What type of economy saudi arabia have

After the budgetary reforms that were implemented as part of the stabilization program of , the Ministry of Finance and National Economy issued annual estimates of budget revenues and expenditures at the beginning of each fiscal year, usually indicating revenues by principal source and total expenditures by ministry. No detailed breakdown of current and capital expenditures is given, but the Ministry issues an explanatory memorandum to clarify current and capital expenditures by major functional categories.

In addition, SAMA publishes estimates of annual development expenditures by economic sector in its annual reports. SAMA has also published total actual revenues and expenditures for recent years.

The Ministry of Finance has overall responsibility for the preparation of the annual budget. The budgeting process usually begins with a memorandum to all ministries requesting detailed budget estimates according to four major categories: personnel, supplies and services, subsidies and other current expenditures, and capital expenditures. The estimates are sent to the Ministry of Finance during the fifth month of the fiscal year. Proposed project expenditures are justified in terms of their relationship to the Development Plan; detailed justification memoranda including benefit-cost analyses are prepared for review by the Deputy Minister for Budgeting, who in turn prepares final recommendations on all proposed projects to the Minister.

The budget is ultimately approved by the Council of Ministers, and a Royal Decree is issued giving revenue estimates by source and expenditure estimates by ministry, together with highlights and comparisons with the preceding year. Development planning was initiated in the summer of , when an Economic Development Committee was set up and a mission from the International Bank for Reconstruction and Development World Bank was invited to explore possibilities for Saudi Arabian economic development.

The Council staff, headed by a Secretary General, was to be responsible for planning and supervising the execution of projects. In January the planning machinery was reorganized in line with a general governmental reorganization.

The Supreme Planning Council was replaced by a new planning organization called the Central Planning Organization, to be headed by a President of ministerial rank who reports directly to the King. The functions of the Central Planning Organization were defined as follows: 1 preparation of periodic economic reports concerning the scope, progress, and prospects of economic development; 2 preparation of economic development plans for the consideration of the Council of Ministers; 3 preparation of estimates of costs of development projects to assist the Ministry of Finance in preparing the various budgets; 4 conduct of economic studies; 5 assistance to the ministries and independent agencies in their planning affairs; and 6 submission of technical advice to the King.

The Plan was formulated at a time when the budget was in deficit and foreign exchange reserves were relatively modest. Budget receipts are dominated by oil revenues, consisting of royalty fees and income taxes on oil operations, which account for about 90 per cent of total revenue.

Other revenues consist of customs duties, public service fees, and other indirect taxes. Taxes on individuals are imposed in three forms: the Zakat, payable by Saudi Arabian nationals and firms; an income tax payable by non-Saudi Arabians; and a road tax of 2 per cent of salaries and wages, payable by all persons earning in excess of SRls per month. Businesses are generally liable to a graduated income tax as well.

The Zakat, introduced by decree in and amended in and , is paid in accordance with the sharia Moslem law and is levied at a rate of 2. The total amount collected remains small, however. Income tax is payable by non-Saudi Arabians only, at a rate which rises from 5 per cent for annual incomes of less than SRls 16, to 30 per cent for incomes in excess of SRls 66, Business taxes are payable by foreign companies and by foreign shareholders of Saudi Arabian companies at rates which start at 25 per cent for net incomes less than SRls , and rise to 45 per cent for incomes in excess of SRls 1 million except for oil companies, which are taxed at a uniform rate of 55 per cent.

However, companies formed under the provisions of the Foreign Capital Investment Regulations with Saudi Arabian participation of no less than 25 per cent are exempt from paying income taxes for five years from the date they start production. Customs duties range between 5 and 40 percent, with numerous exemptions allowed; most imports are taxed at low rates or not taxed at all.

Data on actual collections of total revenues are available for fiscal years through Table Total revenues increased from SRls 1.

However, the growth rate was sharply higher after fiscal year ; during the ten years ended in fiscal year , revenues rose by per cent but during the succeeding three years they increased by per cent. The acceleration in the rate of increase of revenues reflects mainly the steep growth in oil income. The breakdown of revenues is not available, but the share of oil revenues in total budget receipts is estimated to have increased from about 80 per cent in fiscal to 92 per cent in fiscal Nonoil revenues have risen in absolute terms, but their share of the total has declined correspondingly.

The figure was provided by SAMA. Since data on actual current expenditures are available only for total amounts, no distinction as to functional classifications is possible. Actual current expenditures excluding aid payments to Arab countries rose at the average annual rate of 9 per cent during the period , rising from SRls 2.

For several years prior to fiscal year there was a policy of restraint on the growth in current expenditures, as revenues had been growing relatively slowly and, at the same time, substantial aid payments were being made to Arab countries. The improved revenue situation in fiscal year permitted relaxation of this policy, and consequently the growth of current expenditures rose sharply in that year 22 per cent, against an average of 8.

Data on actual expenditures by functional categories are not available. Using budget estimates for recent years, it appears that the largest share went to general administration, which accounted for between 25 and 30 per cent of total allocations Table Defense and public security were allocated about 22 per cent.

The share of education has risen from 15 to 22 per cent, while the shares of health and social welfare remained more or less stable at about per cent.

The current expenditure estimates show no clear shifts over the past seven-year period, except for the steady rise in allocations to education. Since fiscal year Saudi Arabia has made annual aid payments to Arab countries of about SRls million. Actual capital expenditures have increased rapidly in recent years, rising from SRls million in fiscal year to SRls 3. There was an especially large increase in fiscal year , when capital expenditures more than doubled because of increased outlays on infrastructure facilities.

Since then the rate of growth has been maintained at about 18 per cent a year. The rate of growth of development expenditures has persistently exceeded that of current outlays, so much so that the share of the former in the total rose from 12 to 41 per cent over the eight-year period ended in fiscal year No details are available on the functional breakdown of actual capital expenditures, although budget allocations by sector are published annually.

Based on the budget estimates, the largest recipient of capital outlays has been national defense but separate data are available only for and when this sector received SRls 1. The construction of infrastructure facilities has also received a considerable share of project allocations, accounting for SRls 2.

The bulk of these expenditures was allocated to the construction of roads, ports, and airports and to the expansion of communication facilities, while a substantial portion was granted to municipalities for the construction of streets and urban water and sewer systems. Allocations for the development of agriculture and water resources also increased from SRls million in fiscal year to SRls million in fiscal year , the bulk of which went for the construction of dams and irrigation systems, the development of model and experimental farms, the completion of underground water surveys, and the digging of wells.

Educational and informational facilities received SRls million in , or 5 per cent of the total. Mineral exploration and industrial projects continued to receive between 2 and 3 per cent of total allocations, while similar amounts were allocated to health and welfare facilities. It is difficult to discern long-term trends in project allocations because of the lack of uniformity in the classification of expenditure items, but it is evident that the predominant and rising allocations to defense and to infrastructure have overshadowed all other increases.

Thus, despite the sustained increases in allocations to agriculture, industry, health and education, the share of these sectors in the total declined from 31 per cent in fiscal year to 16 per cent in fiscal year The financial allocations of the Plan were initially estimated at a total of SRls In terms of total allocations, defense and administration received the largest shares 23 and 19 per cent, respectively , followed by education and manpower development 18 per cent , transport and communication 18 per cent , public utilities 11 per cent , health and social affairs 5 per cent , agriculture 4 per cent , and industry 3 per cent.

On the basis of project allocations only, transport and communication received 31 per cent; defense, 30 per cent; public utilities, 18 per cent; and the remaining sectors, smaller percentages. The sectors of education, manpower, and health and social affairs received slightly less than 20 per cent of the capital expenditure allocations. Table 19 compares the financial allocations of the Plan with the subsequent budgetary allocations and with actual budget expenditures for the years for which data are available.

In terms of total allocations, about 72 per cent of the financial requirements of the Plan have been budgeted in the first three years.

The corresponding ratio for current expenditures is 68 per cent and for development projects is 78 per cent. Clearly, the budgetary process seems to have responded positively to increased revenues, so that financial allocations were augmented to levels exceeding the initial estimates of the Plan.

In terms of actual expenditures, however, exactly 60 per cent of the total financial allocations of the Plan were spent by the end of the third year. In the mids Saudi Arabian oil revenues stagnated, partly because of a slowdown in the increase in production and partly because of falling prices.

On the other hand, increases in government expenditure continued unchecked. In order to finance the resulting budgetary deficits, the Government resorted to both internal and external borrowing. By June its total indebtedness amounted to about SRls 1. Slightly less than half of the total debt was external, and most of the internal debt was to the Saudi Arabian Monetary Agency.

Although complete data for that period are not available, it is nevertheless possible to trace the broad outlines of fiscal developments following the introduction of stabilization policies. Through fiscal the budgeted increase in expenditures was held well below the anticipated increase in revenues. The cumulative surpluses budgeted through amounted to SRls million, and the estimated actual surplus amounted to more than SRls 1.

The discrepancy is due primarily to the greater than expected increases in oil revenues, while actual expenditures were held down to the budgeted levels. By early the Government had repaid virtually all of its debt to SAMA; by the end of practically all of the internal debt had been liquidated, and a beginning had been made in repayment of the external debt.

After the stabilization policies had proved successful, the Government permitted considerable increases in expenditures, particularly for development. On the whole the budget estimates provided for a balance between revenues and expenditures. The actual results were that through fiscal year the government budget experienced moderate surpluses or deficits, the net fiscal position for being an accumulated deficit of only SRls million see Table In the three years ended in fiscal year , however, the budget had persistent and widening surpluses.

The surplus increased from SRls 1. The rising budget surpluses have been brought about by the dramatic growth of oil revenues since , combined with comparatively less rapid rates in the growth of expenditures. However, discrepancies arise from the fact that the fiscal accounts are not kept on a strictly cash basis.

Furthermore, in certain years timing differences complicate the accounts, as the oil companies keep their accounts on the basis of the Gregorian year while the budget is kept on the basis of the Islamic Hijri year see footnote While the sharp growth in the fiscal surplus would appear to suggest that the budget was tending to exert a contractionary impact on domestic activity, in fact it has been strongly expansionary.

This expansionary impact is due to the very steep increases in government domestic expenditures financed by the oil revenues which are derived from the export sector of the economy. Precise data to classify government revenues and expenditures as domestic or foreign are not available. Available estimates place government domestic expenditures between 75 and 80 per cent of the budget expenditures, although these may have declined slightly relative to the expenditures in foreign exchange.

Budget estimates are compared with the actual fiscal results in Table The underestimation of surpluses is due largely to the understatement of budget revenues, especially in the last three years, as well as to the overstatement of capital expenditures. Until fiscal year the estimates of revenues and expenditures were relatively close to the actual levels, but the rapid rise in revenues since then has left expenditures lagging somewhat, especially in the case of capital expenditures, which normally require longer lead times than other expenditures.

The ratio of actual expenditures to allocations for development projects rose steadily from 79 per cent in fiscal year to 88 per cent in fiscal year , then dropped to 67 per cent in fiscal year , despite the fact that actual project expenditures rose by nearly 50 per cent. The accumulated budget surplus for the period amounted to SRls 10 billion, all of it accruing in While in recent years the number of commercial banks in Saudi Arabia has increased by only one since one Arab bank terminated its activities in Saudi Arabia and two foreign banks set up offices , there has been a considerable increase in the number of branches.

The specialized banks are government-owned; the Agricultural Bank was established in and the Saudi Assistance Credit Bank was approved in The legal framework of the monetary system of Saudi Arabia consists essentially of the charter of SAMA, the currency reform statutes of , and the Banking Control Law of SAMA was established in and its charter was amended several times during the s.

The legislation issued during the s was needed to spell out in detail the currency arrangements and banking control powers implicit in the charter of SAMA. The monetary functions of SAMA included the stabilization and the maintenance of the external and internal value of the currency; the management of monetary reserve funds as separate funds earmarked for monetary purposes only; the buying and selling of gold, silver coins, and bullion for the government account; and appropriate regulation of commercial banks, exchange dealers, and money changers.

To this end it was designated to act as a depository for all government funds, maintaining deposit accounts under such heads as the Minister of Finance might direct, and to act as agent for the Government in paying out funds for purposes duly approved by the Government through the Minister of Finance.

This early legislation stipulated that SAMA would conform in all its actions with the teachings of Islamic law. SAMA was not to be a profit-making institution, and it was not permitted to pay or receive interest; to make advances to the Government or to private entities; to engage in trade; or to have any interest in any commercial, industrial, or agricultural enterprise.

It could not buy or hold fixed property except for its own uses , and it was not permitted to issue currency notes. According to the charter, SAMA was placed under the control of a Board of Directors, comprising a president, a vice-president, the governor of the Agency, and two other members.

Before the establishment of SAMA in , a variety of silver and gold coins had circulated in Saudi Arabia, in addition to the official coins of the realm—the silver riyal and its denominations. During the pilgrimage season the increased demand for the riyal tended to raise its exchange value, but with the introduction of paper receipts SAMA was able to stabilize the exchange value and, in addition, familiarize the Saudi Arabian people with the use of paper money.

In January , a number of decrees were promulgated to provide the legal framework for monetary reform. Decree No. Briefly, this decree designated the Saudi Arabian riyal as the currency unit and legal tender, with the parity fixed at the equivalent of 0.

The riyal was to have per cent cover in gold and convertible foreign exchange. The cover was to be valued at the new par value. Outstanding Saudi Arabian gold sovereigns were to be withdrawn from circulation, and holders of these coins could exchange them for riyals at the rate of 40 riyals to the sovereign within a period of two months from the date of publication of the decree. SAMA was required to publish in the Official Gazette a fortnightly statement containing information on the amount of currency issued and its cover.

In addition, it was to publish an annual report on its operations and position, together with authenticated accounts. A new feature of the decree was the provision allowing SAMA to invest its exchange holdings in foreign government securities. The balance of the revaluation profits was to be credited to the general government reserves. The charter of SAMA stipulates that the Agency shall regulate commercial banks and exchange dealers as may be found appropriate.

Apart from a provision requiring the banks to provide SAMA with financial statements and from a provision permitting SAMA to impose reserve requirements, the charter does not spell out in detail its banking control powers.

The law provides that banks must be licensed by the Minister of Finance and National Economy after approval of the Council of Ministers. Applications for licenses are to be submitted to SAMA, which studies the application and submits a recommendation to the Minister of Finance.

Saudi Arabian banks may be licensed only as joint stock companies with a minimum of paid-up capital of SRls 2. Foreign banks wishing to open up a branch in Saudi Arabia may be granted a license subject to appropriate conditions to be laid down by the Council of Ministers.

All banks operating in Saudi Arabia when this law was promulgated were considered as having been licensed. Exchange dealers were to be permitted to continue engaging in the money-changing business, but they were prohibited from undertaking any banking business. The law stipulates that deposit liabilities of a bank may not exceed 15 times its reserves and paid-up capital; when deposits exceed this ratio the bank must, within one month, deposit 50 per cent of the excess with SAMA. The banks are required to maintain with SAMA deposits equivalent to 15 per cent of their total deposit liabilities; 16 this action may be varied within the range of 10 to In addition to the statutory deposit, banks are required to maintain liquid assets equivalent to not less than 15 per cent of their total deposit liabilities; SAMA may increase this ratio up to 20 per cent.

The law permits SAMA to place restrictions on the volume and uses of credit and to specify the conditions and terms of credit. The law specifies what transactions may not be undertaken by banks and provides for submission of all information requested by SAMA, for auditing of their accounts, and for penalties in cases of contravention of the law. Some important restrictions on SAMA remain: it may not extend credit to the Government or to private entities including banks , and because it may not contravene Islamic laws, it may not use the discount rate as an instrument of monetary policy.

These restrictions obviously place limitations on SAMA in implementing its monetary policy and are reflected in the structure of its assets and liabilities. Its domestic assets consisted mainly of deposits with certain banks. Since SAMA is barred from lending to the banks, or from rediscounting commercial papers, the only way it, as a central bank, can provide accommodation to a commercial bank, where appropriate, is to place a deposit with that bank.

On the liabilities side, at the end of June , 70 per cent of its liabilities were in the form of government deposits. Other liabilities consisted of the currency issue of the deposits of commercial banks, which was made up of reserve requirements equal to 10 per cent for demand deposits and 5 per cent for time and savings deposits, as well as the special deposits of certain banks whose deposit liabilities exceeded 15 times their capital.

In recent years SAMA has pursued a neutral monetary policy in the sense of permitting private demand for credit to find its own level. On the other hand, SAMA has placed strong emphasis on close supervision of the banks in order to ensure sound banking practices.

Commercial banking activity has expanded at a rapid pace in recent years. The total assets and liabilities of the commercial banks have increased from SRls 1. Total deposits with banks, which increased by SRls million during the five years ended December , jumped to SRls 1, million during the 30 months ended June The flood of deposits to the banks has reduced the return to depositors to a range of 1. The limitation on deposits has been necessitated by the inability to find suitable domestic outlets for investments of the new funds.

The banks have increased their investments abroad considerably, but they are reluctant to expand such investments further in view of the risks inherent in the unsettled international monetary situation. With respect to domestic lending, despite the relatively low cost of borrowing per cent , the demand for credit by the private sector has increased only by 6 per cent during to SR1s 1. The low demand for credit by the private sector, despite a high level of activity, probably reflects a substantial degree of liquidity in private hands as well as the practice of advance payments by the Government to contractors undertaking public development projects.

The continuing increase in deposits, coupled with the stagnation in advances, has resulted in a substantial increase in the liquidity position of the banks. The ratio of reserves and foreign assets of the banks to their liabilities excluding capital and unclassified liabilities , which increased from 35 per cent at the end of to 38 per cent at the end of , rose further to 46 per cent at the end of December and to 71 per cent at the end of June S audi A rabia : M onetary S urvey , J une 1.

Regarding the distribution of credit to the private sector, it is estimated that import financing usually accounts for about one half of total credit extended to the private sector, advances to contractors account for about 20 per cent, and advances to industry as well as financing for other activities account for the remainder about 30 per cent.

The Agricultural Bank, established in with a capital of SRls 10 million, has expanded its credit operations steadily in recent years. The Bank has undertaken a review of its operations to date with the idea of improving and expanding its credit operations in the agricultural sector.

The rate of expansion in private liquidity money plus quasi-money averaged The average growth rate for the four years ended in was over 10 per cent; in and private liquidity increased by 14 and 41 per cent, respectively. The growth rate in money and quasi-money was in line with the rate of growth of GDP at current prices, which expanded at an average annual rate of The sharp increase in liquidity in was mainly composed of a large increase in money particularly currency , which possibly reflected increased hoarding of Saudi Arabian riyals.

The rate of expansion in liquidity was 14 per cent during the first six months of , compared with 15 per cent in the corresponding period of Topics Business and Economics.

The Real Estate Development Fund has been financing residential and commercial construction since , with a unique program that provides interest-free loans repayable in 25 years.

Launched in , the Public Investment Fund offers credit to public and semi-public corporations. The Saudi Credit Bank was founded in to provide personal loans for home repair, as well as vocational and crafts training. In addition to the specialized credit institutions, the government offers an array of incentives to the private sector.

A sweeping reduction in utility and public service fees, implemented in early , lowered operating and production costs for private companies, making their products more competitive with foreign goods. Private entrepreneurs are also given access to government information systems specifically created to help local manufacturers target the best market for their products.

Government agencies such as the Saudi Consulting House, replaced in April by the broader Saudi Arabian General Investment Authority SAGIA , provide free consulting and support services and publish lists of investment opportunities for the production of goods in demand in Saudi Arabia. Government tenders also give priority to locally manufactured products and to Saudi companies.

Saudi industries are exempted from paying customs duties on the import of machinery and supplies used in the production of goods domestically. To facilitate the transfer of technology and expand the operations of the private sector, the government also provides various incentives to foreign companies that enter into joint ventures with Saudi firms. Far-reaching new investment regulations in , including removal of the need for sponsorship, gave further encouragement to foreign investors. Saudi Arabia has a modern banking industry with 13 commercial banks.

Saudi banks provide retail and corporate banking, investment services, brokerage facilities, and derivative transactions in addition to credit cards, ATMs and point-of-sale transactions.

There are also banks in the Kingdom that provide Islamic banking services. It prohibits usury, the collection and payment of interest and trading in financial risk. Saudi Arabia also has a thriving stock market. TASI was also one of the first exchanges globally to set up a full electronic clearing and settlement system with immediate transfer of ownership. The banking and finance sector is overseen by several government agencies.

The Ministry of Finance supervises economic policies. Saudi Arabia is the 19th largest exporter and the 20th largest import market in the world. Exports now represent all economic sectors.

Topping the list of exports to some 90 countries are petrochemicals, plastics, metal goods, construction materials, and electrical appliances. This is mainly due to generous government incentives such as the provision of long-term interest-free loans and support services and facilities.

In addition, chambers of commerce and industry in the major cities and regions promote commercial ventures. Although shrouded in secrecy that made details observer, this strategy seemed designed to obtain or increase Saudi Arabia's market share.

During the s and early s, the sharp increase in oil prices relieved the chronic financial constraints that had plagued the Saudi state since its inception. Massive oil revenues, combined with delays in using the funds and the Saudi economy's limited absorptive capacity, created large financial surpluses in both the private and government sectors of the economy. The vast majority of these assets were invested in international financial institutions and in Western government securities.

After government authorities were obliged to change their emphasis from managing surpluses to coping with growing budgetary and balance-of-payments shortfalls. With the downturn in oil prices beginning in , oil revenues to the kingdom began to recede.

Given the huge investment expenditures to which it was already committed, the government was forced to finance large budget and current account deficits of the external balance of payments through foreign asset drawdowns. At first, the small decline in oil prices was considered a necessary "cooling off" period and a chance to review the investment program begun fifteen years earlier. Facing an ever-worsening international oil supply glut, the burden of reducing oil output under OPEC's newly installed quota system fell largely on Saudi Arabia.

The kingdom's oil revenues therefore took a double blow--reduced prices and reduced exports--not to mention the devaluation of the United States dollar, the currency in which oil is sold on international markets. By late , responding to domestic concerns, Saudi Arabia sharply boosted oil output in an attempt to regain its market share and to impose production discipline on other OPEC members.

This policy led directly to the oil price crash of The replacement in of well-known Minister of Petroleum and Mineral Resources Ahmad Zaki Yamani by Hisham Muhi ad Din Nazir, and King Fahd ibn Abd al Aziz Al Saud's personal intervention in the kingdom's oil affairs, were followed by a more commercial approach to oil exports that was designed to maintain Saudi Arabia's world market share. Greater OPEC discipline and a revival in world demand, stimulated by lower oil prices and rapid economic growth in Asia, helped return some buoyancy to the oil markets after Nonetheless, oil revenues in the late s remained at 25 percent to 30 percent of levels during the early s and proved insufficient to cover government expenditures and offset imports, thus perpetuating budget and external payment deficits.

Approximately 6 million foreign workers play an important role in the Saudi economy, particularly in the oil and service sectors; at the same time, however, Riyadh is struggling to reduce unemployment among its own nationals.

Saudi officials are particularly focused on employing its large youth population.