EXECUTIVE SUMMARY
The kingdom of Saudi Arabia faces a grim economic
future. Contrary to predictions in the late 1970s and early 1980s of
rising prices for Middle Eastern oil, world oil demand and prices have
followed a downward trend since 1981-82, resulting in a reduction in Saudi
oil revenues. Since 1983 Saudi Arabia has stopped accumulating financial
surpluses, forcing it to draw down its financial reserves and, since 1987,
to resort to large-scale borrowing.
These erroneous predictions also misread how
oil-exporting countries react to vast increases of oil income. The
assumption was that they would not increase spending as rapidly as they
earned income and would thus accumulate huge financial surpluses. However,
like other countries in a similar position, Saudi spending did keep pace
with revenue, and when the revenue slowed to a trickle, Saudi Arabia
decided it could not decrease spending commensurately.
The dramatic leap in Saudi oil export revenues in the
1960s was soon surpassed by government spending, causing budget deficits
by the late 1960s. Increasing Saudi oil revenues in the early 1970s
quickly paid off the debt and led the government to step up spending in
the development plan of 1975-80. By 1977, however, a glut in the oil
market forced down prices and reduced revenues. The resulting budget
deficit led Saudi leaders to draw on accumulated financial reserves.
The oil shock of 1979-80 once again boosted Saudi
revenues. Although another glut emerged by 1980, the Iran-Iraq War halted
the downward pressure on prices and raised revenues in 1980-82. As they
did after the first shock, Saudi leaders planned additional expenditures
in the development plan of 1980-85. By 1983, however, an unexpected drop
in revenues wiped out the fiscal surplus from the previous years. Outside
of minor attempts to cut spending on foreign aid, and despite a downtrend
in revenues, the Saudis continued to increase expenditures, particularly
off-budget military outlays.
By 1985, the drastic fall in production levels and oil
prices greatly reduced revenues and the government decided to increase its
volume of sales. The result for 1986 was a worsening of the oil glut, a
decrease in prices, and a level of Saudi oil export revenues that were far
below earlier estimates.
Since fiscal year 1983, Saudi Arabia has suffered from
budget deficits and deficits in current accounts in the balance of
payments. These deficits were first covered by drawing on foreign assets,
and after 1987 by government-issued bonds. Attempts to diversify the
economy, create agricultural self-sufficiency, and reduce the number of
foreign workers in the Saudi labor force were largely unsuccessful, with
the cost of the efforts themselves only draining the economy further. By
the end of the 1980s, Saudi Arabia was more dependent on oil revenues than
before. The Gulf War aggravated the long-term deficits that have resulted
from a continuing policy of government expenditures in excess of oil
export revenues. This is due to the huge military cost of the war,
exacerbated by the decision to actually increase domestic subsidies in
times of crisis.
In the future, deficits are likely to continue to grow,
barring any serious effort by Riyadh to curtail major aspects of
government spending. While raising revenue through taxes and cutting back
sharply on subsidies would offer hope for economic rehabilitation, there
is no evidence that Saudi leaders are willing to risk the domestic unrest
such a policy might produce. Instead they appear to be relying on the
unlikely event that the oil market makes a miraculous recovery.
World-wide efforts to improve energy efficiency and
replace oil with other sources of energy, as well as efforts by a wide
range of non-OPEC countries to produce oil, will depress demand and
prices. Iraq's eventual return to the oil market and the probable increase
in production from the former Soviet Union are additional factors that are
likely to contribute to this trend. While the Saudi government is likely
to expand productive capacity and increase oil exports in an attempt to
significantly raise revenues, the chances of revitalizing the economy
solely through reliance on oil exports without any fundamental change in
economic policy are slim.