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Same old story?

Saudi Arabia has predicted yet another large budget deficit for 2003. Why does the country continue to overspend and what’s to be done?

After all the talk about needing to reduce the national debt and control spending, Saudi Arabia has predicted yet another large budget deficit for 2003. In its budget statement, the government projected 2003 expenditure of SR209 billion, against anticipated revenue of SR 170 billion, a whopping SR39 billion shortfall.

The announcement came after a year long debate during which the government admitted that the national debt was becoming a problem and that overspending must be controlled. The national debt is now estimated to be SR650 billion, 94% of 2002’s GDP of SR 695 billion. If the government borrows to fund 2003’s projected budget deficit, debt could rise to 100% of the country’s GDP.

All fairly sobering stuff, but a report from Saudi American Bank (SAMBA) provides some respite. The bank predicts that the projected deficit is based on a very conservative oil price of $17-$18 per barrel. The bank doesn’t make any predictions for 2003, but draws attention to the fact that oil prices have averaged around $23.50 per barrel in 2002.

“Consistent with past conservatism in oil price forecasts, the 2003 forecast allows for a sustained and substantial decline from current price and production levels,” says Brad Bourland, chief economist. “With uncertainty about a possible war in Iraq, 2003 oil prices are particularly difficult to forecast. The futures market is expecting prices to decline about $3 per barrel (Brent) by yearend 2003.”

The upshot is that the Kingdom will again post a budget deficit in 2003, only perhaps not as large as expected. Still hardly cause for optimism, however, especially given that the Kingdom also has a tradition of overspending its budget.

For example, in 2002, the government spent SR225 billion against revenue of SR204 billion, a deficit of SR21 billion ($5.6 billion.) At the start of the year, the government had projected spending of SR202 billion against revenue of SR157 billion, a deficit of SR45 billion ($12.5 billion.)

Dr Said Al Shaikh, chief economist at National Commercial Bank, says that he was “puzzled” by the overspending. “I was expecting [expenditure of] 210 and they spent 225 billion,” says Dr Al Shaikh.
“Expenditure may have taken place somewhere else, outside the economy,” he adds. As for what that may be, he declines to speculate.

“It’s always a forecast budget and not really adhered to,” points out Bisher Bakheet, managing director of Bakheet Financial Advisors. “These are figures that could go up 10-15% depending on the price of oil.”

In a Reuters report, Ihsan Bu Hulaiga, a prominent economist and member of the Shura Council, sounded a note of sympathy for the government. It has to deal with high population growth and low economic growth, challenges that require spending, whilst trying to cut a huge public debt. “The first two objectives require high spending while the third needs spending cuts,” said Bu Hulaiga.

However, the upshot is that the government keeps on overspending and posting a deficit, even in years like 2002 when oil revenues turned out to be far higher than expected.

“If oil was $24 and they couldn’t manage their spending, what will they do in bad years?” says Dr Al Shaikh. “The expectation would be that they could manage spending in these good years, but they couldn’t. Had they come up with a surplus, we would have felt a lot better about things.”

Dr Al Shaikh appears to be alluding to that ‘c’ word — confidence. “I wish they would maintain real discipline, and really emphasise that discipline to show that they are really serious and it’s not just rhetoric,” he says.

Besides exercising fiscal discipline, the government could make some inroads into the deficit by stimulating the private sector. There is considerable consensus amongst economists about how that could be done. They advocate privatisation of state industries, the implementation of laws to govern the lucrative insurance industry and the introduction of taxation. A privatisation programme has begun with the flotation in January of 30% of Saudi Telecom Company, but how far privatisation will go remains to be seen.

There was also talk in 2002 of levying a 10% income tax on expatriates, but the proposal has yet to be ratified. A law to govern the insurance industry is pending. “There seems to be no way out ... except by introducing structural changes to the state finances. Changes should include launching a zero-deficit budget, creating a reserve fund to stabilise income and accelerating the privatisation programme,” says Ihsan Bu Hulaiqa.

Said Al Shaikh calls for more urgency in moving forward the insurance law, more privatisations to follow STC and the establishment of build, operate, transfer (BOT) projects in the water and electricity sectors. He also urges the establishment of dedicated commercial courts to deal with trade disputes and the implementation of corporate tax before income tax. “It could start at a threshold, say of SR100 million, and be taken from there gradually on a yearly basis,” he says.

So how likely is real progress? “I’ve been disappointed before,” says Dr Al Shaikh.

If action isn’t taken quickly, however, the situation is only likely to get worse. “The current sentiment in the market and what people are saying is that it is time for more transparency and accountability for the finances of the country, given that the debt ratio is more than 100% of our GDP,” says Bisher Bakheet. “This is a figure that in any other emerging market [without] oil would put it in real trouble.”

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