Saudi Arabia faces maturity.

Position:Saudi Arabia's economic policy - Special Report

In an interview in June, King Fahd declared that "there is no doubt that the economy in Saudi Arabia, regardless of what anyone tries to say or insinuate from afar, is a strong one." The king was reacting to what he described as "some kind of bias regarding the economy of Saudi Arabia" from European and American sources. In this report, The Middle East assesses the state of Saudi Arabia's economic situation.

LACKING IN DETAIL though it is, the kingdom's 1994 budget implied that reduction of public expenditure is preferable to reduction of oil output. Budget outlays have been reduced by 19% compared with the forecast for 1993. The overall strategy was reaffirmed at a conference in London last October by the oil minister, Hisham Nazer, who declared that Saudi Arabia aimed to achieve a sustainable crude oil production capacity of 10m b/d "before the middle of the decade". At the same conference, one of the minister's senior advisers stated that Saudi Arabia "is not changing its oil policy and is not playing the role of residual supplier ... But sometimes the market dictates what the Saudis do because there is the underlying question of revenue."

In other words, Saudi Arabia will keep a sharp eye on its revenue from oil in the immediate term, but will do its best to preserve market share over the longer term. Saudi oil officials are adamant that under current expansion plans worldwide there is plenty of capacity to meet demand into the next century. This is a coded message to other Opec producers (as well as exporters outside the organisation). Fears have been raised over the past couple of years that investment in expansion of capacity by Opec members to meet demand may well exceed their financial capacity. The kingdom is emphasizing that it is in a position to meet expanding demand and will happily do so.

Whatever the pressures imposed on Saudi Arabia by the rest of Opec, it will not fall for a high-price strategy. Under Opec quota allocations since 1992, it has seen its share of total Opec output shrink gradually, if not drastically. In April 1992, its share was 34.7% of overall Opec production. Under the October 1993 agreement, this had declined to 32.6%. It will not be allowed to fall further. Disillusioned by Opec's persistent failure to observe its own internal production discipline, the kingdom seems to have given up on the idea that Opec can manipulate the market according to its own whims. Instead, the organisation can only respond to broader market forces. As a consequence, Saudi policy will be geared to securing its market share, and will slash spending or defer cash-flow obligations when that is the price to pay. Quite realistically, Saudi Arabia takes the view that it can afford to live with far lower prices than its colleagues in Opec.

The Saudi budget for 1994 envisages a cutback of 19% in spending compared with 1993. In principle, expenditure and revenues will balance at SR160bn ($42.7bn), implying a 5.3% reduction in income of which the Ministry of Finance and National Economy says three-quarters will be derived from oil revenues. Many analysts are sceptical that the government can actually achieve the spending cuts it has set itself over a mere 12 months. But there are indications that individual ministries have been told to reduce their outlays by at least 20% over the current year.

It is difficult to assess the likely impact of the budget programme because no detailed breakdown has been presented. The royal decrees dealing with the budget only referred to the municipalities and water sector. It is, however, important to note that in this critical area, spending will be cut by 24.5% from last year's allocation. In addition, it was announced that the 1994 budget included an allocation of SR43bn ($11.5bn) for completion of existing projects (down from SR53bn), but there is no allocation for new projects and in recent months a number of major schemes have been postponed. Development agencies financing industrial, agricultural and real estate projects have together a budget of SR7.9bn, almost the same as last year, but the bulk of lending will be funded from repayments of earlier loans. The budgets for 22 government agencies (the Saline Water Conversion Corporation, the Royal Commission for Jubail and Yanbu and the kingdom's universities, for example) have also been cut by an average of...

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