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	Saudi Arabia		Info-Prod Country Guide
CHARACTERISTICS   INDICATORS   THE ECONOMY   INVESTMENT ISSUES   PROJECTS   PROSPECTS

The Economy Preliminary figures show that the deficit in the current account declined in the first half of 1996 to about US$ 0.5 billion, compared to US$ 17.3 billion in 1993, US$ 10.5 billion in 1994, and US$ 8.1 billion in 1995, an improvement attributable to prudent fiscal and monetary policies, the higher value of petroleum products and the continued growth of non-oil exports. The latter increased in the first half of this year by 10 percent compared with the same period in 1995, in spite of an increase in imports. Saudi Arabia's budget deficit is structural in nature. Petroleum continues to be the critical source of revenue, averaging 7 percent of all income over recent years, with customs duties and investment receipts comprising much of the remaining government revenue. The income and profits of Saudis are not taxed, except for a voluntary 2.5 percent annual religious donation. The government grants tax holidays to many foreign investments and, therefore, receives limited fiscal benefit from the growing private sector. At the same time, the government continues to spend on a broad social support program, which includes free or heavily subsidized basic utilities, social services and agricultural products. Spending on these services, on both a recurrent and capital basis, is growing because of the rapid population growth. The share of the non-oil sector in the gross domestic product has increased to two-thirds of the total and has posted a growth of 4 percent. The industrial sector has surged by 6 percent. The Kingdom's exports in 1995 stood at US$ 40 billion, while imports totaled US$ 25 billion, a trade surplus of US$ 15 billion. The continued growth, however, is likely to further boost this aspect of the economy. Principal Economic Sectors Industry Major products of Saudi Arabia's manufacturing sector include refined petroleum, petrochemicals, plastics, processed food, clothing, fertilizer and cement. Manufacturing grew considerably during and after the Gulf War, as many firms took advantage of subsidies and soft loans from the government. The aim of the current Saudi Five-year Plan is to continue to help create a diversified economy, which is not so highly dependent on oil. According to a report from the Saudi government, incentives have led to the creation of over 2,400 manufacturing firms, mostly light manufacturing such as metal fabrication, woodworking, food processing and plastics. Under Saudi offset guidelines, several joint venture companies have been established with foreign technolopartners in more sophisticated areas, particularly related to defense and aviation. These include computer software, avionics, aircraft repair, aircraft engine repair, radios for military use and other electronic components. Joint stock companies have been particularly active in developing the downstream petrochemical base of the Kingdom, and consequently, a great deal of the petrochemical needs are nowmet domestically. Mining The current metal mining activity, at the gold mines, creates demand for imported mining equipment worth US$ 40 million a year. The Saudi Ministry of Petroleum and Mineral Resources is spearheading an initiative to develop new mines to produce iron, phosphates, bauxites and precious metals. Once these major projects are underway in the next two to three years, importation of mining equipment should exceed US$ 200 million a year. The Ministry has started negotiating contracts with Western mining companies. Food and Agriculture Because Saudi Arabia has long been a food importer, agriculture is a key area of development. The lack of water has made less than 1 percent of the land area useful for farming. Irrigated lands near oases have been virtually the only sites of cultivation. Many of the foreign workers and technicians who have been brought in are engaged in agricultural projects. Saudi Arabia's leading crops are wheat, watermelons, dates and tomatoes. Other major crops are barley, sorghum, onions, grapes and citrus fruit. Livestock includes sheep, goats, cattle and camels. Saudi agriculture has shown rapid growth in production over the last several years, while food processing has only recently begun significant expansion. The growth in agricultural output has been led until recently by wheat, but notable increases have also taken place in livestock, vegetables and fruits. Much of the expansion has relied on imported technology and production inputs. Wheat production is now declining, but output continues upward for most other crops and livestock. Thus, the prospective demand for inputs is mixed, with a weak near term outlook for large machinery and irrigation equipment, but likely growth in demand for inputs related to the livestock or fruit and vegetable segments. Imports of most food and bulk agricultural products, other than a few items such as wheat, eggs and dates, are continuing at a strong pace. Food processing has started significant growth, but remains modest. Investment in food processing, handling and storage equipment is continuing. Banking Saudi banks control approximately one third of total Arab capital. The largest Arab bank, the Saudi Al-Ahli Commercial Bank, is privately owned by the well-known Mahfouz family, which infused US$ 1.6 billion into the bank in 1993. Considered the largest private bank in the Arab world, it held shareholder equity of US$ 1,942 million in 1995. Bank profits totaled US$ 187 million in 1995, a 21 percent increase over 1994. During the first half of 1996 bank profits reached US$ 120 million, suggesting that 1996 profits will exceed 1995 figures. Electricity The electric power needs of Saudi Arabia are large and growing fast. Demand has been rising at an average annual rate of 10.5 percent from 1985-1995, far exceeding the Kingdom's average GDP growth rate. The lack of adequate investment in the electricity sector has caused the power generating capacity to rise by only 2.9 percent a year during the same period, and the electricity crunch is now beginning to bite various sectors of the Saudi economy, particularly the industrial sector. At a time when the Kingdom is seeking to diversify and to move away from dependency on oil, new industrial schemes are unable to get off the ground because they cannot secure an adequate power supply. The gap between actual operating capacity and peak load is believed to have risen from 68 percent in 1985 to 97 percent in 1995. The excessive consumption of electricity has caused severe constraints on the ability of the electricity companies to meet demand at peak hours, especially during the summer resulting in power shortages in some areas. The annual rate of growth of electricity consumption slowed down from 7.9 percent in 1991 to 4.5 percent in 1995, caused in large part the higher tariff rates introduced in 1995. Demand for electricity is projected in the Sixth Development Plan (1995-2000) to rise at an annual rate of 6.4 percent reaching 5,081 kwh by the turn of the century. This necessitates an additional generating capacity of 9,000 MW in the next five years at a total cost of US$ 8.8 billion or US$ 1.6 billion annually. The main challenge facing the electricity sector in Saudi Arabia is to put in place the required power generation capacity needed. Because of budgetary constraints and the ongoing public sector retrenchment, the government can no longer be expected to provide all the required investment. The private sector will be called upon to participate in financing power projects. For that to happen, the electricity sector needs to be restructured and electricity tariff rates to be adjusted further. Foreign Trade Exports The Kingdom's trade surplus is expected to hit US$ 26.8 billion in 1997 compared to an estimated US$ 29.3 billion for 1996. After returning to surplus for the first time in 13 years in 1996, at US$ 187 million, the current account is expected to show a US$ 3.2 billion deficit. Although exports other than oil and petrochemicals amount to only about 3 percent of Saudi Arabia's total overseas sales, such exports have grown fast, by 15 percent per year in 1989-1993. If the trend continues, Saudi Arabia may reach the government's goal of becoming a major industrial export center in the Middle East. Saudi firms are now building export plans in their business strategies. They are driven by the need to reduce their dependence on the domestic market, which, though fundamentally strong, is prone to swing in response to periodic government spending cuts. Although the Gulf states are the main foreign markets for Saudi goods, some Saudi exporters compete in the sophisticated European markets. Main destinations of exports outside the Gulf are Japan, the United States, South Korea, Singapore, France, the UK, Netherlands, Germany, Italy and India. Imports The total imports to the Kingdom during 1995 were US$ 28 billion, an increase of US$ 4.728 billion, or 20.3 percent compared to the previous year. The United States topped the list of countries exporting to the Kingdom, with US$ 6.04 billion in exports. Total imports from ten major trading partners; the US, Japan, Britain, Germany, Switzerland, France, Italy, South Korea, China and the Netherlands reached US$ 19.24 billion. In 1995 the Kingdom imported 97,350 cars, 6,347,838 heads of sheep, 12,760 heads of cattle, 41,268 heads of camel, 151,443 washing machines, 108,342 refrigerators and 343,852 television sets. Imports of foodstuffs reached US$ 4.58 billion during 1995, compared to US$ 3.02 billion during 1994. Apart from textiles and clothes, imports were US$ 2.1 billion in 1995 compared to US$ 1.71 billion in 1994. Previous Chapter Contents Menu Next Chapter

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