Huge Saudi Debt Expected To Increase Further

Gulf analysts said stagnating oil prices will make the kingdom one of the biggest debtor nations in the world. Riyad is expected to owe more than $200 billion by the end of 2002.

Already, the analysts said, Saudi Arabia owes $203 billion. The kingdom is expected to borrow another $12 billion during 2002.

A study by Saudi economist Ihsan Bu Hlaika said the kingdom turned into a debtor from the oil prices that first stabilized and then dropped during the 1980s. Hlaika said the kingdom has repaid only a small part of its domestic debt.

The study said Riyad is expected to record a $6.6 billion budget deficit for 2001. Saudi officials have maintained that the kingdom will not record a deficit for last year.

The Saudi Economy Crisis
Entrance and Exit

Introduction

The Saudi authorities published at the beginning of this week the official financial figures of 1998 and the projection for 1999. The authorities admitted 1998 deficit of SR46 billion ($12.26 billion). They also expected a deficit of SR44 billion ($11.7 billion) for 1999. The official deficit figures are usually less than the actual figures but they are bad enough to prove that the country is today facing a deep economic crisis of unprecedented severity in its recent history. Within little over a decade, overseas assets of over US$170bn was turned into a debt equal to that sum or higher. The internal debt is already above GNP. The recent collapse in oil prices has exposed the fragile status of the Saudi economy and full dependence in oil. All stories of diversity of revenue and productive infrastructure proved by this exposure untrue. This year’s budget deficit swell to around $12 billion according to above official figures ($15 billion according to Financial Times), stock market lost 27% of its value, all projects were frozen and commercial activity is in lethargy. The situation is expected to be worse next year because of further collapse in oil prices.

Why would a country with this huge oil production and reserves, end up almost bankrupt? Could it have been possible to build a proper infrastructure out of the huge oil revenue in the past and diverse the revenue? Or was this an inevitable result because of the nature of the country?

Some introductory facts

Among the reasons of failing to understand Saudi economy properly is to consider it as an average capitalist economy. It is important to imagine the massive secrecy encircling all affairs in the kingdom. Many financial institutions have to rely on official figures, which can not be double-checked because of the complete lack of transparency. In addition to releasing deceptive figures, the Saudi government sometimes does not release figures at all. For example the actual expenditure and revenue figures in the period between 1989 and 1995 has never been released. The government never publishes or releases figures about internal debt. In the last few years the government gave only few details regarding the budget avoiding mentioning any thing about expenditure on defence and other sensitive “sections”.

The Roots of the Economic Crisis

The Saudi government always tries to blame gulf crisis and oil prices for the economic disaster but is that the case?

Regarding the gulf crisis, Saudi Arabia might have spent $50 billion but have gained double that amount during the few years after the gulf war by taking over the Iraqi quota in OPEC.

The argument about oil prices is a loosing argument because Saudi Arabia sold on the average oil with reasonably high prices in the last 25 years. Indeed the total oil revenue out of those years is well above $1.7 trillion. The total revenue in those 25 years from oil and other sources could well be in the range of $2 trillion. That will make average annual revenue of $80 billion.

The government justifies the expenditure by talking a lot about building the “incredible infrastructure”. The real status of this infrastructure is far away from that massive expenditure. To be more precise this infrastructure consist of the following: one “orphan” railway between Riyadh and Dhahran, very deficient highway network, telephone system with capacity 1/20th of the capacity in Europe per person, electricity service covering hardly 60% of the country’s population and lingering with massive problems, education system with 80% of schools as rented buildings with 5 years arrears of non payment with no maintenance, and health system completely deficient in it’s primary level. The real expenditure on this infrastructure as we estimate could hardly exceed $300 billion.

The economy story in the country has witnessed flagrant corruption and intemperance among members of the ruling family, phenomenal wastefulness, not to mention huge and unjustified arms purchases inflated by commissions and kickbacks.

This wastefulness and mismanagement coincided with the collapse of oil prices, leading to a huge budget deficit which continued to increase year after year, in spite of attempts to mitigate it by drawing on reserves and overseas assets. So in summery it is not the gulf crisis nor the oil prices.

The OIL

As is well known, oil still remains the backbone of the country's economy, representing 35% of the GNP and providing the bulk of the country's foreign earnings and about 80% of government income. The Kingdom possesses the largest known oil reserve in the world (more than 25% of the world's known reserves) and it is the largest producer among the OPEC countries, supplying more than an eighth of the world's oil exports. The Kingdom's ability to produce over 10 millions barrels per day used to enable it to control world production and act as "swing" producer, and thus control prices. This role is difficult to play now.

The country's income from oil continued rising from the time oil was first discovered in 1938 (when income was a mere US$3.8m) and until 1981, when it reached US$101.81bn. After that, oil income started to decline due to the fall in prices caused by overproduction and the shift to alternative energy sources. In 1986, oil income reached a low of US$13.55bn before starting to rise again slowly. After the Gulf crisis of 1990, income jumped to US$31.5bn.

The management of the economy did not pose an insurmountable problem when oil money was still pouring in, but on the contrary, the only problem appeared to be how to spend the huge surplus. However, the economic decline in the early 1980's and the collapse of the oil prices posed a real test for the government's ability to manage the crisis. The first things the crisis exposed was that the government had not taken any steps in the boom years to diversify the economy and create alternative income sources through investment, industrialisation or the strengthening of the local economy, as some other oil states had done. The economy thus became hostage to the fluctuations of oil prices and the vicissitudes of world demand. It is also a fact that the Kingdom contributed significantly to the fluctuations of the world oil markets and exacerbated them by insisting on pumping huge amounts of oil which the market could not absorb, merely to please some allies who wanted "stable" prices.

The Accumulated Deficit and Resort to Borrowing

At the start of the crisis, the government tried to meet the budget deficit by drawing on its reserves and overseas assets, which totaled around US$170bn when drawing started in 1983. According to government figures (as stated in official documents passed to the Shura Council in August 1994), the reserves have been completely exhausted by 1988, i.e. within less than six years of Fahd acceding to the throne. This led the government first to resort to borrowing, and then attempt to impose new taxes. The government began to borrow huge amounts of money from local and foreign banks. In 1988 alone, government borrowing totalled over US$50bn. It then started to issue interest-paying bonds and forced local banks to buy them. Attempts were also made to sell them to foreign banks, especially in the Gulf. From then on, borrowing with interest became the norm for the government, and soon para-statals, such as SABIC, electricity companies and even ARAMCO itself (through some of its subsidiaries) followed suit. It is now impossible to determine with any accuracy the amounts borrowed by the government and para-statals, because of the reigning chaos, which also became a new avenue of corruption.

According to available statistics, assets have gone down from US$170.709bn in 1982 to US$52.157 in 1991, becoming US$27.131bn in 1993. Government documents indicate that assets in 1997 rose to US$70bn, and that liquid reserves (excluding gold reserves) held by Saudi Monetary Agency (SAMA) remained below a ceiling of US$7bn throughout the 1990's, standing at US$6.6bn last year. All these figures must be viewed with caution, however, for the declared assets amounts needed to cover the issuing of currency or meet letters of credit that had already been issued, and these reserves are practically unavailable to draw on. Assets also include loans made to other countries, most of which are not recoverable, such as the debts owed by some of the poorer Arab and African countries. For example, the Kingdom is owed US$26bn by Iraq, but there is no prospect for these debts to be repaid in the near future. It may thus be necessary to disregard most of these "paper" assets.

Government Policy and the Deepening Recession

The recession which took hold from the mid-1980's deepened into a full-blown economic crisis, as projects started to falter or were abandoned. The government stopped paying local and foreign contractors, while the cancellation of a large number of projects undermined confidence. The inability of the government to meet its obligations to suppliers and contractors exacerbated the recession and led to more deterioration in the economy.

A study commissioned by MIRA in 1994 indicated that the backlog of unpaid government dues stood at SR210bn owed to over 3,000 companies. This led to the collapse of many large and small Saudi companies, including Mabco and Saudi Carlson al-Saudia, Laing Wimpey Alireza, to mention but a few. In addition, government funding agencies cut back on funding to projects in the private sector since the inception of the crisis, which in turn contributed to the deepening of the recession.

Failure to Reduce the Deficit

After heavy pressure from the IMF and the United States, the government was forced to show some effort to cut expenditure and reduce the gaping budget deficit. In 1994, it announced its intention to reduce government expenditure by 20%. But its options were limited, since it had no intention of touching the two highest items in the expenditure: the expenses of the royal family, and the expenditure on “security”, including the bribes paid to win the support of western and other countries in accordance with the exigencies of the hallowed "riyal diplomacy." It is noteworthy that the United States continued to send delegations urging the Kingdom to cut its budget deficit, and then sent others urging the same officials to pay the money owed to arms exporters and other contractors, while continuing to put pressure to win new arms deals. And these are obviously irreconcilable demands.

Since 1988, the government tried to impose direct taxes, which were levied only from expatriate workers. However, in that first instance it had been forced to retreat and cancel those taxes after only three days. The tendency then was to impose indirect taxes, starting with raising prices of fuel, electricity and telephone services and imposing fees on passports and visas. These levies deepened the crisis, since they contributed to inflation while pay has been frozen for years. This is socially dangerous option because it is putting pressure on the ordinary people at a time when princes and their cronies are living in legendary luxury with free services.

As expected, the attempts to cut expenditure and raise government income in 1994 failed miserably. The goal was to cut expenditure by 15% and raise non-oil income by SR17bn. This was to be achieved by imposing taxes and levies and cutting subsidies to agriculture and other areas. These measures were supposed to reduce the budget deficit to SR10bn. However, what happened was that expenditure in fact rose by 2.8% and non-oil income rose by only SR7.3bn. The budget deficit stood at SR27.4bn. In 1997, the unexpected rise in oil prices boosted government revenues, but the deficit remained at SR6bn. This year (1998), figures are catastrophic. The official deficit figures are SR46 billion while Ft estimate is SR56 billion. Officially next year’s deficit is expected to be SR44 but we estimate it to similar or bigger than 1998

Falling into the Debt Trap

The accumulated budget deficit totaled over SR570bn between 1983 and 1998. By 1992, the government debts with local banks reached SR11.7bn riyals in local currency and US$4.535bn in foreign currencies. Debts to foreign banks reached US$16.4bn by 1994, the same year the Kingdom contracted a new loan of US$6bn to finance the Boeing deal which it had concluded under heavy US pressure, and was forced to reschedule debts totalling US$9bn, mainly to US banks. The issuing of interest-bearing bonds also continues apace. In 1988, bonds worth SR30bn were issued to local banks, and a further SR25bn worth were issued the following year. The total issued by 1994 stood at SR210bn, a third of which to banks and the rest to para-statals. In 1997 alone, bonds worth SR98.9bn (US$26bn) were issued. The IMF estimates debt servicing to stand at SR28bn annually in 1997, or about 12% of the budget. Government debts in 1992 stood at 52% of the GNP (i.e. SR236.6bn). This ratio rose to 86% in 1995 (SR505.3bn). The percentage remained more less the same in 1996 (85%) in spite of GNP rising to SR511bn that year. This year it exceeded the GNP according to FT.

This uncontrollable spiraling of debts caused leading international financial institutions to take a dim view of the country's finances, leading some to withdraw loan guarantees for exporters and issue warnings against lending to the Kingdom. Intervention at the highest level from the US administration prevented US credit agencies from downgrading the Kingdom's credit rating in 1993. Leading international financial institutions are beginning to worry that the Kingdom may have already fallen in the debt trap, suffering the fate of many Third World countries which could no longer meet the spiraling debt servicing repayments.

The Privatisation Dilemma

One other solution the government started to promote recently as a way out of its financial dire straits (with heavy pressure from the US and the IMF) was to privatise government-owned companies and utilities. Chief among these are mail, telephone, and electricity services and the country's main air carrier. The government-owned media trumpeted these proposals and portrayed them at the panacea for all the country's economic ills, since they were going to generate enough revenues to cover the deficit, as well as enhancing the role of the private sector and free enterprise. But the government neglected to mention a few facts that will make it impossible for privatisation to succeed. For all these companies and utilities face problems that no private operator can solve. To start with, the thousands of princes and their families and entourage use these services to excess, and they get them free. There are thousands of telephone lines in hundreds of royal palaces, which accumulate astronomical bills that are never paid. Huge electricity bills also go unpaid, while free air travel is guaranteed for all royal princes, their families, staff and servants, all year round. And they make full use of this advantage. Even the most minor member of the royal family, as well as the wives and children of many princes, are often not satisfied with free first class travel, but insist on being flown around the world in private jets. Princes at times send jets to bring food from abroad or run errands that could not be discussed here in the interest of decency.

All this saddled these utilities and companies with huge losses and made them totally dependent on government subsidies. It is inconceivable that the private sector would accept to pay money to acquire these loss-making businesses. In addition to unrecoverable losses, ownership of these companies threaten possible confrontation with senior princes and officials, which would not be to the advantage of these business people. The experience of privatising electricity utilities has made it clear that privatisation was not going to make these utilities abandon their dependence on subsidies. The utilities were sold to influential individuals , who were promised unlimited government support, as well as the permission to raise tariffs at will. As a result, the services are now costing the state more than before, without the customers witnessing any improvement in services. All thindicates that privatisation is going to complicate the problem, both for the utilities and for the government. Senior Princes will sell the companies to themselves (paying nothing, of course) either directly or through intermediaries such as children or partners, and then use it as a new way for defrauding the state of even more funds. The recent announcement of changing Saudi Telecom and Electricity into private companies is misleading because the companies are still practically government run and the plans to sell them to the private sector are very vague.

Impasse

It is therefore clear that the government has arrived at an impasse in its attempts to reform the economy. It failed to raise revenues through taxes, or to reduce expenditure effectively. It cannot continue borrowing without limit either. Its only salvation is to wait for oil prices to rise.

Problems of the Oil Sector

The economic crisis has impacted all sectors of the economy. In particular, the oil sector, the backbone of the economy, is facing problems in marketing and pricing which threatens to destroy OPEC and exacerbate the collapse of oil prices. The government's desperate financial situation leads it to pump more and more amounts of oil to maintain or increase its market share, and this in turn depresses prices even further, and deepens the country's economic crisis. However, it is well-known that it had been in fact the government's policies which were instrumental in causing the oil price collapse. Recent frantic attempts to cut production has not helped to raise prices, and the price free fall continued.

The problem is further complicated by other aspects of the country's oil policy, which make it even more difficult to stabilise markets. The increasing resort to barter deals, as happened in the Yamama deal with Britain, reduces the country's control over its own oil sales. Similar practices, such as giving princes huge oil shipments in lieu of payments, contribute to the problem. Desperate for cash, the princes offload their oil shipments at ridiculously low prices. With the state unable to control its own production and sales in this way, it is gratuitous to speak about control over world markets.

In addition, the refining sector is facing problems relating to management, organisation, investment, modernisation and capacity building. Recently the government tried to remedy the problem by merging Petromin into SAMAREC and then SAMAREC into ARAMCO, but no indication has appeared as yet of these measures coming any way near to solving the problem. Many of the projects undertaken by the new conglomerate have failed. And example is the abortive attempt to set up a refinery in Japan with Japanese partners. Another project in Qasim in the centre of Saudi Arabia was cancelled after spending SR300m for unknown reasons. A telling indication of the absence of any credible strategy to develop the refining sector is the fact that the country, far from boosting its exports of refined products and benefiting from the added value which this could generate, continues to import a large portion of its needs of refined products from abroad.

Industrial Sector

The industrial sector, which includes petrochemicals, is suffering from a multiplicity of handicaps, and is reeling from the impact of the recession which pushed many companies to the brink or forced them to rely on government subsidies. The Kingdom appears to be one of the least industrialised countries in the Arab world, with industry providing only 8.4% of its GNP (compared to 10.9% in Yemen and 26% in Morocco). the government has failed to persuade local and foreign investors to increase their investments in industry.

The offset programs incorporated in defence and other contracts (which impose on foreign companies winning large contracts to invest in local industries) failed also for many reasons, foremost amongst which were the numerous red-tape obstacles put by the government in the face of all economic activities. They also fail because Saudi counterpart does not take them seriously after being paid the proper kickbacks.

The Banking Sector

The banking sector has also suffered heavily as a consequence of the economic crisis as numerous firms indebted to banks began to collapse, while some others were unable to pay to their debts, or even refused to do so. As expected, many influential debtors, particularly from the royal family, were among those who just did not want to pay. Government offices and para-statals also donot pay. Currently the talk of the banking circles is the dilemma facing Riyadh Bank for failure to recover $800m loan to Saudi Airlines and huge loan to Russia guaranteed by the Saudi government. Riyadh bank refused to release its periodic budget to SAMA in protest of those problems.

Agricultural Sector

As for the agricultural sector, it remains the most telling illustration of the composite failure of the regime's economic policies. The state disbursed billions of Riyals in subsidies to agricultural production, but the bulk of this cash had gone to large companies controlled by princes and other influential individuals. The results did not accord with the money spent. And in addition, the intensive farming methods adopted had exhausted the country's precious underground water resources, while ordinary farmers continued to suffer neglect and failed to receive the designated subsidies. Indeed there is complete lack of agricultural strategy taking into account the desert nature of the country and limited water resources.

The Flight of Capital

The most significant indicator of the deepening crisis is the constant flight of capital. Saudi assets abroad are estimated to $500 billion according to Merrill Lynch. The first culprit in this outward movement of funds is the senior figures in the royal family and top officials. Most of these own real estate holdings abroad and keep secret foreign bank accounts, which are stashed with stolen state funds. It is difficult to put any estimate on these assets abroad, but they represent in themselves a vote of no confidence in the country's economy by the very people running it. The message was not lost on businessmen and other investors, who have additional reasons to keep their money abroad, which is to keep it safe from the greedy princes. They also continue to suffer from the unstable and unfair policies, which threaten all investment and business.

The Root of the Crisis

From what has been said, it become clear that the causes of the crisis are many, most important among which are: the absence of proper planning and persistent and wasteful mismanagement and continuos looting by those who are supposed to be treasurers.

A key indicator of the depth of the crisis is the fact that the figures released by the government (often reluctantly and after significant doctoring) are meant to hide the full dimensions of the crisis. Nevertheless, even these figures point to serious problems. These figures, for example, give us no clue regarding the huge amounts of waste, such as the large commissions paid to senior and minor princes, nor does it refer to the abundant land and oil grants given mainly to royal figures. Also the figures do not reveal that the budget deficit is due, in large part, to the abuse of public utilities, such the national airline and telephone company, by members of the royal family, who use these services to excess and pay nothing for them. However, a cursory look at the balance of payments would yield such revelations as the fact that the Kingdom pays US$10bn annually to cover the cost of its embassies abroad. This is a staggering figure for a country like ours, unless we take into account that this sum covers a lot of items not included in usual diplomatic work, such as the numerous services offered to VIPs. The country also spends huge amounts of money on the media and pubic relations, most of that are bribes offered to unscrupulous political figures and media organisations.

Principles of Remedy

We have to conclude, therefore, that reforming the economy can only be achieved as a result of a comprehensive overhaul of the system. We stibelieve that oil revenue is enough with its current prices to cover the country’s needs. We (as well as others) estimate the total shift of money from the state to the royal family and their entourage is in the range of 40% of revenue. Much of the rest can be saved by clearing the administration from corruption and illegal practice.

It has to be noted that for economic reforms to be successful, they need to be part of comprehensive political reforms. We need an administration, which put national interests before its interests. That will then create an environment for proper planning, transparency and accountability. The nation must maintain its full supervision of public finances in all phases: starting from planning, the ratification of the budget and holding officials accountable for implementing policies. Needless to say that all sorts of favoritism and cronyism have to be abolished. All citizens should be given an equal right to public wealth. No one has a right to avail himself to public funds except on these grounds, or on the basis of some other criteria, applicable to all, and agreed by the people through their representatives

The way to reform

On this basis, the required reform program must aim at a radical transformation of the economy on the following lines:

1) Complete restructuring of financial administration to guarantee the choice of clean and honest minister of finance who is supposed to be completely accountable to an economic committee in the Shura council or any chamber of people representatives. The financial affairs should be completely transparent and the public should have free access to the information concerned.

2) Adopting proper economic planning, with the objective of determining the methods for the optimum exploitation of natural and human resources. Planning must take into consideration the safeguarding of the nation's interests, conserving its resources and protecting the future of its children. Academic institutions should be encouraged to contribute to a public debate about the country’s economy.

3) Cancellation of all illegitimate privileges and prosecute all involved in illegal commissions and the conclusion of inappropriate contracts. Additional safeguards must be put in place to ensure full accountability of officials as detailed above.

4) Controlling military expenditure through the adoption of well considered and realistic armament policies appropriate to the country's needs. Only competent experts from the armed forces must be relied upon to draw such policies, while middlemen and arms merchants must be excluded from this exercise.

5) The guaranteeing of freedom of trade and economic enterprise, in particular, the protection of economic activities from unwarranted interference by the government and senior princes. Rule of law and powerful independent judiciary have to dominate to provide this guarantee. The freeing of the economy from stifling state control and extortionate practices will release the energies of competent entrepreneurs and enable them to help lift the economy out of the recession. It could also help to diversify the economy, putting it on a firm base and ending dependence on oil. This will make any privatisation plan straight forward and popular.

6) The adoption of an oil policy based on a thorough study of markets and related economic processes. Such a policy must be based on the country's real needs, and not in response to the pressures of "allies" or interests of senior executives..

7) Putting an end to borrowing, and imposing on top officials to give back to the state some of the money they had illegitimately acquired. As a start, King Fahd could repatriate some of his foreign assets, estimated at more thanUS$30bn, and order his children, his brothers and their children to do the same. This alone would be sufficient to repay the country's debts and leave a huge surplus..

8) Encouraging investment within the country by removing all obstacles and restrictions hampering investment. The first obstacle that needs to be eliminated is the stranglehold the influential figures are maintaining over the economy, and their attempts to monopolise all economic activity, thus creating a very insecure and unstable environment for investment. There is also a need to remove all restrictions on ownership and investment, which create unhealthy distortions in the economy.

9) Refraining from imposing any new taxes or levies unless the following safeguards are taken:

a) Having rationalised government spending in all areas and eliminated waste and corruption.

b) Having established an urgent public need, such as essential services, which benefit all citizens, and could not be financed from any other legitimate source.

c) Having ascertained these conditions by the nation's competent representatives.

d) A firm undertaking that these taxes shall be lifted as soon as they are no longer needed.

12) Refraining from lifting subsidies to essential goods and services except within a comprehensive plan, which should involve the appropriate adjustment of salaries and social security payments, which have been frozen for over a decade. Another condition to be met is to widen the social security net to cover all those in need, and to force the rich to pay for some of the services they receive today without payment

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