Term paper on Saudi arabia
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Term paper on Saudi arabia
PapersQueen Mon Jan 25, 2010 5:25 am
The Country:
Over the last twenty years, the Kingdom of Saudi Arabia has emerged as a significant influence in the world, a major power in the Middle East region, and the world's leading oil exporter. However, Saudi Arabia is much more than just an oil producer. The country's economic strength is certainly based on petroleum, and with the largest reserves in the world, oil will remain the foundation for the Saudi economy for many years. But the Saudi economy has already diversified to become one of the 20 largest economies in the free world, with a total Gross Domestic Product estimated at about $74 billion in 1988. The oil sector in 1987 accounted for about 32 per cent of the Gross Domestic Product, compared to almost 70 per cent in 1980. In world trade, Saudi Arabia alone is the fourth largest importer of OECD exports, and constitutes the largest when combined with its partners in the gulf Cooperation Council. Saudi Arabia is now the leading industrial economy among all the Arab countries, and is a major player in the international petrochemical market. It is one of the largest donors of foreign aid, it is stable and prosperous and, in addition to this economic strength, has a great influence throughout the Islamic world, which embraces over 1 billion Muslims. Saudi Arabia is honored to contain the two most revered mosques of Islam, in Makkah and Madina, and the official title of the King of Saudi Arabia is Custodian of the Two Holy Mosques. Every year, Saudi Arabia hosts approximately two million pilgrims for the Hajj (the Pilgrimage) to Makkah, in the greatest single concentration of travelers in the world. Thus in world economics, and in international politics, Saudi Arabia is a country which is of great importance to businessmen.
graphy is important in Saudi Arabia - it s a huge country, with a total land area of about 850,000 square miles, the same size as the European Community, and as the United States west of the Mississippi. The population is relatively small; estimates vary, but a useful approximation is a total of about 12 million in 1988, widely distributed among numerous cities, towns and villages. So transport and distribution are important business activities and critical factors for managers. Almost all parts of the country have a hot desert climate, therefore all products must be well packaged and protected - not only perishable food stuffs but also infrastructure and equipment which need to withstand the environment.
Saudi Arabia is normally divided into five main geographical regions. The West, called the Hijaz, has about 34 per cent of the total population, and is heavily urbanized. The Central Region has about 25 per cent of the kingdom's population, with just over half in the main cities. The Eastern Region, Al Hasa, has about 13 per cent of the total population, and is the oil producing area, with over 80 per cent of its population in the conurbations. The Southern Region, the Asir, has about 16 per cent of the total population, the great majority of whom (70 per cent) live in agricultural villages in the high mountains and the wide coastal plains of the region. The North holds the remainder of the population, and again the majority are villagers and some nomads. Twenty years ago a much larger proportion of the total population was still nomadic or semi-nomadic, but as the younger generations were educated and took on new employment, especially in the military, most settled in villages or towns where their relatives worked. Thus Saudi Arabia has a diverse, widely distributed and cosmopolitan population, with millions of guest-workers and their families, from other Arab countries, Asia , and a sizeable American and European community. The whole country has a young demographic profile - over 50 per cent of the population is aged under 15, and the growth rate of the Saudi population is estimated to be 3.5 per cent per year.
ontinents. The Red Sea is the channel linking the sea-lanes East from Asia , and South from Africa , to the Mediterranean through the Suez Canal . The air routes from Europe to South Asia and the Far East traverse the Arabian Gulf , and a large new airport is being built to replace the present one at Dhahran, and will compete with the established transit points at Bahrain and Dubai . There are good communication links to other countries in the Middle East , and these geographical features, combined with the good international relations of the Kingdom, have encouraged companies to locate in Saudi Arabia as their regional base.
The Oil Boom and Afterwards:
Economic and infrastructural development had been slowly but steadily progressing ever since World War II, and had accelerated since about 1965. However, the ten year oil boom from 1974 to 1984 is the dominant factor in the current Saudi business environment, not least because of the aftermath. The boom is today perceived as a window of opportunity, from which the country benefited greatly, but not as a continuing state of affairs.
The boom and the following downturn were dramatic and directly affected the whole economy, not just the oil patch. Total Government revenues soared from a level of $10 billion in 1973 to $100 billion in 1981/82, and then dropped to $35 billion in 1987. During this period, the Government converted oil revenues into physical infrastructure, and provided considerable support for private sector investment in industry, agriculture and services, with the effect that the non-oil economy grew between 10 and 20 per cent a year in the 1970s. Then the sudden downturn in the mid-1980s came as a shock to the economy and to the business community. This change in fortunes caused many to think that the economy was entirely dependent on oil and would move in a boom-slump-boom cycle in direct response to the movements of the oil market.
However, notwithstanding the great significance of oil, it is clear that Saudi Arabia is no longer just an oil economy. Business has diversified sufficiently, and the consumer market and private sector have proved large enough and wealthy enough to revive growth. The evidence is that the economy has now weathered the sudden downturn. The non-oil GDP fell by 4.3 per cent in 1984, by 8.3 per cent in 1985 at the bottom of the recession, then by 3.3 per cent in 1986, and preliminary estimates from the Ministry of Finance show that it has since made a slow recovery, growing by 1.1 per cent in 1987 and 1.6 per cent in 1988. Exports in 1988 were 5.1 per cent higher than 1987, and imports were up by 8.3 per cent, suggesting increased domestic demand, yet Saudi Arabia still maintained a positive trade balance of almost $2 billion. Furthermore, even though companies were hit by the downturn there have been opportunities for business growth. Almost all the Saudi companies are privately owned, and do not need to publish annual reports and accounts. But a number have stated that they had good years in sales and profitability in 1987 and 1988, because they anticipated the downturn in the conventional mainstream sectors like construction and transport, and diversified into new growth areas. Both Hajji Hussein Ali Reza and Co. and E.A. Juffali and Brothers for example, launched successful drives into the smaller towns and villages in the outlying regions, and tapped a hitherto largely undeveloped market.
Today there appears to be a greater degree of realistic confidence among the business community. The optimistic expectations of a sudden new upturn in the oil market, and a return to the good old days of the oil boom, have generally been replaced by a perception of slow but steady growth, probably accelerating in the mid 1990s if the oil market conditions favor OPEC producers. At the other end of the spectrum of opinion, the pessimistic gloom expressed by some foreign and Saudi businessmen that there would be a prolonged slump after the collapse of the oil price in 1986, has given way to a more realistic recognition that there is still room for good business growth but, above all, that companies cannot depend on large-scale Government contracts and must be competitive, efficient, innovative and aggressive if they are to survive - just like anywhere else in the world. A recent survey of business published by the Ministry of Planning showed that confidence is returning, and that the business community expects to increase sales by an average of nine per cent in 1989/90, with higher than average sales anticipated in manufacturing, trade and services, and lower growth in construction and finance.
Characteristics of Saudi Development:
With the benefit of twenty years' hindsight, it is possible to identify three of the most outstanding features of Saudi Arabian development as: first, the extent and degree of economic and physical change to the country; second, the high degree of social and economic stability and cultural integrity in the midst of this change; and third, the progressively increasing role of the private sector in national development. There have been disruptions to traditional social life, but in general Saudi society has absorbed the impact of change without serious dislocation and alienation - and this applies not only to the long high growth period in the 1970s, but also the sudden downturn, which lasted for several years in the mid 1980s. While this stability is no surprise to the Saudis themselves, it is perceived as a major achievement by outsiders who have witnessed the turn oil of rapid change in their own histories and in other parts of the world.
This ordered and stable transformation was not attained by circumstance assisted by luck-it was deliberately planned and managed. When oil revenues and Government expenditures started to increase, the late King Faisal introduced systematic planning in the early 1960s, and in 1968 established the Central Planning Organization (later to become the Ministry of Planning). From the beginning, development planning in Saudi Arabia was much more than a mechanistic system of forecasting and budgeting Government expenditure - it became a method of managing the integration of economic growth, physical infrastructure development, and social change. It was guided by a sense of vision, which was not based on any economic ideology or grand design, but set a practical way to identify the long-term development goals and needs of Saudi society, and chart the course to achieve them in a free-enterprise economic system. Thus, the Fist Five Year Development Plan for 1970-1975 was based on a thirty year perspective plan to the year 2000. This identified the long-term strategic goals - such as economic diversification to avoid dependence on oil, social welfare, the development of human resources and the firm commitment to upholding Islam - which still guide the Government policies and provide a framework of consistency and continuity.
After twenty years of growth, it is evident that a special talent of Saudi Arabia has been the ability to orchestrate the benefits of comprehensive development - to make the whole greater than the sum of the parts - and to take a long-term view. In hindsight, the various parts of the national development efforts have come together over the years, and the dislocations and inconvenience of rapid growth have borne fruit in the size and diversification of the economy, the virtual eradication of poverty, and the emergence of a large and strong private sector and of an outstanding physical infrastructure. Saudi Arabia has been fortunate enough to have been able to amass large financial surpluses which have enabled the Government to take a long-term view and to invest. This degree of security does lead to perceptions and priorities among both Saudi Government officials and private sector businessman which are different from those of other governments and foreign businessmen who are preoccupied with short-term problems and solutions - next month's stock prices rather than the transfer of technology over five years. It is of course a matter of judgement, but it is unlikely that Saudi Arabia would have achieved the same degree of successful diversification and outstanding infrastructure without the strengths of a long-term, holistic vision which is shared by the business leaders as well as by the Government.
The difficulties of Saudi development have proved to be the reverse image of these strengths - the concentration on the broad picture results in less attention to detail, the concern for the effective impact of a program tends to override the efficiency of its operations, the perspicacity of long-term vision tends to blur the short-term issues. For example, although there has been successful integration of numerous projects into a highly developed system of physical infrastructure, the coordination of their construction was not so successful during the 1970s.
Economic development in Saudi Arabia has certainly not been easy nor without constraints and mistakes, but overall it has been very successful. In the words of one prominent Saudi businessman "In retrospect I would not make any major changes to the development policies the country has followed - certainly we bit some potholes on the road, but overall it has been highly successful."
There are also major challenges ahead. The Government will need to tackle the budget and the balance of payments deficit, at the same time as sustaining a sufficient pace of growth to keep up the drive to economic diversification, while finishing the process of weaning the private sector away from dependence on Government expenditure. At present, the Government has a fairly comfortable cushion of reserves, but there will still be a difficult balancing act between fiscal and economic objectives, and the Government is cautious in not counting on potential windfalls from a sudden oil price rise in the next few years.
The private sector also faces major challenges of competing in an economy which attracts and allows in products from all over the world, of coping with lower Government expenditure, and of investing in training new generations of Saudi manpower. There is again a difficult balance between reconciling the needs of an efficient free enterprise system, and providing an adequate degree of assistance to allow infant industries and commercial companies to get established.
But, although there are major challenges, there is confidence that they can be faced and overcome. The country is politically stable and also has a continuity of leadership and policies. The King and all members of the Council of Ministers have decades of hard experience, including the difficult times before the oil boom, and have shown that they can make tough decisions. There is also a generation of younger men in senior positions in the Government, who can contribute fresh ideas. These features are shared by the private sector: many of the older generation of hard-bitten entrepreneurs who built up major enterprises before the oil boom, are still providing leadership, and are now being joined by their sons and by a new generation of professional Saudi managers in many companies which were previously managed only by family members and expatriates.
Thus, Saudi Arabia faces the 1990s with a vision of where the country wants to be by the year 2000, with a combination of experience and innovation in the leadership of the Government and the business community, and with the foundation of the largest oil reserves in the world. The next stage of development will pose new challenges, in particular with the development of advanced technology capacities through the Offset Program. However, Saudi Arabia has already shown that it can realize its ambitions, even when others had doubts, and has demonstrated a quiet but strong determination to attain its objectives.
History:
The modern Kingdom of Saudi Arabia was proclaimed in 1932, the culmination of a process of unifying various small states and tribal communities by King Abdul Aziz Bin Abdul Rahman Al Saud, generally known as Ibn Saud. But though modern Saudi Arabia is a relatively new state, it has a long history. Saudi Arabia is the country where Islam was revealed to the Prophet Muhammad fifteen centuries ago, it has ancient pre-Islamic civilizations, and the first extensive state of the Al Saud had been established in the 18th century AD.
The Al Saud family is the hereditary rulers of the territory around Riyadh . In the early 18th century AD, they welcomed Mohammed Bin Abdul Wahhab, a religious scholar and reformer who taught the return to the fundamental principles of Islam.
In brief terms, Islam holds that it is the duty of the state to uphold religion and to enforce the Sharia, Islamic law. So, in order to extend these principles, the Al Saud rulers widened their state through invitations from other communities and through military intervention, to incorporate a large part of present Saudi Arabia into the Saudi State . This expansion brought them into conflict with the Ottoman Empire , which include the Hijaz in the West and Al Hasa in the East, and claimed sovereignty over the central part of the Arabian Peninsula . A campaign by the Ottoman army led to the destruction of the first Saudi state in 1818, but a second state soon flourished in the mid 19th century. This in turn lost control of the central part of Arabi to a state based on Hail in the north, and by the end of the 19th century the Al Saud family was in exile in Kuwait . Then in 1902, the 21 year old Abdul Aziz Ibm Saud led a party of just 40 men back to Riyadh , re-captured the city, and progressively won the rest of the country over the next thirty years.
The new Kingdom of Saudi Arabia brought peace and stability to the peninsula, and, in a century dominated by colonial empires and characterized by the formation of states in the course of independence struggles, Saudi Arabia is perhaps unique as a new 20th century state which was formed through different circumstances and based on religious principles. King Abdul Aziz Ibn Saud adopted the Sharia as the constitution of Saudi Arabia . As the civil power with jurisdiction over the holy cities of Makkah and Madina, which contain the two holiest shrines of Islam, the Kaabah and Mosque in Makkah and the Prophet's Mosque in Madina, the Saudi Government is responsible for the safety of the holy places and for the security of all Muslims who make the Pilgrimage, the Hajj, to Makkah, which is the last of the five pillars of Islam.
King Abdul Aziz died in 1953 after 21 years on the throne of Saudi Arabia , and over half a century as the ruler of an expanding state. He was succeeded by his sons: King Saud Bin Abdul Aziz, who reigned until 1963, followed by King Faisal Bin Abdul Aziz, who ruled until 1975. King Faisal was succeeded by King Khalid, who ruled until his death in 1982, when the present King Fahd Bin Abdul Aziz, acceded to the throne. In recognition of the duties of the ruler of Saudi Arabia , King Fahd took the title Custodian of the Two Holy Mosques as his official designation and thus re-affirmed the fundamental responsibilities of the Saudi State .
Islam is one of the world's great monotheistic religions. The followers of Islam, called Muslims, believe in one God - Allah in Arabic - and that Muhammad is His Prophet. Today, the worldwide community of Muslims, which embraces the people of many races and cultures, numbers nearly one billion. Historically Saudi Arabia has occupied a special place in the Islamic world as the very heartland of Islam. Indeed, it is towards the sacred Ka'abah in Makkah that Muslims turn devoutly in prayer five times a day. An appreciation of Islamic history is therefore essential for a genuine understanding of the Kingdom of Saudi Arabia , it Islamic heritage and culture, and its leading role in the Arab and Muslim world.
The Coming of the Prophet:
Around the year 570, Muhammad was born into a family of the ruling tribe of Makkah, the powerful and noble Quraysh. Makkah, a caravan city in the Hijaz region of northwestern Arabia , grew around the Ka'abah, meaning the House of God, a shrine of ancient origins built by Abraham and his son Ishmael. Pre-Islamic Arabia was polytheistic; some 360 idols representing the divinities of the Hijaz were housed in the Ka'abah.
Orphaned as a child, Muhammad spent several years of his boyhood among the Bedouins of the desert, developing a love for the rich Arabic language that was the Bedouins' proudest art. He learned the patience and forbearance of the herdsmen, whose life of solitude he came to understand and appreciate. As a young man, Muhammad traveled widely with the trade caravans through Palestine , Syria and Yemen before dedicating his life to meditation.
In 610, God revealed His word to Muhammad through the Angel Gabriel. In this way, Muhammad became the chosen bearer of the divine message and began proclaiming the oneness of God. The name of this new religion, Islam, means submission to God. The followers of Islam are called Muslims, meaning those who submit.
God's message, as transmitted through Muhammad, was not unanimously accepted in Makkah. Pagan worshippers threatened by the monotheistic religion, and merchants anxious to preserve their lucrative pilgrimage trade, intensified their opposition to Islam. To foil an assassination plot against him, Muhammad and a small group of his dedicated followers emigrated to Madina. This, the Hijrah or emigration, dates the beginning of the Islamic era and the history of the Islamic community.
In 629, Muhammad re-entered and conquered Makkah without bloodshed, destroying the idols in the Ka'abah and converting the inhabitants of Makkah to Islam. Through Islam, Muhammad gave the tribes of the Arabian Peninsula their first sense of unity and secured for his homeland a permanent place in the history of the world.
The Stages of Industrial Development:
Saudi industry has come a long way in a short time. In 1965, there were only about 30 modern factories in the country; by 1975, there were over 700 factories producing a wide variety of goods, most of which were relatively simple products, or final assembly of the more complicated goods, but at least a manufacturing base was established.
Then in the following decade, 1975-1985, the manufacturing sector grew at an average rate of over 15 per cent a year and the number of factories soared to about 2,000. This was the period of the infrastructure boom, and Saudi entrepreneurs swiftly established factories to produce building materials.
This decade also saw the birth of a whole new world scale, export-directed petrochemical industry and an export refining industry. The Saudi Arabian Basic Industries Corporation (SABIC) was established in 1976; by 1985/86 it had constructed and brought on stream 11 large petrochemical and steel factories and developed two others (which came on stream in 1988), four of which were billion dollar projects. Total sales had increased from under $500 million in 1984 to over $3.3 billion in 1988. This whole program was achieved ahead of schedule and within budget. SABIC also incorporated two older basic industries factories, a steel rolling mill and a fertilizer plant. During the same period three new large refineries were built, including one of the largest in the world. Aramco provided the feedstock for the petrochemical industry through a $10 billion gas gathering and treatment scheme to collect all the gas which previously had to be flared off. So in a single decade, the Saudi industrial sector was transformed with the investment of over $24 billion in gas gathering, oil refining and petrochemicals.
Currently, Saudi manufacturing is undergoing a period of restructuring and a pause. The output value of the manufacturing sector as a whole declined in 1985-1987, due to two main factors; the lower prices of refined oil products and the decline in demand for construction materials. Other manufacturing activities, however, did well, thus, there is a strong trend away from building materials where there is overcapacity. In 1987-1988, there was an upturn with the industrial sector as a whole growing by 1.9 per cent in 1987 and 4.7 per cent in 1988, according to provisional figures from the Ministry of Finance. Investment is still continuing but factory start-ups are not proceeding at the same level as five years ago. There are various reasons for this; first, the number of start-ups was artificially high during the boom years and the same momentum could not be sustained. Second, investors are certainly more cautious at a time of general economic slowdown, and take more time to study and plan their new projects - the obvious opportunities were all taken long ago. Third, the Saudi industrial sector is preparing itself for a new phase of expansion and a major step change in the level of technology during the 1990s.
A number of major industrial groups have completed several years of careful planning and are set to launch a range of large scale projects including the Alusa aluminum smelter complex. This will be the largest single investment project undertaken by the Saudi private sector, with a total invested capital of up to $840 million, and a capacity of 210,000 tons per year. The project illustrates the strategic thinking of the Saudi industrialists. It was originally conceived back in 1983, when the founders of the Saudi Cable Company (which was itself established in 1975) recognized that they would ultimately need an integrated chain of copper, aluminum and PVC in order to compete efficiently in the cables business. Saudi Arabia is an excellent location for aluminum smelting because of the low energy costs and the infrastructure, but world market conditions did not justify the development of a project until 1985, as other smelters had been established in Dubai and in Bahrain (in which SABIC is a shareholder). The Saudi aluminum smelter was originally planned to be a SABIC project, because the scale was considered too large for the private sector, but the increasing strength of the Saudi private sector enabled SABIC to relinquish its plans in 1982, and in 1983 the private investors started planning for the project and negotiating with potential foreign partners.
The Alusa project will be owned by a joint venture between the Alujain Corporation, a Saudi joint stock company, with a 60 per cent shareholding, and foreign partners, including Pechiney which will provide the technology, and could possibly include British Aerospace as part of the Al Yamamah Offset Program.
The Oil Sector:
Although Saudi Arabia has diversified its economic base significantly, oil is still easily the most important sector - and 1988 was a most important year, in which some far reaching changes in the whole oil sector were introduced.
Oil and Gas Production:
Oil production is historically associated with Aramco, which has long been the Kingdom's main crude oil and gas Production Company. Oil is also produced by the Arabian Oil Company (in which Japanese companies participate) and Getty Oil, but over 96 per cent of Saudi Arabian oil production and revenues derive from Saudi Aramco.
In 1988, a new entity known as the Saudi Arabian Oil Company (or Saudi Aramco), a company owned fully by the Saudi Government, was incorporated to absorb the functions of Aramco. This development followed the acquisition of beneficial ownership of Aramco's assets by the Saudi Government between 1973 and 1980, after which Aramco carried out the managerial and operational responsibilities of oil production on behalf of the Government. Also, in 1988, Saudi Aramco took a major step into downstream integration and international expansion, by participating, through the Aramco Services Company and on behalf of the Saudi Government, in a joint venture with Texaco for refining, distributing and marketing refined petroleum products in the eastern and southern United States .
Saudi Aramco's predecessor, Aramco, had its origins in 1933, when the Saudi Arabian Government signed the basic oil concession agreement with the then Standard Oil Company of California . By 1948, Social (now Chevron) had been joined by Exxon, Mobil and Texaco as shareholders in the Arabian American Oil Company - Aramco. The name and tradition of Aramco continues today in Saudi Aramco.
Saudi Aramco is the free world's largest-producing oil company and one of the top producers of natural gas. It has the world's greatest reserves of oil, 252.4 billion barrels, and gas reserves totaling 177.3 trillion standard cubic feet. With additional development of the existing fields; and with the recent expansion of exploration activities in Saudi Arabia , these reserves could be as high as 315 billion barrels of oil and 253 trillion standard cubic feet of gas. In 1988, Aramco had an average daily production of 4.9 million barrels, 24 per cent higher than 1987, and the capability to produce at higher levels.
But Saudi Aramco is more than an oil production company - it is in the process of assuming responsibility for many other activities which Aramco performed. Aramco played a crucial role in the Kingdom's development for more than 50 years. Aramco engineers helped develop some of the early infrastructure in the Eastern Province . Aramco has also followed a policy of encouraging local industries and business. Some of the foremost Saudi corporations were started by ex-employees who were encouraged to establish their own contracting and transport companies to supply Aramco. By the end of 1988, Saudi Aramco had approved 625 local manufacturing plants as sources of supply, many of which had received technical assistance and guidance from the company's Local Industrial Development Division. The vision of the early Aramco managers has a profound legacy in the good relations between foreign investors and Saudi society. Saudi Aramco plans to continue to foster these relations and to encourage and assist the expansion of Saudi commerce.
Foreign Aid:
Saudi Arabia has now emerged as a major contributor to international aid to developing countries, awarding up to 4.k per cent of its Gross Domestic Product in development assistance - yet Saudi aid is distributed with a low profile.
There are five main channels for the distribution of Saudi Aid. First there is the official assistance which is granted directly to other governments, and handled through the Ministries of Finance and Foreign Affairs. Secondly, there are contributions of the Saudi Government to multilateral agencies, both of the United Nations and the Islamic world. Third, there are direct emergency grants of funds, food and equipment to foreign governments, such as wheat, dates, fertilizers and cement as disaster relief, for example to Bangladesh and Sudan for the flood victims. Saudi medical teams (with extensive experience of managing health and shelter for large numbers of pilgrims) were sent to assist earthquake victims in Yemen . Fourth, there is the aid loans program which is administered through the Saudi Fund for Development. Fifth, there are private transfers to developing countries, which should be taken to include both private philanthropic contribution and also private investment.
It is very likely that foreign aid as a proportion of GDP would be well above 4.5 per cent if all the private sector transfers are included, as is the practice with OECD countries when meeting the United Nations target of 0.7 per cent of Gross Domestic Product to be given as foreign aid.
Details of private Saudi investments in developing countries are not easily gathered, but it is known that many of the large Saudi companies have made extensive investment overseas. For example, the Saudi Cable Company has manufacturing investment in Turkey; the Xenel Corporation is involved in a large build-operate-transfer electricity generation project in Pakistan, while the Baraka Corporation has a number of housing and real estate development projects in Egypt, Turkey and Tunisia, and has also extended its operations as a general trading company, promoting trade among the Arab countries in particular.
The Saudi Fund for Development was established in 1974, with initial capital of about $2.5 billion, which was progressively raised to a level of $7 billion in 1981. It is the primary vehicle for the distribution of Saudi aid, and has now become a prominent part of the international aid community. The Saudi Fund has participated increasingly in the joint funding of projects with other agencies, such as the World Bank, Kuwait Fund, USAID, and African Development Bank.
Up to 1987, the Saudi Fund had granted a cumulative total of $5.7 billion for 276 development projects in 61 countries. The Fund has a policy to give priority to low income countries (defined as those with a per capita annual income of less than $700), which received approximately 60 per cent of the number of projects and of the value of aid.
This priority has also led to a concentration of aid in response to the problems of Africa, which have recently become the prime concern of the international aid community, and 60 per cent of the number of the Saudi aid projects have been in Africa, with 37 per cent in Asia and 3 per cent in other areas of the world as far apart as Jamaica, Brazil, Malta and Western Samoa. About 20 per cent of the aid from the Saudi Fund goes to the Middle East .
Aid is given for a wide variety of development projects, with the largest proportion (just over 50 per cent) going to civil engineering projects (roads, railways, air and sea ports, energy and communication) with another nine per cent on social infrastructure such as housing and water supply; 20 per cent is directed to agriculture, and the remainder to education, health, industry and other projects, and credit facilities such as for an economic structural adjustment program in Senegal. One of the largest projects is the Ait Ayoub dam, at a total cost of $176 million, for which the Saudi Fund is providing 22 per cent.
Banking and Finance:
There are now twelve commercial banks in Saudi Arabia . The two largest, the Riyad Bank and the National Commercial Bank, are wholly Saudi-owned, as is the newest, the Al-Rajhi Banking and Investment Corporation, formed in 1988 from the former Al-Rajhi Company for Currency Exchange and Commerce. These three hold about 58 per cent of the total assets of the commercial banks, with the remainder distributed among joint venture banks, with foreign banks and the Saudi public as shareholders. The Riyad Bank is the only Saudi Bank which is not privately owned, with 52 per cent of shares held by Saudi citizens and the remainder by the Saudi Arabian Monetary Agency. The largest joint venture bank is Saudi American in which Citicorp has a 40 per cent shareholding. While all these banks concentrate their main efforts on the Saudi domestic market, some have also established their own branches overseas to better serve their customers: Saudi American Bank, for example, has branches in London and Istanbul and a subsidiary in Geneva, while Riyad Bank has a branch in London, will soon open one in Houston, and has equity participation in other banks in the GCC, Europe, Asia and America.
The performance of the commercial banks has recently improved significantly. Profitability, which was very high by international standards during the boom years, dropped after 1984, but has picked up sharply. Saudi American Bank announced their highest ever profits, and according to its Managing Director "1989 looks like it will be even better." Saudi British Bank has also indicated that 1989 should be a good year. The improvement is attributed to a number of reasons: the banks have spent several years clearing problem loans from their balance sheets, they have improved productivity, reduced their operating expenses and extended automation, as a result of which the banks are now healthier today than a few years ago - even compared to the boom years. The banks have remained very liquid: an average 45 per cent of deposits are channeled into loans, and a good portion of the balance is held in liquid assets. Also, these operating improvements have been gained at the same time as Saudization of the staff has increased markedly.
In addition to the commercial banks, the Government has established and funded a network of specialized credit institutions to provide medium and long term finance in key development sectors. The largest is the Real Estate Development Fund, which provides loans to private citizens to build their own homes, and to real estate developers for commercial and residential investment projects. The Public Investment Fund provides investment loans to the state owned corporations like Saudi and SABIC. The Saudi Industrial Development Fund awards loans to manufacturing enterprises; the Agricultural Bank to farmers; while the Saudi Credit Bank provides assistance loans to private citizen for personal needs and also to small businessmen, in particular to graduates from the Vocational Training Institutes to start up their own workshops.
Apart from the formal banking institutions, there are the currency-changers, about thirty companies which historically grew up to serve the pilgrims to Makkah, and now mainly handle money transfers for expatriate workers. These currency changers have an extensive branch network, long opening hours, and offer competitive exchange rates and hence are very convenient for their customers.
Islamic banks also offer alternative investment and financing vehicles to Muslim investors and borrowers. These facilities are primarily available for trade finance, operating with the principle of murabaha, by which goods are purchased and then sold for a profit (at risk) on a deferred settlement basis. The Islamic Development Bank and the Al Rajhi Banking and Investment Corporation operate on this basis, and some other commercial banks are starting to offer Islamic financing vehicles.
Although the retail banking sector is highly developed, the capital market is not. There is a Saudi Stock Market, and shares are traded through the banks in a system modeled after Germany 's. Share issues are prepared by the Consulting Center for Finance and Investment, and almost all have been eagerly over-subscribed. Memories of the collapse of the unofficial stock exchange in Kuwait; of Black Monday throughout the world in October 1987; together with the environment of highly liquid investors eagerly looking for good opportunities, have encouraged the Saudi Government to be cautious in the stimulation and regulation of the capital market. Nevertheless, the banking community is looking forward to good growth prospects. Saudi American Bank, for example, is to launch a new local investment fund before the end of 1989.
The whole banking sector is regulated by the Saudi Arabian Monetary Agency (SAMA), the central bank, which has won respect for its management skills, especially in the difficult years between 1985 and 1987, and also for its encouragement of innovation. SAMA is described as a proactive rather than a reactive institution by a leading foreign banker, for example it has stimulated a national ATM system. SAMA has a good track record in supporting local banks which face temporary difficulties; in 1988 it started issuing five year development bonds to help finance the budget deficit, which provided new outlets for the bank's liquidity; while in 1987 it established a Banking Disputes Committee to handle the settlements of unpaid loans, with very useful results.
A variety of new trends are emerging in the Kingdom's financial sector. First, private finance is supplementing Government expenditure and could take on a greater role. The proportion of bank deposits to GDP has raised from a level of 10 per cent in 1980 to 45 per cent in 1987, and as the economy continues to recover, the slowdown in Government expenditure could be partly filled by private finance. The commercial banks are offering more varied services. In retail banking, there is continued expansion of ATMs, especially in offsite locations such as shopping malls, airports, and drive-in facilities, which are proving very popular. From a small base, the demand for credit and charge cards is growing very quickly, and inter-branch services are increasing. EFTPOS will become feasible with the establishment of the national ATM network, and Saudi Arabia joined the SWIFT system in March 1989. Corporate banking services are also expanding, with improved project finance taking a more important role after the historic concentration on trade and contract finance. Treasury and advisory services are being strengthened, and the more innovative banks are providing on-line terminals and national networks for their corporate customers. Almost all the banks have invested heavily in new technology, and there is every indication that they will not only continue but increase this pattern.
Over the last twenty years, the Kingdom of Saudi Arabia has emerged as a significant influence in the world, a major power in the Middle East region, and the world's leading oil exporter. However, Saudi Arabia is much more than just an oil producer. The country's economic strength is certainly based on petroleum, and with the largest reserves in the world, oil will remain the foundation for the Saudi economy for many years. But the Saudi economy has already diversified to become one of the 20 largest economies in the free world, with a total Gross Domestic Product estimated at about $74 billion in 1988. The oil sector in 1987 accounted for about 32 per cent of the Gross Domestic Product, compared to almost 70 per cent in 1980. In world trade, Saudi Arabia alone is the fourth largest importer of OECD exports, and constitutes the largest when combined with its partners in the gulf Cooperation Council. Saudi Arabia is now the leading industrial economy among all the Arab countries, and is a major player in the international petrochemical market. It is one of the largest donors of foreign aid, it is stable and prosperous and, in addition to this economic strength, has a great influence throughout the Islamic world, which embraces over 1 billion Muslims. Saudi Arabia is honored to contain the two most revered mosques of Islam, in Makkah and Madina, and the official title of the King of Saudi Arabia is Custodian of the Two Holy Mosques. Every year, Saudi Arabia hosts approximately two million pilgrims for the Hajj (the Pilgrimage) to Makkah, in the greatest single concentration of travelers in the world. Thus in world economics, and in international politics, Saudi Arabia is a country which is of great importance to businessmen.
graphy is important in Saudi Arabia - it s a huge country, with a total land area of about 850,000 square miles, the same size as the European Community, and as the United States west of the Mississippi. The population is relatively small; estimates vary, but a useful approximation is a total of about 12 million in 1988, widely distributed among numerous cities, towns and villages. So transport and distribution are important business activities and critical factors for managers. Almost all parts of the country have a hot desert climate, therefore all products must be well packaged and protected - not only perishable food stuffs but also infrastructure and equipment which need to withstand the environment.
Saudi Arabia is normally divided into five main geographical regions. The West, called the Hijaz, has about 34 per cent of the total population, and is heavily urbanized. The Central Region has about 25 per cent of the kingdom's population, with just over half in the main cities. The Eastern Region, Al Hasa, has about 13 per cent of the total population, and is the oil producing area, with over 80 per cent of its population in the conurbations. The Southern Region, the Asir, has about 16 per cent of the total population, the great majority of whom (70 per cent) live in agricultural villages in the high mountains and the wide coastal plains of the region. The North holds the remainder of the population, and again the majority are villagers and some nomads. Twenty years ago a much larger proportion of the total population was still nomadic or semi-nomadic, but as the younger generations were educated and took on new employment, especially in the military, most settled in villages or towns where their relatives worked. Thus Saudi Arabia has a diverse, widely distributed and cosmopolitan population, with millions of guest-workers and their families, from other Arab countries, Asia , and a sizeable American and European community. The whole country has a young demographic profile - over 50 per cent of the population is aged under 15, and the growth rate of the Saudi population is estimated to be 3.5 per cent per year.
ontinents. The Red Sea is the channel linking the sea-lanes East from Asia , and South from Africa , to the Mediterranean through the Suez Canal . The air routes from Europe to South Asia and the Far East traverse the Arabian Gulf , and a large new airport is being built to replace the present one at Dhahran, and will compete with the established transit points at Bahrain and Dubai . There are good communication links to other countries in the Middle East , and these geographical features, combined with the good international relations of the Kingdom, have encouraged companies to locate in Saudi Arabia as their regional base.
The Oil Boom and Afterwards:
Economic and infrastructural development had been slowly but steadily progressing ever since World War II, and had accelerated since about 1965. However, the ten year oil boom from 1974 to 1984 is the dominant factor in the current Saudi business environment, not least because of the aftermath. The boom is today perceived as a window of opportunity, from which the country benefited greatly, but not as a continuing state of affairs.
The boom and the following downturn were dramatic and directly affected the whole economy, not just the oil patch. Total Government revenues soared from a level of $10 billion in 1973 to $100 billion in 1981/82, and then dropped to $35 billion in 1987. During this period, the Government converted oil revenues into physical infrastructure, and provided considerable support for private sector investment in industry, agriculture and services, with the effect that the non-oil economy grew between 10 and 20 per cent a year in the 1970s. Then the sudden downturn in the mid-1980s came as a shock to the economy and to the business community. This change in fortunes caused many to think that the economy was entirely dependent on oil and would move in a boom-slump-boom cycle in direct response to the movements of the oil market.
However, notwithstanding the great significance of oil, it is clear that Saudi Arabia is no longer just an oil economy. Business has diversified sufficiently, and the consumer market and private sector have proved large enough and wealthy enough to revive growth. The evidence is that the economy has now weathered the sudden downturn. The non-oil GDP fell by 4.3 per cent in 1984, by 8.3 per cent in 1985 at the bottom of the recession, then by 3.3 per cent in 1986, and preliminary estimates from the Ministry of Finance show that it has since made a slow recovery, growing by 1.1 per cent in 1987 and 1.6 per cent in 1988. Exports in 1988 were 5.1 per cent higher than 1987, and imports were up by 8.3 per cent, suggesting increased domestic demand, yet Saudi Arabia still maintained a positive trade balance of almost $2 billion. Furthermore, even though companies were hit by the downturn there have been opportunities for business growth. Almost all the Saudi companies are privately owned, and do not need to publish annual reports and accounts. But a number have stated that they had good years in sales and profitability in 1987 and 1988, because they anticipated the downturn in the conventional mainstream sectors like construction and transport, and diversified into new growth areas. Both Hajji Hussein Ali Reza and Co. and E.A. Juffali and Brothers for example, launched successful drives into the smaller towns and villages in the outlying regions, and tapped a hitherto largely undeveloped market.
Today there appears to be a greater degree of realistic confidence among the business community. The optimistic expectations of a sudden new upturn in the oil market, and a return to the good old days of the oil boom, have generally been replaced by a perception of slow but steady growth, probably accelerating in the mid 1990s if the oil market conditions favor OPEC producers. At the other end of the spectrum of opinion, the pessimistic gloom expressed by some foreign and Saudi businessmen that there would be a prolonged slump after the collapse of the oil price in 1986, has given way to a more realistic recognition that there is still room for good business growth but, above all, that companies cannot depend on large-scale Government contracts and must be competitive, efficient, innovative and aggressive if they are to survive - just like anywhere else in the world. A recent survey of business published by the Ministry of Planning showed that confidence is returning, and that the business community expects to increase sales by an average of nine per cent in 1989/90, with higher than average sales anticipated in manufacturing, trade and services, and lower growth in construction and finance.
Characteristics of Saudi Development:
With the benefit of twenty years' hindsight, it is possible to identify three of the most outstanding features of Saudi Arabian development as: first, the extent and degree of economic and physical change to the country; second, the high degree of social and economic stability and cultural integrity in the midst of this change; and third, the progressively increasing role of the private sector in national development. There have been disruptions to traditional social life, but in general Saudi society has absorbed the impact of change without serious dislocation and alienation - and this applies not only to the long high growth period in the 1970s, but also the sudden downturn, which lasted for several years in the mid 1980s. While this stability is no surprise to the Saudis themselves, it is perceived as a major achievement by outsiders who have witnessed the turn oil of rapid change in their own histories and in other parts of the world.
This ordered and stable transformation was not attained by circumstance assisted by luck-it was deliberately planned and managed. When oil revenues and Government expenditures started to increase, the late King Faisal introduced systematic planning in the early 1960s, and in 1968 established the Central Planning Organization (later to become the Ministry of Planning). From the beginning, development planning in Saudi Arabia was much more than a mechanistic system of forecasting and budgeting Government expenditure - it became a method of managing the integration of economic growth, physical infrastructure development, and social change. It was guided by a sense of vision, which was not based on any economic ideology or grand design, but set a practical way to identify the long-term development goals and needs of Saudi society, and chart the course to achieve them in a free-enterprise economic system. Thus, the Fist Five Year Development Plan for 1970-1975 was based on a thirty year perspective plan to the year 2000. This identified the long-term strategic goals - such as economic diversification to avoid dependence on oil, social welfare, the development of human resources and the firm commitment to upholding Islam - which still guide the Government policies and provide a framework of consistency and continuity.
After twenty years of growth, it is evident that a special talent of Saudi Arabia has been the ability to orchestrate the benefits of comprehensive development - to make the whole greater than the sum of the parts - and to take a long-term view. In hindsight, the various parts of the national development efforts have come together over the years, and the dislocations and inconvenience of rapid growth have borne fruit in the size and diversification of the economy, the virtual eradication of poverty, and the emergence of a large and strong private sector and of an outstanding physical infrastructure. Saudi Arabia has been fortunate enough to have been able to amass large financial surpluses which have enabled the Government to take a long-term view and to invest. This degree of security does lead to perceptions and priorities among both Saudi Government officials and private sector businessman which are different from those of other governments and foreign businessmen who are preoccupied with short-term problems and solutions - next month's stock prices rather than the transfer of technology over five years. It is of course a matter of judgement, but it is unlikely that Saudi Arabia would have achieved the same degree of successful diversification and outstanding infrastructure without the strengths of a long-term, holistic vision which is shared by the business leaders as well as by the Government.
The difficulties of Saudi development have proved to be the reverse image of these strengths - the concentration on the broad picture results in less attention to detail, the concern for the effective impact of a program tends to override the efficiency of its operations, the perspicacity of long-term vision tends to blur the short-term issues. For example, although there has been successful integration of numerous projects into a highly developed system of physical infrastructure, the coordination of their construction was not so successful during the 1970s.
Economic development in Saudi Arabia has certainly not been easy nor without constraints and mistakes, but overall it has been very successful. In the words of one prominent Saudi businessman "In retrospect I would not make any major changes to the development policies the country has followed - certainly we bit some potholes on the road, but overall it has been highly successful."
There are also major challenges ahead. The Government will need to tackle the budget and the balance of payments deficit, at the same time as sustaining a sufficient pace of growth to keep up the drive to economic diversification, while finishing the process of weaning the private sector away from dependence on Government expenditure. At present, the Government has a fairly comfortable cushion of reserves, but there will still be a difficult balancing act between fiscal and economic objectives, and the Government is cautious in not counting on potential windfalls from a sudden oil price rise in the next few years.
The private sector also faces major challenges of competing in an economy which attracts and allows in products from all over the world, of coping with lower Government expenditure, and of investing in training new generations of Saudi manpower. There is again a difficult balance between reconciling the needs of an efficient free enterprise system, and providing an adequate degree of assistance to allow infant industries and commercial companies to get established.
But, although there are major challenges, there is confidence that they can be faced and overcome. The country is politically stable and also has a continuity of leadership and policies. The King and all members of the Council of Ministers have decades of hard experience, including the difficult times before the oil boom, and have shown that they can make tough decisions. There is also a generation of younger men in senior positions in the Government, who can contribute fresh ideas. These features are shared by the private sector: many of the older generation of hard-bitten entrepreneurs who built up major enterprises before the oil boom, are still providing leadership, and are now being joined by their sons and by a new generation of professional Saudi managers in many companies which were previously managed only by family members and expatriates.
Thus, Saudi Arabia faces the 1990s with a vision of where the country wants to be by the year 2000, with a combination of experience and innovation in the leadership of the Government and the business community, and with the foundation of the largest oil reserves in the world. The next stage of development will pose new challenges, in particular with the development of advanced technology capacities through the Offset Program. However, Saudi Arabia has already shown that it can realize its ambitions, even when others had doubts, and has demonstrated a quiet but strong determination to attain its objectives.
History:
The modern Kingdom of Saudi Arabia was proclaimed in 1932, the culmination of a process of unifying various small states and tribal communities by King Abdul Aziz Bin Abdul Rahman Al Saud, generally known as Ibn Saud. But though modern Saudi Arabia is a relatively new state, it has a long history. Saudi Arabia is the country where Islam was revealed to the Prophet Muhammad fifteen centuries ago, it has ancient pre-Islamic civilizations, and the first extensive state of the Al Saud had been established in the 18th century AD.
The Al Saud family is the hereditary rulers of the territory around Riyadh . In the early 18th century AD, they welcomed Mohammed Bin Abdul Wahhab, a religious scholar and reformer who taught the return to the fundamental principles of Islam.
In brief terms, Islam holds that it is the duty of the state to uphold religion and to enforce the Sharia, Islamic law. So, in order to extend these principles, the Al Saud rulers widened their state through invitations from other communities and through military intervention, to incorporate a large part of present Saudi Arabia into the Saudi State . This expansion brought them into conflict with the Ottoman Empire , which include the Hijaz in the West and Al Hasa in the East, and claimed sovereignty over the central part of the Arabian Peninsula . A campaign by the Ottoman army led to the destruction of the first Saudi state in 1818, but a second state soon flourished in the mid 19th century. This in turn lost control of the central part of Arabi to a state based on Hail in the north, and by the end of the 19th century the Al Saud family was in exile in Kuwait . Then in 1902, the 21 year old Abdul Aziz Ibm Saud led a party of just 40 men back to Riyadh , re-captured the city, and progressively won the rest of the country over the next thirty years.
The new Kingdom of Saudi Arabia brought peace and stability to the peninsula, and, in a century dominated by colonial empires and characterized by the formation of states in the course of independence struggles, Saudi Arabia is perhaps unique as a new 20th century state which was formed through different circumstances and based on religious principles. King Abdul Aziz Ibn Saud adopted the Sharia as the constitution of Saudi Arabia . As the civil power with jurisdiction over the holy cities of Makkah and Madina, which contain the two holiest shrines of Islam, the Kaabah and Mosque in Makkah and the Prophet's Mosque in Madina, the Saudi Government is responsible for the safety of the holy places and for the security of all Muslims who make the Pilgrimage, the Hajj, to Makkah, which is the last of the five pillars of Islam.
King Abdul Aziz died in 1953 after 21 years on the throne of Saudi Arabia , and over half a century as the ruler of an expanding state. He was succeeded by his sons: King Saud Bin Abdul Aziz, who reigned until 1963, followed by King Faisal Bin Abdul Aziz, who ruled until 1975. King Faisal was succeeded by King Khalid, who ruled until his death in 1982, when the present King Fahd Bin Abdul Aziz, acceded to the throne. In recognition of the duties of the ruler of Saudi Arabia , King Fahd took the title Custodian of the Two Holy Mosques as his official designation and thus re-affirmed the fundamental responsibilities of the Saudi State .
Islam is one of the world's great monotheistic religions. The followers of Islam, called Muslims, believe in one God - Allah in Arabic - and that Muhammad is His Prophet. Today, the worldwide community of Muslims, which embraces the people of many races and cultures, numbers nearly one billion. Historically Saudi Arabia has occupied a special place in the Islamic world as the very heartland of Islam. Indeed, it is towards the sacred Ka'abah in Makkah that Muslims turn devoutly in prayer five times a day. An appreciation of Islamic history is therefore essential for a genuine understanding of the Kingdom of Saudi Arabia , it Islamic heritage and culture, and its leading role in the Arab and Muslim world.
The Coming of the Prophet:
Around the year 570, Muhammad was born into a family of the ruling tribe of Makkah, the powerful and noble Quraysh. Makkah, a caravan city in the Hijaz region of northwestern Arabia , grew around the Ka'abah, meaning the House of God, a shrine of ancient origins built by Abraham and his son Ishmael. Pre-Islamic Arabia was polytheistic; some 360 idols representing the divinities of the Hijaz were housed in the Ka'abah.
Orphaned as a child, Muhammad spent several years of his boyhood among the Bedouins of the desert, developing a love for the rich Arabic language that was the Bedouins' proudest art. He learned the patience and forbearance of the herdsmen, whose life of solitude he came to understand and appreciate. As a young man, Muhammad traveled widely with the trade caravans through Palestine , Syria and Yemen before dedicating his life to meditation.
In 610, God revealed His word to Muhammad through the Angel Gabriel. In this way, Muhammad became the chosen bearer of the divine message and began proclaiming the oneness of God. The name of this new religion, Islam, means submission to God. The followers of Islam are called Muslims, meaning those who submit.
God's message, as transmitted through Muhammad, was not unanimously accepted in Makkah. Pagan worshippers threatened by the monotheistic religion, and merchants anxious to preserve their lucrative pilgrimage trade, intensified their opposition to Islam. To foil an assassination plot against him, Muhammad and a small group of his dedicated followers emigrated to Madina. This, the Hijrah or emigration, dates the beginning of the Islamic era and the history of the Islamic community.
In 629, Muhammad re-entered and conquered Makkah without bloodshed, destroying the idols in the Ka'abah and converting the inhabitants of Makkah to Islam. Through Islam, Muhammad gave the tribes of the Arabian Peninsula their first sense of unity and secured for his homeland a permanent place in the history of the world.
The Stages of Industrial Development:
Saudi industry has come a long way in a short time. In 1965, there were only about 30 modern factories in the country; by 1975, there were over 700 factories producing a wide variety of goods, most of which were relatively simple products, or final assembly of the more complicated goods, but at least a manufacturing base was established.
Then in the following decade, 1975-1985, the manufacturing sector grew at an average rate of over 15 per cent a year and the number of factories soared to about 2,000. This was the period of the infrastructure boom, and Saudi entrepreneurs swiftly established factories to produce building materials.
This decade also saw the birth of a whole new world scale, export-directed petrochemical industry and an export refining industry. The Saudi Arabian Basic Industries Corporation (SABIC) was established in 1976; by 1985/86 it had constructed and brought on stream 11 large petrochemical and steel factories and developed two others (which came on stream in 1988), four of which were billion dollar projects. Total sales had increased from under $500 million in 1984 to over $3.3 billion in 1988. This whole program was achieved ahead of schedule and within budget. SABIC also incorporated two older basic industries factories, a steel rolling mill and a fertilizer plant. During the same period three new large refineries were built, including one of the largest in the world. Aramco provided the feedstock for the petrochemical industry through a $10 billion gas gathering and treatment scheme to collect all the gas which previously had to be flared off. So in a single decade, the Saudi industrial sector was transformed with the investment of over $24 billion in gas gathering, oil refining and petrochemicals.
Currently, Saudi manufacturing is undergoing a period of restructuring and a pause. The output value of the manufacturing sector as a whole declined in 1985-1987, due to two main factors; the lower prices of refined oil products and the decline in demand for construction materials. Other manufacturing activities, however, did well, thus, there is a strong trend away from building materials where there is overcapacity. In 1987-1988, there was an upturn with the industrial sector as a whole growing by 1.9 per cent in 1987 and 4.7 per cent in 1988, according to provisional figures from the Ministry of Finance. Investment is still continuing but factory start-ups are not proceeding at the same level as five years ago. There are various reasons for this; first, the number of start-ups was artificially high during the boom years and the same momentum could not be sustained. Second, investors are certainly more cautious at a time of general economic slowdown, and take more time to study and plan their new projects - the obvious opportunities were all taken long ago. Third, the Saudi industrial sector is preparing itself for a new phase of expansion and a major step change in the level of technology during the 1990s.
A number of major industrial groups have completed several years of careful planning and are set to launch a range of large scale projects including the Alusa aluminum smelter complex. This will be the largest single investment project undertaken by the Saudi private sector, with a total invested capital of up to $840 million, and a capacity of 210,000 tons per year. The project illustrates the strategic thinking of the Saudi industrialists. It was originally conceived back in 1983, when the founders of the Saudi Cable Company (which was itself established in 1975) recognized that they would ultimately need an integrated chain of copper, aluminum and PVC in order to compete efficiently in the cables business. Saudi Arabia is an excellent location for aluminum smelting because of the low energy costs and the infrastructure, but world market conditions did not justify the development of a project until 1985, as other smelters had been established in Dubai and in Bahrain (in which SABIC is a shareholder). The Saudi aluminum smelter was originally planned to be a SABIC project, because the scale was considered too large for the private sector, but the increasing strength of the Saudi private sector enabled SABIC to relinquish its plans in 1982, and in 1983 the private investors started planning for the project and negotiating with potential foreign partners.
The Alusa project will be owned by a joint venture between the Alujain Corporation, a Saudi joint stock company, with a 60 per cent shareholding, and foreign partners, including Pechiney which will provide the technology, and could possibly include British Aerospace as part of the Al Yamamah Offset Program.
The Oil Sector:
Although Saudi Arabia has diversified its economic base significantly, oil is still easily the most important sector - and 1988 was a most important year, in which some far reaching changes in the whole oil sector were introduced.
Oil and Gas Production:
Oil production is historically associated with Aramco, which has long been the Kingdom's main crude oil and gas Production Company. Oil is also produced by the Arabian Oil Company (in which Japanese companies participate) and Getty Oil, but over 96 per cent of Saudi Arabian oil production and revenues derive from Saudi Aramco.
In 1988, a new entity known as the Saudi Arabian Oil Company (or Saudi Aramco), a company owned fully by the Saudi Government, was incorporated to absorb the functions of Aramco. This development followed the acquisition of beneficial ownership of Aramco's assets by the Saudi Government between 1973 and 1980, after which Aramco carried out the managerial and operational responsibilities of oil production on behalf of the Government. Also, in 1988, Saudi Aramco took a major step into downstream integration and international expansion, by participating, through the Aramco Services Company and on behalf of the Saudi Government, in a joint venture with Texaco for refining, distributing and marketing refined petroleum products in the eastern and southern United States .
Saudi Aramco's predecessor, Aramco, had its origins in 1933, when the Saudi Arabian Government signed the basic oil concession agreement with the then Standard Oil Company of California . By 1948, Social (now Chevron) had been joined by Exxon, Mobil and Texaco as shareholders in the Arabian American Oil Company - Aramco. The name and tradition of Aramco continues today in Saudi Aramco.
Saudi Aramco is the free world's largest-producing oil company and one of the top producers of natural gas. It has the world's greatest reserves of oil, 252.4 billion barrels, and gas reserves totaling 177.3 trillion standard cubic feet. With additional development of the existing fields; and with the recent expansion of exploration activities in Saudi Arabia , these reserves could be as high as 315 billion barrels of oil and 253 trillion standard cubic feet of gas. In 1988, Aramco had an average daily production of 4.9 million barrels, 24 per cent higher than 1987, and the capability to produce at higher levels.
But Saudi Aramco is more than an oil production company - it is in the process of assuming responsibility for many other activities which Aramco performed. Aramco played a crucial role in the Kingdom's development for more than 50 years. Aramco engineers helped develop some of the early infrastructure in the Eastern Province . Aramco has also followed a policy of encouraging local industries and business. Some of the foremost Saudi corporations were started by ex-employees who were encouraged to establish their own contracting and transport companies to supply Aramco. By the end of 1988, Saudi Aramco had approved 625 local manufacturing plants as sources of supply, many of which had received technical assistance and guidance from the company's Local Industrial Development Division. The vision of the early Aramco managers has a profound legacy in the good relations between foreign investors and Saudi society. Saudi Aramco plans to continue to foster these relations and to encourage and assist the expansion of Saudi commerce.
Foreign Aid:
Saudi Arabia has now emerged as a major contributor to international aid to developing countries, awarding up to 4.k per cent of its Gross Domestic Product in development assistance - yet Saudi aid is distributed with a low profile.
There are five main channels for the distribution of Saudi Aid. First there is the official assistance which is granted directly to other governments, and handled through the Ministries of Finance and Foreign Affairs. Secondly, there are contributions of the Saudi Government to multilateral agencies, both of the United Nations and the Islamic world. Third, there are direct emergency grants of funds, food and equipment to foreign governments, such as wheat, dates, fertilizers and cement as disaster relief, for example to Bangladesh and Sudan for the flood victims. Saudi medical teams (with extensive experience of managing health and shelter for large numbers of pilgrims) were sent to assist earthquake victims in Yemen . Fourth, there is the aid loans program which is administered through the Saudi Fund for Development. Fifth, there are private transfers to developing countries, which should be taken to include both private philanthropic contribution and also private investment.
It is very likely that foreign aid as a proportion of GDP would be well above 4.5 per cent if all the private sector transfers are included, as is the practice with OECD countries when meeting the United Nations target of 0.7 per cent of Gross Domestic Product to be given as foreign aid.
Details of private Saudi investments in developing countries are not easily gathered, but it is known that many of the large Saudi companies have made extensive investment overseas. For example, the Saudi Cable Company has manufacturing investment in Turkey; the Xenel Corporation is involved in a large build-operate-transfer electricity generation project in Pakistan, while the Baraka Corporation has a number of housing and real estate development projects in Egypt, Turkey and Tunisia, and has also extended its operations as a general trading company, promoting trade among the Arab countries in particular.
The Saudi Fund for Development was established in 1974, with initial capital of about $2.5 billion, which was progressively raised to a level of $7 billion in 1981. It is the primary vehicle for the distribution of Saudi aid, and has now become a prominent part of the international aid community. The Saudi Fund has participated increasingly in the joint funding of projects with other agencies, such as the World Bank, Kuwait Fund, USAID, and African Development Bank.
Up to 1987, the Saudi Fund had granted a cumulative total of $5.7 billion for 276 development projects in 61 countries. The Fund has a policy to give priority to low income countries (defined as those with a per capita annual income of less than $700), which received approximately 60 per cent of the number of projects and of the value of aid.
This priority has also led to a concentration of aid in response to the problems of Africa, which have recently become the prime concern of the international aid community, and 60 per cent of the number of the Saudi aid projects have been in Africa, with 37 per cent in Asia and 3 per cent in other areas of the world as far apart as Jamaica, Brazil, Malta and Western Samoa. About 20 per cent of the aid from the Saudi Fund goes to the Middle East .
Aid is given for a wide variety of development projects, with the largest proportion (just over 50 per cent) going to civil engineering projects (roads, railways, air and sea ports, energy and communication) with another nine per cent on social infrastructure such as housing and water supply; 20 per cent is directed to agriculture, and the remainder to education, health, industry and other projects, and credit facilities such as for an economic structural adjustment program in Senegal. One of the largest projects is the Ait Ayoub dam, at a total cost of $176 million, for which the Saudi Fund is providing 22 per cent.
Banking and Finance:
There are now twelve commercial banks in Saudi Arabia . The two largest, the Riyad Bank and the National Commercial Bank, are wholly Saudi-owned, as is the newest, the Al-Rajhi Banking and Investment Corporation, formed in 1988 from the former Al-Rajhi Company for Currency Exchange and Commerce. These three hold about 58 per cent of the total assets of the commercial banks, with the remainder distributed among joint venture banks, with foreign banks and the Saudi public as shareholders. The Riyad Bank is the only Saudi Bank which is not privately owned, with 52 per cent of shares held by Saudi citizens and the remainder by the Saudi Arabian Monetary Agency. The largest joint venture bank is Saudi American in which Citicorp has a 40 per cent shareholding. While all these banks concentrate their main efforts on the Saudi domestic market, some have also established their own branches overseas to better serve their customers: Saudi American Bank, for example, has branches in London and Istanbul and a subsidiary in Geneva, while Riyad Bank has a branch in London, will soon open one in Houston, and has equity participation in other banks in the GCC, Europe, Asia and America.
The performance of the commercial banks has recently improved significantly. Profitability, which was very high by international standards during the boom years, dropped after 1984, but has picked up sharply. Saudi American Bank announced their highest ever profits, and according to its Managing Director "1989 looks like it will be even better." Saudi British Bank has also indicated that 1989 should be a good year. The improvement is attributed to a number of reasons: the banks have spent several years clearing problem loans from their balance sheets, they have improved productivity, reduced their operating expenses and extended automation, as a result of which the banks are now healthier today than a few years ago - even compared to the boom years. The banks have remained very liquid: an average 45 per cent of deposits are channeled into loans, and a good portion of the balance is held in liquid assets. Also, these operating improvements have been gained at the same time as Saudization of the staff has increased markedly.
In addition to the commercial banks, the Government has established and funded a network of specialized credit institutions to provide medium and long term finance in key development sectors. The largest is the Real Estate Development Fund, which provides loans to private citizens to build their own homes, and to real estate developers for commercial and residential investment projects. The Public Investment Fund provides investment loans to the state owned corporations like Saudi and SABIC. The Saudi Industrial Development Fund awards loans to manufacturing enterprises; the Agricultural Bank to farmers; while the Saudi Credit Bank provides assistance loans to private citizen for personal needs and also to small businessmen, in particular to graduates from the Vocational Training Institutes to start up their own workshops.
Apart from the formal banking institutions, there are the currency-changers, about thirty companies which historically grew up to serve the pilgrims to Makkah, and now mainly handle money transfers for expatriate workers. These currency changers have an extensive branch network, long opening hours, and offer competitive exchange rates and hence are very convenient for their customers.
Islamic banks also offer alternative investment and financing vehicles to Muslim investors and borrowers. These facilities are primarily available for trade finance, operating with the principle of murabaha, by which goods are purchased and then sold for a profit (at risk) on a deferred settlement basis. The Islamic Development Bank and the Al Rajhi Banking and Investment Corporation operate on this basis, and some other commercial banks are starting to offer Islamic financing vehicles.
Although the retail banking sector is highly developed, the capital market is not. There is a Saudi Stock Market, and shares are traded through the banks in a system modeled after Germany 's. Share issues are prepared by the Consulting Center for Finance and Investment, and almost all have been eagerly over-subscribed. Memories of the collapse of the unofficial stock exchange in Kuwait; of Black Monday throughout the world in October 1987; together with the environment of highly liquid investors eagerly looking for good opportunities, have encouraged the Saudi Government to be cautious in the stimulation and regulation of the capital market. Nevertheless, the banking community is looking forward to good growth prospects. Saudi American Bank, for example, is to launch a new local investment fund before the end of 1989.
The whole banking sector is regulated by the Saudi Arabian Monetary Agency (SAMA), the central bank, which has won respect for its management skills, especially in the difficult years between 1985 and 1987, and also for its encouragement of innovation. SAMA is described as a proactive rather than a reactive institution by a leading foreign banker, for example it has stimulated a national ATM system. SAMA has a good track record in supporting local banks which face temporary difficulties; in 1988 it started issuing five year development bonds to help finance the budget deficit, which provided new outlets for the bank's liquidity; while in 1987 it established a Banking Disputes Committee to handle the settlements of unpaid loans, with very useful results.
A variety of new trends are emerging in the Kingdom's financial sector. First, private finance is supplementing Government expenditure and could take on a greater role. The proportion of bank deposits to GDP has raised from a level of 10 per cent in 1980 to 45 per cent in 1987, and as the economy continues to recover, the slowdown in Government expenditure could be partly filled by private finance. The commercial banks are offering more varied services. In retail banking, there is continued expansion of ATMs, especially in offsite locations such as shopping malls, airports, and drive-in facilities, which are proving very popular. From a small base, the demand for credit and charge cards is growing very quickly, and inter-branch services are increasing. EFTPOS will become feasible with the establishment of the national ATM network, and Saudi Arabia joined the SWIFT system in March 1989. Corporate banking services are also expanding, with improved project finance taking a more important role after the historic concentration on trade and contract finance. Treasury and advisory services are being strengthened, and the more innovative banks are providing on-line terminals and national networks for their corporate customers. Almost all the banks have invested heavily in new technology, and there is every indication that they will not only continue but increase this pattern.
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