Steady governmental spending in Saudi Arabia
As 160,000 nationals enter Saudi Arabia’s job market annually, the government is hoping that stronger spending along with resulting improvement in economic conditions will help the kingdom to address its high unemployment levels
 

By Dr Jasim Husain Ali

Notwithstanding uncertainties related to on-going financial crisis, Saudi Arabia’s budget for 2009 is generous on spending, and for good reasons. Steady spending is vital for registering highest possible growth rate in gross domestic product (GDP) on the back of expected drop in private sector investments resulting from confidence problems. To be sure, public spending is uniquely significant in Saudi Arabia by virtue of comprising nearly one third of the country’s GDP. Saudi Arabia’s GDP amounts to $382bn in market prices and $555bn on purchasing power parity (PPP) basis.

Solid expenditures
Projected expenditures amount to $126bn, up by 15 per cent versus originally planned figure for fiscal year 2008. However, actual spending in fiscal 2008 was augmented by nearly 25 per cent thanks to firm oil prices during the first half of the year.

Surprisingly, the budget is not necessarily conservative with regards to income. Customarily, Saudi authorities tend to underestimate revenue as part of a deliberate conservative policy.

Revenues for fiscal year 2009 amount to $109bn, merely $11bn less than the original figure for 2008. Observers were expecting lower income figure due to the extraordinary drop in oil prices from a record $147 per barrel in June 2008 to around $40 per barrel lately.

Fortunately, the government allocated a hefty $60bn for developmental projects in 2009. The figure is sizable by virtue of comprising some 47 per cent and 55 per cent of total projected expenditures and revenues, respectively. Projects include expansion of road network and new power and water plants. Such investments should help the objective of avoiding the turning of financial crisis into an economic one.

At the same time, firmer public spending stands to stimulate private sector investors. Traditionally, private investors take the lead from the government with regards to economic directions. Accordingly, private sector investors adopt conservative spending in case of contraction in public sector expenditures, in turn suggesting tough times ahead.

No debt problem
Actual statistics for 2008 changed dramatically from projected ones, something not likely to be repeated anytime soon. Actual revenues increased by a hefty 144 per cent from $120bn to $293bn. Also, total expenditures rose from $109bn to $136bn. As a result, the kingdom posted a record $157bn surplus. In retrospect, Saudi Arabia registered a surplus of $71bn in 2006, the highest historically recorded at the time.

Gladly, the authorities opted to use part of surplus achieved last year to help reduce outstanding debt. More specifically, debt was reduced to 19 per cent of GDP in 2008, down from 19 of GDP in 2007, thereby continuing the trend of doing away with public arrears. Still, the debt figure compares favourably with a key condition attached to planned implementation in 2010 of monetary union project amongst Gulf Cooperation Council (GCC) countries. Amongst others, member states are required to limit public debt to 60 per cent of gross domestic product (Oman has opted not to join the monetary union initiative).

First things first
Priorities projected figures for fiscal year 2009 call for a deficit of $17bn. If recorded, the shortfall would mark the first of its kind since 2002. The possibility of actual budgetary deficit could not be ruled out in the light of prevailing oil prices in international markets. Yet, the deficit comprises nearly 4.5 per cent of GDP, which violates the three per cent limit prescribed for the planned monetary union.

By one account, Saudi Arabia enjoys some $300bn in the form of sovereign wealth funds (SWF). Similar to other fellow GCC members, the kingdom succeeded in strengthening its SWF over the last few years on the back of firm oil prices. The petroleum sector contributes more than two thirds of Saudi’s treasury income. Needless to say, time is ripe for Saudi authorities to use part of reserves accumulated over the last few years to address economic challenges.

Positive spillover effects
Stronger spending together with resulting improvement in economic conditions should help the authorities to address high unemployment levels. According to the Ministry of Economy and Planning, the unemployment rate amongst national workforce stood at 11.2 per cent in the first half of 2007. In reality, Saudi Arabia’s eighth development plan calls for reducing unemployment rate dropping from 7 per cent in 2004 to merely 2.8 per cent by 2009.

Saudi authorities are under pressure to create 160,000 jobs annually for nationals entering the job market.

Demographic statistics add to pressures since about half of locals are below the age of 20. Undoubtedly, many would be entering the job markets in the next few years looking for suitable employment. One such resolution for doing away unemployment amongst locals relates to restricting certain jobs to Saudi nationals. The Ministry of Labour and Social Affairs restricts some 40 jobs to locals. These include taxi drivers, training and purchasing managers, public relations officers, administrative assistants, secretaries, operators, debt collectors, customer service accountants, tellers, postmen, data handlers, librarians, booksellers, ticket kiosk keepers, auto salesmen, janitors, internal mail handlers and tour guides.

In addition, the authorities allocated 25 per cent and 8 per cent of expenditures to education and heath, respectively. Such planned expenditures should help improving the country’s position on human development index (HDI), in turn issued by the United Nations Development Programme (UNDP). Saudi Arabia clinched 55th position amongst 177 nations ranked in 2008 report. In fact, this was the lowest result amongst GCC countries. Kuwait topped GCC list by ranking number 29 worldwide. The report ranks countries on the basis of their performance on three variables, namely life expectancy at birth, education and income on purchasing power parity basis. Stronger spending on education and health should help improving Saudi Arabia’s ranking on HDI.

In short, steady public sector spending should help in achieving several challenges including creating enough employment opportunities for locals amidst anticipated drop in private sector investments in the aftermath of global credit crunch.
 

The author is an eminent economist and Member of Parliament, Bahrain

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