The announcement on June1 by Abdul Rahman Ibn Abdul Aziz Al-Tuwaijeri, the secretary general of Saudi Arabia’s Higher Economic Council, who said that, under the directive of King Fahd Ibn Abdul Aziz, customs tariffs on imports into the kingdom were being cut from 12 to five percent, was an important step in what is a multi-faceted plan to transform the country’s economy.
It preceded, just by several days, the signing of a series of agreements with a number of foreign oil firms, which essentially give them entry back into a country from which they had been expelled more than 25 years previously. In the 1970s the tendency had been to reject any foreign economic involvement, and instead provide a clear advantage—if not an absolute monopoly—to enterprises that were Saudi owned, frequently by the state itself.
Admittedly, the Saudis are not turning the clock back completely. The foreigners are being excluded from the oil industry, and instead are being provided entry into the country’s less developed gas sector. The state-owned Saudi Aramco will continue to control oil reserves, including any that may be found in the new areas being prospected for gas.
But with the Saudi energy sector being opened—downstream as well—the country is becoming a very attractive business opportunity for outside business interests. According to the Economist, Saudi officials have put the price tag for upgrading basic services alone at $200 billion over the coming decade.
But the newfound readiness of the Saudi government to open its economy to outsiders is extremely significant, and to a degree represents a tacit admission that it is not able to meet the demands of the coming few years on its own.
'Concepts have changed. We need to achieve growth rates that are compatible with the population growth," said Prince Salman Ibn Abdul Aziz, the Emir of Riyadh, quoted by Ain-Al-Yaqeen. “We must focus on the private sector by giving it a bigger role in the economy.”
And such demands on the Saudi government are considerable. With a population that is growing at an estimated three percent per annum, unemployment—currently reported to be 14 percent—is likely to continue climbing, unless a rapid rate of economic growth is maintained. This has not been a feature of the country’s centralized economy over the past quarter century. For, whereas personal wealth, or GDP per capita, equaled that of the United States 20 years ago—shortly after the nationalization of the oil industry—today it is only one quarter of the American level.
To prepare itself for the global economy of the early 21st Century, the Saudi government has been deliberately removing the protectionist barriers that were once considered protective. So, not only were oil majors provided a route back into the kingdom, but last year new investment law was passed, allowing 100 percent foreign ownership and a series of attractive tax breaks for foreign investors. A new telecommunications bill is pending that will end the state monopoly in the sector, opening it up to foreign capital. And then, at the beginning of this month, the government cut most import tariffs from 12 to five percent.
As a preliminary measure, on May 7 the Saudi government dropped a requirement that only firms owned by Gulf citizens would qualify for preferential treatment in the tariff regime of the Gulf Cooperation Council (GCC). Instead, it ruled that products imported into Saudi Arabia would have to have 40 percent local added value to enjoy preferential tariffs.
Toward the goal of a GCC customs union, which is scheduled to come into force in March 2005, the other GCC states aligned the custom duties at a uniform rate ranging from 5.5 percent on essential items and 7.5 percent on other goods. It is possible to see the Saudi government’s recent tariff cut within this context.
These moves come as Saudi Arabia is making a concerted effort to join the World Trade Organization, an act that has been accomplished by all its other GCC colleagues. Unsurprisingly, the Saudi government’s protectionist tendencies are, for the most part, what kept it out of that exclusive club to date.
Saudi Arabia had hoped to be a WTO members already by December 2000, but it was slow in introducing the measures demanded of it, which included improving market access to its banking, finance, and upstream oil sectors, a cut in its tariff rates—which before the most recent reduction were generally the highest among the GCC countries—and a phasing out of direct and indirect subsidies to local business enterprises.
But not all foreigners are applauding Saudi Arabia’s new policy of openness. The news of the cut in the kingdom’s customs duties was rudely received in Dubai, where IT and telecommunications wholesalers had profited handsomely on the difference between UAE customs duties and those of Saudi Arabia, by under-invoicing of goods exported to the latter.
According to dealers in computer components, the Saudi tariff cut could impact on as much as 30 percent to 40 percent of the Dubai trade, which traditionally considered the kingdom as one of the biggest re-export markets for IT equipment. ― (MENA Report)
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