Sowing the seeds of growth

With 1% economic growth, declining real per capita income and high unemployment, many in ksa are still banking on investment reform measures, entering the WTO and becoming self sufficient in agriculture

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By  Massoud Derhally Published  February 21, 2002

|~||~||~|Most of you will think this country, which is synonymous with oil, has nothing to do with agriculture. Yet in 1992 it became the sixth largest wheat exporter when it produced over 4 million tons of wheat, and the size and role of agriculture in its economy has expanded. 1.5 million tons of fruit were produced in 2000, and 1 million tons of dairy products and 54,500 tons of fish were produced in 1998.

The agricultural sector’s share of non-oil GDP has increased from 3.7% to 10.3%, according to Abdullah Moammar, the Minister of Agriculture. According to the International Monetary Fund, net foreign direct investment into the Kingdom of Saudi Arabia (KSA), stood at $4.3 billion in 1998, a considerable improvement from a mere $-79 million in 1992.

With a population close to 25 million, unemployment at 25%, waning oil revenues and a soaring budget deficit, KSA has had little choice but to implement reform measures which have raised eyebrows as the country ventures into virgin territory. Oil receipts, which have had a predominant influence on the kingdom’s trade balance, are no longer sufficient to cover the budget and the government has recognised the importance of diversifying its export base, and reforming its ownership and investment laws with the goal of stimulating its economic growth rate. The growing public debt; high population growth, coupled with a high level of unemployment; low price of oil, from which the kingdom derives 70% of its revenues, has forced the kingdom to diversify as it faces both medium and long-term pressures.
According to Dr. Khan Zahid, chief economist and vice president at Riyad Bank, KSA can create investment alternatives and revenue streams that can reduce its dependency on oil revenues. The kingdom should “downstream oil and gas, petrochemicals, energy services. This also means the infrastructure (including electricity, water and telecom), tourism, mining, and consumer products.”

The government has, in light of the gloomy picture, taken steps to implement structural reform measures through the creation of the Supreme Economic Council, the Saudi Arabian General Investment Authority (SAGIA), and a new foreign investment act.
The newly sanctioned foreign investment law grants foreign investors several incentives, say officials at the newly established SAGIA. Foreign investors have the right to full ownership of their investment projects, to own land and to hire and sponsor foreign employees. These features are in addition to a 15% reduction in the tax rate and the ability to carry over financial losses of foreign joint ventures to profitable years.
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These initiatives, according to Zahid, will create investment opportunities in Saudi Arabia that are attractive to both foreign and local investors and will entice individuals to invest in the kingdom (a market that has traditionally grown at 1%) as opposed to investing in other markets where return could be much higher. “The improvements in regulations such as foreign investment, capital markets, and investor protection that are being worked out will make the kingdom more attractive,” says Zahid.

In his speech at the Jeddah Economic Forum this January, Prince Alwaleed bin Talal, the famous Saudi investor who is estimated to be worth $20 billion by Forbes magazine, said, “I believe there are three main challenges that our nation faces at this time: economic diversification, economic growth, and job creation.”

The remarks of the high profile Saudi Prince were certainly on target, but he went even further and described how things in KSA stand now. “Oil currently represents 40% of our GDP, 80% of our government’s budget, and 92% of our exports,” said Alwaleed.

The dependence on oil presents serious issues that must be addressed. The implications of not doing so are far reaching as the government of Saudi Arabia forecasts its budget on the estimated returns from oil exports. As Alwaleed illustrated in his speech, the revenue budgeted for the year 2000 was SR157 billion and the actual revenue was SR258, a 64% positive difference. However, spending for 2002 is budgeted at SR202 billion, a 20% decline from 2001 spending, when revenues are projected to be SR157 billion, a deficit forecast of SR45 billion.

Prince Alwaleed is right: Saudi Arabia’s economy needs to be insulated from the negative effects brought about by fluctuations in oil prices. It also needs to stimulate economic growth by diversifying its economy and there are signs that the attitude is beginning to change.

At a recent agricultural investment forum, which was held under the patronage of the Crown Prince Abdullah, the kingdom unveiled its ambitious plans to market the Jizan area and the Tihama Plains, famous for their 3000-metre high Hijaz Mountains as well as agriculture and aquaculture development projects.

“The Kingdom of Saudi Arabia has taken a strategic decision to attract national and foreign investments,” said Prince Abdullah in his opening remarks of the three-day agro investment forum. “All the necessary incentives, guarantees and facilities must be provided to lure these investments and encourage them in all fields,” he added. These comments were salient as they sparked a flurry of speculation among journalists attending the conference as to whether the Crown Prince was hinting at an expanded liberalization policy in the future in all sectors of the economy.
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The Crown Prince emphasized at the conference the importance of agricultural development to the Saudi economy. Delegates of 30 international companies from 18 countries attended the conference and foreign and local investors were urged to invest in the 800km strip on the Red Sea between Jeddah in the west and Jizan in the southwest. The minister of agriculture, Abdullah Moammar, highlighted the rich natural resources of the Jizan area and Tihama Plains, which are the poorest regions of the kingdom. Described as one of the most fertile virgin lands in the world, Jizan and Tihama have sufficient water supplies from the 600 mm average annual rainfall they receive and thus are promising regions for farming and the cultivation of tropical fruits.

Osamah Faquih, Minister of Commerce, believes that promoting the strip on the Red Sea will contribute to food security for the kingdom, which still imports some 70% of its food substances, and enhance exports to foreign markets. “Saudi Arabia is now the 13th largest exporter of goods and the 25th largest importer. Our merchandise trade amounted to (SR 438) billion in the year 2000, with a surplus of (SR 192) billion in favor of the Kingdom,” said Faquih. “The Kingdom’s trade in services totaled about (SR 55) billion) in the year 2000 and it is thus placed 31st among importers of services and 38th among exporters,” added Faquih.

Moammar, the minister of agriculture, also emphasised that the government was in the process of opening up the agriculture sector, while many await the establishment of the new Ministry of Water in the coming months. The establishment of the new ministry is expected to trigger activity in the power sector and engage the private sector. The minister told Arabian Business, that while the existing 10 dams in the area have a capacity of 105 cubic million metres of water, there are plans to build an additional 10 dams that will have a capacity of 760 million cubic metres within the next two years at a cost of $613 million.

Based on the potential of the region, the minister estimated that the expected investment flows into the region would be in the billions of dollars. When asked about the estimated return on investment, Moammar said, “it is estimated by some to be in the realm of $4 billion but it could be above or below that as we still don’t have actual forecasts.” To encourage investment, Moammar added that lucrative incentives would be available, such as the lease of land on a long-term lease basis of 30 to 40 years at competitive prices, depending on location of the property. Plans are underway for the construction of a pipeline to enhance the irrigation mechanism and encourage agricultural investment in the area.
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The Jizan region, which is already famous for shrimp and fish farming, has the largest shrimp project being carried out at the moment and it is expected to be completed in 2003. The region already packages 7 tones of shrimp daily and exports to the US and Japan. The $100 million shrimp farm project is expected to produce 10,000 tones of shrimp each year and the return on investment to be complete three years from the date of completion.

Aquaculture and agriculture projects are new streams that the government wants to tap in order to offset the high level of unemployment and reduce its exposure to the volatile price of oil. Unlike last year, the kingdom does not have a surplus in 2002 and the budget deficit is expected to be large in light of declining oil prices and fluidity of markets.

Prince Abdullah bin Faisal bin Turki, who was appointed as governor of SAGIA echoes the Crown Prince’s call for liberalisation and transparency. As governor, he oversees the Kingdom’s initiative to attract foreign investment and facilitate aspects associated with the drive for privatisation. Yet, his enthusiasm has been muted as restrictions remain, and the foreign investment Exclusion List, still prohibits foreigners from investing in certain segments of the Saudi infrastructure including telecommunications.

At the agro forum, Prince Abdullah explained that while few investors and investments flows have come to the kingdom since September 11, the Saudi currency remained stable with a solid and highly regulated banking sector, the infrastructure is good and well developed.
While some ground has been covered over the past two years, the pace at which that ground is being covered remains slow and the door to private investment nowhere near where it should be. Since SAGIA was formed in April 2000, the Kingdom has only been able to attract $9 billion in foreign investment, most of which has largely gone into the petrochemicals and manufacturing sectors according to one Saudi official.

Investment to other sectors has been slow or nonexistent due to a combination of protectionist measures and heavy regulatory infrastructure of the Saudi economy. Prince Abdullah has openly proclaimed he would like to change this and did so at the agro forum when he was asked about the new and revised ‘negative list’. “If it were up to me, I would have opened all sectors to private investors both local and foreign,” said Abdullah.

While the minimum to invest in the manufacturing sector is $1.3 million, most of the investors are locals from Egypt, Syria, Lebanon, Pakistan, Palestine and India who already live in the Kingdom and have merely transferred the sponsorship of their interests to themselves, drawing criticism from some, who say that no real investment is really taking place.

Market fundamentals may be an essential perquisite to economic development, the decisive factor will be the pace at which the Kingdom engages the private sector and implements structural reforms that have inherently stagnated. —By Massoud A. Derhally
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