compensated by a sharp increase in non-oil exports and import growth fell reflecting economic slowdown.
The Saudi Arabian Monetary Agency's (SAMA) net foreign assets rose slightly to the equivalent of 11 months of prospective imports of goods and services. Growth of domestic liquidity picked up modestly in 2001 as domestic credit increased by over eight percent in terms of the beginning money stock, mainly to finance the fiscal deficit and an increase in consumer credit to the private sector.
The financial sector continued to perform well and the stock market registered gains. The average riyal-US dollar interest rate differential in 2001 remained virtually unchanged and, reflecting the appreciation of the US dollar, the Saudi riyal appreciated in real effective terms by about 2 percent.
Progress on structural reforms during 2000-01 was focused mainly on building the legal and institutional foundations for a more market-based resource allocation. The state monopoly of telecommunications is ending, and rules governing foreign direct investment under the new Investment Law were liberalized. Steps were taken to improve the employability of Saudi workers through vocational training and the establishment of specialized educational facilities.
In an important step to liberalize trade, and to facilitate the introduction of the common external tariff among Gulf Cooperation Council (GCC) countries, the import tariff was reduced from 12 percent to five percent.
Oil prices have firmed up in 2002 and the macroeconomic position is expected to be better than initially anticipated. While the fiscal deficit would moderate, the external current account surplus is expected to remain lower than in 2001, and SAMA's net foreign assets could moderate to the equivalent of 10 months of prospective imports.
With the expected pickup in real non-oil GDP growth to about four percent, domestic liquidity is projected to trend upwards, and credit to the private sector is expected to increase by about 10 percent.
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions in Saudi Arabia each year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
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