Table Of Content

The Saudi Arabian Economy The Saudi Arabian Economy Policies, Achievements, and Challenges Second Edition Mohamed A. Ramady KingFahdUniversityofPetroleum&Minerals 123 MohamedA.Ramady DepartmentofFinance andEconomics KingFahdUniversity ofPetroleumandMinerals Dhahran31261,SaudiArabia [email protected] ISBN978-1-4419-5986-7 e-ISBN978-1-4419-5987-4 DOI10.1007/978-1-4419-5987-4 SpringerNewYorkDordrechtHeidelbergLondon LibraryofCongressControlNumber:2010930268 ©SpringerScience+BusinessMedia,LLC2005,2010 Allrightsreserved.Thisworkmaynotbetranslatedorcopiedinwholeorinpartwithoutthewritten permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY10013,USA),exceptforbriefexcerptsinconnectionwithreviewsorscholarlyanalysis.Usein connectionwithanyformofinformationstorageandretrieval,electronicadaptation,computersoftware, orbysimilarordissimilarmethodologynowknownorhereafterdevelopedisforbidden. Theuseinthispublicationoftradenames,trademarks,servicemarks,andsimilarterms,eveniftheyare notidentifiedassuch,isnottobetakenasanexpressionofopinionastowhetherornottheyaresubject toproprietaryrights. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Youroldmenshalldreamdreams:youryoungmenshallseevisions DedicatedtomychildrenAli,FaisalandLayla andalltheyoungmenandwomenoftheArab world Contents PartI TheSetting 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SettingtheStage . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 TheFinancialSector . . . . . . . . . . . . . . . . . . . . . . . . . 5 TheHeartoftheKingdom:TheHydrocarbonSector . . . . . . . . 6 TheForeignSector . . . . . . . . . . . . . . . . . . . . . . . . . . 8 MeetingFutureChallenges . . . . . . . . . . . . . . . . . . . . . . 9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 PartII TheDevelopmentProcess 2 ReformsandEconomicPlanning . . . . . . . . . . . . . . . . . . 15 DifficultDecisionsBeingTaken . . . . . . . . . . . . . . . . . . . 15 EconomicDiversificationRemainsCritical. . . . . . . . . . . . . . 15 ReformsatCentreStage . . . . . . . . . . . . . . . . . . . . . . 16 TransformingtheJudicialSystem . . . . . . . . . . . . . . . . . 18 NationalEconomicPlanning:TheFramework . . . . . . . . . . . . 18 StrategicChoices . . . . . . . . . . . . . . . . . . . . . . . . . . 20 TheHistoryofSaudiPlanning . . . . . . . . . . . . . . . . . . . . 21 PlanAchievements . . . . . . . . . . . . . . . . . . . . . . . . . 23 ThePerformanceoftheSaudiEconomy . . . . . . . . . . . . . . . 27 EconomicDiversification:Realities. . . . . . . . . . . . . . . . . . 29 CompositionofSaudiGDP . . . . . . . . . . . . . . . . . . . . . . 32 TheChallengesAhead . . . . . . . . . . . . . . . . . . . . . . . . 38 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 41 3 PublicFinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 TheBudget–ABarometeroftheNation’sHealth . . . . . . . . . . 43 OilWealthversusOilPoverty. . . . . . . . . . . . . . . . . . . . . 45 SaudiWindfallGainsandLosses . . . . . . . . . . . . . . . . . . . 47 vii viii Contents OverdependenceonOilversusBuildingTrueWealth . . . . . . . . 48 TheSaudiBudgetarySystem:SignalsversusReality . . . . . . . . 50 BudgetSectoralAllocations:GovernmentIntentionsAreRevealed 52 CapitalExpenditureAssumesMoreImportance . . . . . . . . . . 53 LimitedSourcesofIncomeIsKeyConstraint . . . . . . . . . . . 54 IncomeDiversificationIsNotEasy . . . . . . . . . . . . . . . . 57 DespiteLowerOilPrice,BumperExpenditureContinues . . . . . 60 FinancingBudgetDeficits:CyclicalorStructuralDeficits? . . . . . 61 BurdenofIndebtednessandDebt-LedGrowth . . . . . . . . . . . . 63 “CrowdingOut”thePrivateSector . . . . . . . . . . . . . . . . . . 65 FacingtheChallenges:Short-andLong-TermSolutions . . . . . . . 67 TheTimeforRhetoricIsOver . . . . . . . . . . . . . . . . . . . . 69 HopefulFuture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 71 PartIII TheFinancialSector 4 SaudiArabianMonetaryAgency(SAMA)andMonetaryPolicy 75 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 AssertingIndependence . . . . . . . . . . . . . . . . . . . . . . . . 76 SAMA’sStatedFunctions . . . . . . . . . . . . . . . . . . . . . . 78 SAMA’sEvolvingResponsibilities . . . . . . . . . . . . . . . . . . 79 CentralBankMonetaryPolicy . . . . . . . . . . . . . . . . . . . . 81 StructureoftheSaudiFinancialSystem . . . . . . . . . . . . . . 82 CentralBankMonetaryPolicy:TheTheory . . . . . . . . . . . . 83 SaudiMonetaryPolicyinPractice . . . . . . . . . . . . . . . . . 84 TheCentralityofSAMA’sExchangeRatePolicy . . . . . . . . . 87 SaudiBanksHaveAmpleReserves . . . . . . . . . . . . . . . . . . 90 Relianceon“Open-Market”Operations . . . . . . . . . . . . . . . 91 MoneySupplyCreationandMonetaryPolicy . . . . . . . . . . . . 93 CompositionofSaudiArabia’sMoneySupply . . . . . . . . . . . . 96 FinancialDeepeningoftheSaudiEconomy . . . . . . . . . . . . . 97 SAMAandInflationControlPolicies . . . . . . . . . . . . . . . . . 98 TheEconomicandSocialImpactofInflation . . . . . . . . . . . . 101 ManagingtheKingdom’sReserves . . . . . . . . . . . . . . . . . . 103 FutureDevelopmentandChallenges . . . . . . . . . . . . . . . . . 105 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 108 5 TheFinancialMarkets . . . . . . . . . . . . . . . . . . . . . . . 111 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 TheSaudiBankingSector . . . . . . . . . . . . . . . . . . . . . . 112 SAMAandBankSupervision. . . . . . . . . . . . . . . . . . . . . 114 TheEarlyYears(1940s–1960s):InfancyPeriod . . . . . . . . . . 115 The1970s:TheAdolescencePeriod . . . . . . . . . . . . . . . . 116 Contents ix ComingofAgeinthe1980s:YoungAdulthood . . . . . . . . . . 117 The1990sandthePeriodofMaturity . . . . . . . . . . . . . . . 118 2000Onwards . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 SaudiBankShareholderConcentrationandOwnership . . . . . . . 121 PerformanceoftheSaudiBanks . . . . . . . . . . . . . . . . . . . 123 ConcentrationRatiosAreWorryingforCompetition . . . . . . . . . 126 TheRushtoSegmentation . . . . . . . . . . . . . . . . . . . . . . 127 SaudiBanks’LendingProfile . . . . . . . . . . . . . . . . . . . . . 130 Asset-LiabilityManagementIsaProblem . . . . . . . . . . . . . . 132 SaudiBanksSectoralLending:ConsumerLendingTakesOff . . . . 134 TheEmergenceoftheInsuranceSector . . . . . . . . . . . . . . . 136 ForeignParticipationintheInsuranceSector . . . . . . . . . . . . . 139 IslamicFinanceintheKingdom . . . . . . . . . . . . . . . . . . . 140 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 142 6 TheSaudiCapitalMarket. . . . . . . . . . . . . . . . . . . . . . 145 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 EstablishingaNationalStockMarketCarrieswithItRisks andResponsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . 146 SaudiCapitalMarketDevelopments:AHistoricalPerspective . . . 146 SaudiCapitalMarketOperation . . . . . . . . . . . . . . . . . . . 147 TheNewCapitalMarketLaw . . . . . . . . . . . . . . . . . . . . . 149 OrganizationStructureandOperationsoftheCMA . . . . . . . . . 152 RegulatorySupervisionandInherentBiases . . . . . . . . . . . . . 157 TheSaudiCapitalMarket:ArabWorld’sLargest. . . . . . . . . . . 158 FreeShareFloatIsanIssue . . . . . . . . . . . . . . . . . . . . . . 161 SaudiCapitalMarketPerformance . . . . . . . . . . . . . . . . . . 162 SectoralPerformanceoftheSaudiMarket . . . . . . . . . . . . . . 164 InvestorBehaviour:IrrationalExuberanceandHerdMentality . . . 165 BoostingForeignParticipation . . . . . . . . . . . . . . . . . . . . 169 SaudiMutualFundMarketGrowth . . . . . . . . . . . . . . . . . . 171 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 176 PartIV TheDomesticSector 7 ThePrivateSector:GlobalizationChallenges . . . . . . . . . . . 181 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 TheOperatingFramework . . . . . . . . . . . . . . . . . . . . . . 182 TheLegalSetting . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 TheCorporateSetting . . . . . . . . . . . . . . . . . . . . . . . . . 184 TheEconomicSetting . . . . . . . . . . . . . . . . . . . . . . . . . 185 GovernmentNationalStrategyforIndustry. . . . . . . . . . . . . . 187 x Contents ForeignParticipation . . . . . . . . . . . . . . . . . . . . . . . . . 188 TheSmallandMediumEnterprises–SMEs . . . . . . . . . . . . . 190 SMEModelforGrowth . . . . . . . . . . . . . . . . . . . . . . 194 SaudiFamilyBusinesses . . . . . . . . . . . . . . . . . . . . . . . 196 SaudiWomenandtheNationalEconomy . . . . . . . . . . . . . . 200 EstimatingtheSizeofSaudiWomen’sInvestments . . . . . . . . 202 GovernmentandBusinessRelationsinSaudiArabia . . . . . . . . 205 PromotingPrivateSectorSelf-SustainedGrowth . . . . . . . . . . . 210 LookingAhead:AModelforCooperation . . . . . . . . . . . . . . 213 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 214 8 TheEnergySector . . . . . . . . . . . . . . . . . . . . . . . . . . 217 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Oil-BasedEconomies:ATheoreticalAnalysis . . . . . . . . . . . . 218 TheSaudiPetroleumSector . . . . . . . . . . . . . . . . . . . . 219 TheOpportunityCostofMaintainingSpareCapacity . . . . . . . 223 “OilPeak”Debates:SoonerorLater? . . . . . . . . . . . . . . . 223 SaudiArabia,OPECand“Fair”Pricing . . . . . . . . . . . . . . . 225 SaudiOilPolicy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 DilemmaofHighandLowPrices . . . . . . . . . . . . . . . . . . 233 OilandSaudiGDPContribution . . . . . . . . . . . . . . . . . . . 237 MaintainingtheFarEastPricingPremium . . . . . . . . . . . . . . 239 ANewEnergyStar:TheGasSector . . . . . . . . . . . . . . . . . 241 ForeignInterestinGasProjects . . . . . . . . . . . . . . . . . . . . 242 NewPartnersStepIn . . . . . . . . . . . . . . . . . . . . . . . . 243 OutlookforSaudiGasSector . . . . . . . . . . . . . . . . . . . . . 244 Petrochemicals:AddingValue . . . . . . . . . . . . . . . . . . . . 245 GeneratingSecondaryIndustries . . . . . . . . . . . . . . . . . . . 247 FutureChallenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 TheMiningSector:AHiddenGem . . . . . . . . . . . . . . . . . . 249 EstablishingaModelforMiningCooperation . . . . . . . . . . . 252 TheChallengeofAlternativeEnergy . . . . . . . . . . . . . . . . . 252 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 255 PartV TheForeignSector 9 ForeignTrade:ChangingCompositionandDirection . . . . . . 259 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 TheCausesofTrade . . . . . . . . . . . . . . . . . . . . . . . . . 260 SaudiIndustrialandExportStrategy . . . . . . . . . . . . . . . . . 263 SaudiArabia’sTradingPatterns:Exports . . . . . . . . . . . . . . . 265 ImportDiversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 OriginsofImportsAreChanging . . . . . . . . . . . . . . . . . . . 269 Contents xi TheExportSector:OilIsStillKing . . . . . . . . . . . . . . . . . 271 AsianExportsPredominate . . . . . . . . . . . . . . . . . . . . . . 272 EfficiencyandCompetitiveness . . . . . . . . . . . . . . . . . . . . 273 AchievingCompetitiveness . . . . . . . . . . . . . . . . . . . . 275 SaudiCompetitivenessPerformance . . . . . . . . . . . . . . . . 276 ReducingCompetitivenessObstacles . . . . . . . . . . . . . . . 279 SaudiArabia’sCompetitiveAdvantages . . . . . . . . . . . . . . 280 ForeignSectorTradeDevelopment . . . . . . . . . . . . . . . . . . 282 DirectAssistanceforExportingFirms . . . . . . . . . . . . . . . 282 AssistAllSizesofFirmstoExport . . . . . . . . . . . . . . . . 283 EstablishInstitutionalDevelopmentProgrammes . . . . . . . . . 283 DevelopInternationalTradeinServices . . . . . . . . . . . . . . 284 AdoptBestPractices . . . . . . . . . . . . . . . . . . . . . . . . 284 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 286 10 SaudiArabiaandtheWTO . . . . . . . . . . . . . . . . . . . . . 289 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 289 KeyChallenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 Globalization:TheTheoreticalArguments . . . . . . . . . . . . . . 290 BenefitsandCostsofTradeLiberalization . . . . . . . . . . . . . . 293 TheWorldTradeOrganization . . . . . . . . . . . . . . . . . . . . 293 HistoricalOverviewofGATTandWTO . . . . . . . . . . . . . . 295 WhatNextfortheWTO? . . . . . . . . . . . . . . . . . . . . . . 298 SaudiArabia’sWTOAccession:ALongandHardRoad . . . . . . 299 TheWTOAgreements:ImplicationsforSaudiIndustry. . . . . . 301 WTOandDisputeSettlement . . . . . . . . . . . . . . . . . . . . . 312 TheHydrocarbonSectorandWTOAccession . . . . . . . . . . . . 313 WTOand“Saudization” . . . . . . . . . . . . . . . . . . . . . . . 316 TheWTOandSaudiLegalSystem . . . . . . . . . . . . . . . . . . 317 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 SummaryofKeyPoints . . . . . . . . . . . . . . . . . . . . . . . . 320 PartVI KeyChallenges 11 PrivatizationandForeignDirectInvestment . . . . . . . . . . . 323 LearningOutcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 323 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 TakingtheFirstStepsforPrivatization . . . . . . . . . . . . . . . . 324 Privatization:KeyConcepts . . . . . . . . . . . . . . . . . . . . . . 325 RoutestoPrivatization . . . . . . . . . . . . . . . . . . . . . . . . 327 SaudiArabia’sBasicPrivatizationObjectives . . . . . . . . . . . . 329 PrivatizationEffortsbySector:MixedResults . . . . . . . . . . . . 330 ObstaclestoPrivatization . . . . . . . . . . . . . . . . . . . . . . . 336 ForeignDirectInvestment(FDI):TheoreticalBasis . . . . . . . . . 338 SaudiFDI:EstablishingtheOperationalFramework . . . . . . . . . 339

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The Saudi Arabian economy has changed almost beyond recognition since the oil boom days of the 1980s, and the Kingdom itself has changed too economically, socially, and demographically. In the second edition of The Saudi Arabian Economy, Mohamed Ramady uses several overlapping themes to establish an
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The Saudi Arabian economy has changed almost beyond recognition since the oil boom days of the 1980s, and the Kingdom itself has changed too economically, socially, and demographically. In the second edition of The Saudi Arabian Economy, Mohamed Ramady uses several overlapping themes to establish an

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