Saudi Arabia: Economic development

Saudi Arabia’s economy looks set for a period of sustained growth, with oil revenues remaining high, non-hydrocarbons exports on the rise and the effects of a massive investment programme by the state starting to kick in.

Estimates vary as to the rate at which the Saudi economy will expand this year, with the International Monetary Fund (IMF) projecting GDP will rise by 6.5%, while some local experts put the figure at near 7.5%, in part driven by higher earnings from oil exports and increased state spending on housing and infrastructure developments.

Oil production has increased in recent months, with Saudi Arabia ramping up output to 8.96m barrels per day (bpd) in May according to OPEC data, with an average of 6.84m bpd being exported, up by 1.2% on the April total. At this rate, and with the current price of Brent crude on the international market averaging about $112 per barrel, Saudi Arabia is looking at around $234bn in oil export revenue this year.

Much of this windfall is being ploughed back into the economy, with King Abdullah announcing a series of new spending programmes over the past few months, schemes that will see up to $130bn invested in large-scale housing, infrastructure and economic support projects.

While some of the forecast increase in GDP is being driven by oil revenue and the state’s investment programme, the government’s long-term policy of diversifying the economy is also having a greater impact. Data issued by the Central Department of Statistics in mid-July showed that non-oil exports had jumped by 14% in the first quarter of the year, with overseas sales totalling $9.9bn on the back of growing demand for Saudi plastics and petrochemical products.

One possible threat that the Saudi economy faces is a rise in inflation fuelled by increased state spending, higher disposable incomes and some supply bottlenecks. Estimates from ratings agencies and the IMF suggest that this year’s inflation rate could be in the 5.5 to 6% range, up from 5.3% in 2010. After a series of declines, inflation in June reversed the trend, creeping up from May’s 4.6% to 4.7%. Much of this increase was due to the usual culprits, said Jarmo T Kotilaine, chief economist at the National Commercial Bank.

“The latest numbers point to a slight intensification of inflationary pressures in the region, marking a reversal of some of the moderation seen of late,” he said in an interview with the Arab News on July 15.

Inflation has come down since the 9.9% recorded in 2008, though some factors such as any rise in imported commodities and foodstuffs may be out of the government’s control.

A potentially greater concern, though one far further down the track for the Saudi economy, is the rising domestic demand for the nation’s most important product, oil. A report released by Riyadh-based financial services firm Jadwa Investment on July 21 warned that Saudi Arabia could find itself in debt unless it reined in its high levels of state expenditure, which has come at a time when domestic consumption of oil products is on the rise and oil productions is relatively static.

Domestic demand for oil is projected to increase from last year’s level of around 2.4m bpd to 5.1m bpd by 2025, while production is only expected to rise from the 8.4m bpd of 2010 to 10.7m by the middle of next decade. This incremental increase in local consumption, outstripping new production, would mean that by 2014 Saudi Arabia would be running a budgetary deficit if it continued to boost state spending by 7% or more, Jadwa said.

“Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production,” the authors of the report said.

The government is already moving to implement some of these measures, with plans to diversify sources of energy production, further expand the base of the economy and encourage private sector investment, which in turn should generate new revenue streams and reduce the calls on state funding.

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