SAUDI ARABIA

COUNTRY OVERVIEW

LOCATION AND SIZE.

Saudi Arabia is located in the Middle East between the Persian Gulf and the Red Sea. It borders Jordan, Iraq, and Kuwait to the north, Yemen to the south, and Oman, the United Arab Emirates (UAE), and Qatar to the east. The country, which is divided into 13 provinces, is composed primarily of desert. Each region has a governor appointed by the king. With a land area of about 1.96 million square kilometers (756,981 square miles), Saudi Arabia is about one-fourth the size of the continental United States. Riyadh, the capital, is located in the central eastern part of the country.

POPULATION.

The population of Saudi Arabia was estimated at 22,023,506 in July of 2000, a figure growing at about 3.3 percent a year. Saudi nationals account for close to 75 percent of the population. The remaining residents, nearly 6 million people, are expatriates comprised primarily of foreign workers. About 90 percent of Saudi nationals are Arabs. The rest of the indigenous population, according to CIA statistics, are Afro-Asian.

In 2000, the birth rate stood at 37.47 per 1,000 population, compared with a death rate of 6.02 per 1,000. According to a Saudi census taken in the early 1990s, a little over 50 percent of the population is male. While men make up a majority of the population, due primarily to the high concentration of males among expatriate workers, women are expected to live longer. Women on average live 69 years in Saudi Arabia, while the men live 66.

An overwhelming majority of the Saudi population is young. In 1999, according to the Saudi Ministry of Planning, 46 percent of the population was under 15. Another 38 percent was under 40. Those over 40 accounted for only 16 percent of the population. Efforts to accommodate the rising numbers of young adults entering the workforce each year have been only partly successful, and the consequent rise in unemployment has begun to aggravate the underlying tensions between the country's richest and poorest citizens.

Up until the 1960s a majority of the Saudi population were either nomadic or semi-nomadic desert dwellers with no fixed homes. However, after petroleum was discovered in Saudi Arabia in the 1930s, state revenues quickly began to rise. As the oil industry matured, the economy quickly modernized and nomadic herding faded as an economic base. By 2000, 95 percent of the Saudi population was settled.

The Saudi royal family and a majority of the population are Sunni Muslim. About 5 percent of the population, around 1 million people, are Shia Muslim. Tensions between the Sunni majority and the Shia minority have been especially high since the 1979 Iranian Revolution, when Saudi Shiites rioted in parts of the Eastern Province. Shia Muslims routinely suffer from religious discrimination.

THE FIVE YEAR PLANS.

The first 5-year plans, covering the 1970s, focused on developing the national infrastructure (see Infrastructure, Power, and Communications). The third plan (1980-85) focused less on infrastructure and more on education, health, and social services. It also included efforts to expand the productive sectors of the economy, namely industry—a goal which was only partly achieved. While the building of 2 new industrial cities, Jubail and Yanbu, was completed, no broad industrial expansion occurred, leaving primary components of the plan unfulfilled.

The fourth plan, which covered the latter half of the 1980s, remained focused on education and training. It also sought to reduce government spending while generating growth in the private sector . Joint ventures were encouraged between foreign companies and Saudi state enterprises in the hope of increasing foreign investment. The role of the private sector grew during this time, rising to 70 percent of non-oil GDP by 1987.

Starting in 1990, the fifth 5-year plan concentrated on expanding the infrastructure and strengthening the Saudi national defense. The perceived need for a stronger military was reinforced by the Iraqi invasion of Kuwait, a move which destabilized the region and precipitated the 1991 Persian Gulf War. Between 1990-94 34 percent of Saudi expenditures went toward national defense. The fifth plan also sought to increase private sector employment opportunities for Saudi citizens by limiting the number of foreign workers on Saudi soil. Efforts to "Saudiize" the workforce—raise the percentage of Saudi workers—continued through the sixth plan (1995-2000), which also focused on the diversification of economic activity through private sector growth, especially in the areas of industry and agriculture.

The Saudi government will continue in its efforts to create jobs for Saudi citizens over the next 5 years and beyond. Indeed, with 100,000 nationals entering the workforce each year, job creation will remain a priority for the foreseeable future.

GOVERNMENT SPENDING.

High petroleum prices in the 1970s boosted Saudi revenues and allowed increased spending. A series of ambitious, high cost initiatives were launched to develop the nation's infrastructure, expand industry and agriculture, overhaul health and education, and modernize the military (as outlined above). These efforts eventually put a strain on the government budget, as spending began to outpace the flow of revenues. In the 1970s, the problem was mitigated by the high price of oil, but in the 1980s, when oil prices declined, revenues fell and the government deficit grew, reaching 19.6 percent of GDP by 1986. Financial resources were further strained in 1990 when Iraq's invasion of Kuwait prompted the Saudis to appropriate US$30 billion in emergency defense spending. Though the value of Saudi exports exceeds that of its imports, the trade surplus has historically been unable to offset the deficit, which is generally financed through domestic borrowing. Eighty percent of the debt is held by autonomous government institutions, such as pension funds and social security. The other 20 percent is held by commercial banks.

Over the past decade, measures have been taken to lower government spending and reduce the fiscal imbalances created in the 1980s. In 1996 and 1997, spending cuts coupled with rising oil prices helped lower domestic debt and ease the pressure on government finances. However, this trend was interrupted in 1998 when oil prices fell, prompting calls for additional austerity measures and general economic reform. In 1999, government spending was reduced by an additional 13 percent. That year, with financial pressure building, the government also implemented new revenue-generating measures, a move it had resisted in the past. It raised domestic gasoline prices by 50 percent, introduced airport taxes, and doubled work permit fees. In 2000, surging oil prices produced the first government surplus in 17 years. However, the surplus may be shortlived, as the Saudi government plans to increase spending in 2001, a decision based primarily on expectations of rising oil prices.

While spending in 2001 is expected to be higher than in 2000, total spending between 2000-04 is actually slated to go down. The seventh 5-year plan (2000-04) calls for spending no more than US$200 billion, down from US$258 billion over the previous 5 years.

The Saudi government has expressed an interest in decentralizing the economy and increasing private sector participation. Although a number of privatization schemes have been considered, the government has yet to relinquish control over most major industries. Plans to privatize telecommunications and electric companies have stalled, as have plans to privatize the state-owned Saudi Arabian airlines.

Privatization efforts will likely be revitalized as Saudi Arabia attempts to gain entry into the World Trade Organization (WTO), an international regulatory body that sets standards for international trading practices and arbitrates disputes between member nations. (The WTO holds that free market, rules-based economies are more transparent than state-run economies and sees them as more fit for membership.) Joining the WTO will force Saudi Arabia to further liberalize its economy and would place its economic policies under international scrutiny, depriving Saudi policy makers of a certain degree of freedom. But once Saudi Arabia was admitted to the WTO it would have protection against the arbitrary exclusion of its imports by other members, a trade-off most Saudi officials find favorable. Among the measures the kingdom will have to take to gain entry into the organization are the removal of protectionist trade barriers, the lowering of import tariffs , and the opening of key service sectors to foreign participation—all policies which remove protection for local producers from competition. Saudi Arabia will also have to improve its protections for intellectual property rights. These measures will likely improve the investment climate in Saudi Arabia, paving the way for greater inflows of foreign exchange and smaller outflows of remittances .

Many workers in Saudi Arabia are from other countries, and send home much of their earnings. These worker remittances amount to approximately US$16 billion a year. Opening the private sector up to greater foreign participation—allowing, for instance, non-Saudis to buy homes and invest in local companies— could provide a means for keeping more capital in local markets.

GOVERNMENT STRUCTURE.

Saudi Arabia is an absolute monarchy where the king essentially rules by decree. That does not mean, however, that judicial structures are entirely absent, or that the king's powers are limitless. The Basic Law, the closest thing the Saudis have to a written constitution, was introduced in 1992 to be used in conjunction with Islamic Sharia law, whose dictates up to that point had been the sole source of legal guidelines. Neither the Basic Law nor the king's decrees are meant to violate Sharia law.

The Mutawaa'in, or religious police, constitute the Committee to Prevent Vice and Promote Virtue. The semi-autonomous group enforces compliance with Islamic customs. Abuses by the Mutawaa'in are known to occur, especially in its treatment of Saudi Arabia's Shia minority.

The Council of Ministers, established in 1953, holds executive and legislative powers, but any of its decisions can be overruled by the king. The council is appointed by the king and is primarily made up of members of the royal family. There is also a Consultative Council, which was formed in 1993. Its members are also appointed by the king. Originally comprised of 60 members, the council was expanded to 90 members in 1997. Made up of tribal leaders, government officials, and educated elites, the council plays an advisory role to the king and has no governing power. Each of Saudi Arabia's 13 regions has its own council as well as a regional governor who is appointed by the king.

TAXATION.

Saudi Arabia has a very limited tax regime, as it relies mostly on oil receipts, customs duties , and licensing fees to produce government revenue. Saudi nationals, rather than paying income or property taxes, pay what is called the zakat, an annual 2.5 percent assessment of a person's net personal wealth. Revenue from zakat collection helps pay for social services, such as health care and education. Foreign companies and self-employed foreigners in Saudi Arabia are not obliged to pay the zakat, but are, on the other hand, charged with income taxes , which range from 25 percent on income under US$26,667 to 45 percent on income over US$266,667.

Saudi Arabia also charges tariffs on imported goods which range from 12 percent to 20 percent. In order to gain entry into the WTO, the government will have to lower these tariffs to a maximum of 7.5 percent.

INDUSTRY

OIL.

Due to vast petroleum reserves, low production costs, and high levels of distribution, the oil industry is the most vibrant sector in the Saudi economy, providing the country with the bulk of its capital. Oil revenues account for 35 percent to 40 percent of the Saudi GDP annually.

As of 2001, Saudi Arabia's proven oil reserves amounted to over 263 billion barrels, representing about a quarter of the world's known oil supply. Assuming production rates were to remain what they were in 2000, Saudi Arabia's reserves would last about 87.5 years. It is probable, however, that more reserves will be discovered in the future, extending the industry's viability. As of 2001, Saudi Arabia was the largest producer and exporter of oil in the world.

Sales of Saudi oil are highly profitable due to low production costs. The sheer abundance of oil in Saudi Arabia and its close proximity to the earth's surface makes it easy to find and cheap to extract. According to the kingdom's oil minister, Ali bin Ibrahim al-Nuaimi, the production of a barrel of oil in the kingdom costs about US$1.5 compared with an average cost of US$5/barrel elsewhere in the world. Discovery costs are also low—about 10 U.S. cents per barrel as opposed to the worldwide average of US$4/barrel. Of the 400 billion barrels of recoverable oil discovered in the last 20 years, about a quarter was discovered in Saudi Arabia. The low discovery costs and high yields in Saudi Arabia are very attractive to foreign oil companies, who work in conjunction with the Saudi government to extract and deliver oil to world markets.

A majority of Saudi oil is produced from fields near Riyadh, in the Eastern Province, the largest of which are Ghawar, Safaniyah, Abqaiq, and Berri. Ghawar, with 70 billion barrels, is thought to be the largest oil field in the world. These 4 fields alone account for nearly half of the kingdom's reserves and 85 percent of its production capacity. Oil fields in the "Neutral Zone"—lands shared between Saudi Arabia and Kuwait—contain about 5 billion barrels.

Saudi Arabia exports a majority of its oil by tanker. Tankers loaded daily on the Persian Gulf coast have a full capacity of 14 million barrels a day (b/d). The other primary distribution route is through the 1,200-kilome-ter (746-mile) Trans-Arabian pipeline linking the Abqaiq oil field, near Riyadh, with Yanbu on the Red Sea. The pipeline has a capacity of 5 million b/d. Most of the oil arriving in Yanbu is loaded onto tankers for transport out of the Red Sea. Some of the oil continues on through the Sumed pipeline to Sidi Krier on Egypt's Mediterranean coast.

As of 2000 the most recently developed field in Saudi Arabia was the Shaybah oil field in the Empty Quarter, which holds reserves of up to 7 billion barrels. The Empty Quarter is the harsh desert region covering the southeastern part of the peninsula. Sand dunes in the Empty Quarter average 600 feet in height. In the summer, daytime temperatures reach 122 degrees Fahrenheit, then plummet to 32 degrees at night. Because of the harsh climate and terrain, much of the Empty Quarter remains unexplored. The field came on line in 1999 after the completion of a 635-kilometer (395-mile) pipeline linking it to distribution points in Abqaiq.

Practically all oil production in Saudi Arabia is controlled by the state-run Saudi Arabian oil company, Saudi Aramco. While foreign companies are contracted to build infrastructure and install equipment, the Saudi government maintains ownership of the facilities.

Saudi Arabia played a lead role in orchestrating the 1973-74 oil embargo against the United States. The resultant rise in oil prices was not enough to offset losses in sales, prompting the Saudis to soften their position and resume business in the West. Over the course of the next 25 years a stable partnership formed between Saudi Arabia and the United States, with the United States guaranteeing Saudi security in return for an uninterrupted flow of oil. Saudi Arabia now generally favors only moderate price increases, realizing it is in the country's long-term interests to keep demand steady by ensuring that oil remains competitive with other forms of energy. Out of a total workforce of 7.12 million people, 127,000 are employed in the oil and mining industry.

The kingdom is also planning to expand the production of natural gas, a venture that will involve the participation of a number of foreign companies. In 1991, natural gas reserves in Saudi Arabia were estimated at 6.1 trillion cubic meters, about 3.9 percent of the world's total. While most of this gas is acquired as a derivative of crude oil production, non-oil associated reservoirs are thought to exist in abundance. It is the mining of gas from these reservoirs that the government will focus on in the coming years, being that the use of oil-associated gas is constrained due to OPEC production quotas. It has been estimated that new foreign investment under the initiative could total tens of billions of dollars, more than the total level of foreign investment currently in the country.

NON-OIL MINING.

Saudi Arabia is a country rich in minerals. Large deposits of gold, silver, iron ore, copper, bauxite, coal, tungsten, phosphates, lead, zinc, and uranium are known to exist, but have yet to be fully exploited. The reasons for this vary. For one, the kingdom's concentration on oil has led it to neglect other forms of mining. Furthermore, the mineral deposits are in remote areas where the lack of roads and water make extraction difficult. Still, the government views non-oil mining as a potentially lucrative industry, one that might help re-orient the economy away from its dependence on oil. Thus, despite the difficulties, the government has decided to move forward in its efforts to exploit the country's mineral resources. Working in conjunction with the private sector, the government hopes to see the non-oil mining sector grow, on average, by 8.3 percent per year between 2000-04.

The newly formed Saudi Arabian Mining Company (Maadin) is at the center of the government's plans. The state-owned company, in partnership with privately run firms, has taken over key government mining operations with a goal to improve efficiency and increase production. Maadin is already active at the Mahd al-Dahab mine, from which over 100,000 ounces of gold are produced a year. In 2001, plans were approved to begin operations at Al Hajjar, in Asir province, with an anticipated annual yield of 55,000 ounces of gold. Renewed interest in phosphate mining is also expected to have an impact on the country's economy. If the deposits in the northern and center part of the kingdom can be feasibly removed, a major new processing plant may be constructed in Jubail to refine the high level yields.

Maadin is also involved in zinc mining near Riyadh, where results have been promising. In order to stimulate growth in the industry, the government may move to further deregulate mining in the second half of 2001.

MANUFACTURING.

The Saudi government, in its bid to diversify the economy and increase employment opportunities, has encouraged growth in the non-oil industrial sector. However, results have been limited. The number of licenses issued and industries established did not grow by a significant margin in the last half of the 1990s. During this time, the sector's contribution to GDP remained steady at around 15 percent.

Although an informal manufacturing base (involving the production of such various items as textiles, soap, and furniture) has existed in Saudi Arabia for centuries, these small-scale private industries contribute relatively little to the GDP, and the government is doing little to promote their development. Primarily the government has focused on the growth of heavy industry—petrochemicals, fertilizer, and steel—in its efforts to stimulate the economy.

CONSTRUCTION.

The rapid growth of the Saudi oil industry has led to fast-paced urban development and an ever-expanding infrastructure. As a result, construction is one of the more active sectors of the non-oil economy. It provided jobs for 16 percent of the workforce in 1998 and, in 1999, accounted for almost 9 percent of GDP.

Despite the construction sector's importance to the economy, growth in the industry during the 1990s was slow, averaging just 1.5 percent. This was partly due to the decline in infrastructure work following the completion of a number of major projects in the 1980s. However, industry prospects look good for 2001, with the pace of urban development once again on the rise. In 2000, the government issued over 27,000 work permits, with the number of contracts awarded rising 49 percent in the first 9 months of the year. The heightened activity pushed up the sales of cement by 6 percent.

SERVICES

TOURISM.

Hoping to capitalize on its Red Sea coastline, unspoiled desert landscapes, and a slew of archeological sites, the Saudi Arabian government has expressed an interest in expanding the country's tourism sector. However, this task will likely be complicated by the country's rigid social structures and its fear of outside influence. Visitors have little freedom of movement in Saudi Arabia. All tourist activities are controlled by a sponsor, or guide, who is responsible for ferrying tourists to and from points of interest. Outsiders are expected to adhere to Saudi conventions. Western women, for instance, are required to abide by the country's conservative dress codes, covering their heads, arms, and legs whenever they are in public. Pants for women are not permitted, nor are women allowed to drive. Furthermore, unmarried couples may not stay in the same hotel rooms. There have been reports of Saudi citizens harassing or assaulting foreigners who fail to comply with Saudi norms of behavior. These restrictive social rules could be off-putting to some western tourists. Nonetheless, steps are being taken to increase the kingdom's annual number of visitors.

New guidelines were recently approved for issuing tourist visas to foreigners, making it easier for travel companies in Saudi Arabia to arrange group tours. The king-dom's efforts to accommodate non-Muslim, recreational travelers only began in 1998, when a tour group visited the kingdom for the first time. It was an archeological tour limited to married couples and women over the age of 45. Expanding the tourism industry amid the country's restrictive social environment will not be easy. Still, the government hopes that between 2000 and 2004, it will grant some 3 million tourist visas to foreigners, generating revenues worth approximately US$2.67 billion.

A majority of the kingdom's tourism currently comes from Muslims performing the "haj," the pilgrimage to the country's holy sites. All Muslims are instructed to make the pilgrimage at least once in their lives. In 1999, the government moved to expand the travel rights of foreign Muslims, allowing them to venture beyond Mecca and Medina. In March 2000, it is estimated that over 1 million foreigners and 700,000 Saudis made their way to the western region of Hejaz to visit the holy cities.

FINANCIAL SERVICES.

Ten commercial banks operate within Saudi Arabia. Seven of them are joint ventures with foreign banks which operate according to international norms. The other 3 banks—the National Commercial Bank (NCB), the Al Rajhi Banking and Investment Company, and the Riyadh Bank—are state-owned and are run in accordance with Islamic law. This forbids them from charging interest on their loans. Any expansion of the banking system appears unlikely, at least in the near future, as the government considers the current number of banks to be sufficient to serve the economy.

Saudi Arabia has a viable over-the-counter stock market where investors, primarily the domestic commercial banks, trade equity in 75 Saudi companies, up from 70 companies in 1996. The number of shares traded and the value of those shares rose dramatically in the last half of the 1990s, gaining 43.6 percent in 1999 alone. In 2000, the market rose another 11 percent, making Saudi Arabia the only Arab country outside of Tunisia whose stock market posted overall gains for the year.

The Saudi Arabian stock market has traditionally been closed to non-Saudi investors. However, laws barring foreign participation were amended in 1997, and foreign nationals are now allowed to trade in the market, although on a limited scale (generally through investment in mutual funds).

DEPENDENCIES

Saudi Arabia has no territories or colonies.

BIBLIOGRAPHY

Asad, Muhammad. The Road to Mecca. 1954; Louisville, KY:Fons Vitae, 2001.

Commercial Office, Royal Embassy of Saudi Arabia in Washington, D.C. <http://www.saudicommercialoffice.com> . Accessed September 2001.

Economist Intelligence Unit. Country Profile: Saudi Arabia. London: Economist Intelligence Unit, 2001.

Metz, Helen Chapin, editor. Saudi Arabia: A Country Study. Washington, DC: Library of Congress, Federal Research Division, 1993.

The Saudi Arabian Cultural Mission to the U.S.A. <http://www.sacm.org> . Accessed September 2001.

U.S. Central Intelligence Agency. World Factbook 2000. <http:// www.odci.gov/cia/publications/factbook/index.html> . Accessed August 2001.

U.S. Department of State. Background Notes: Saudi Arabia, September 1998. <http://www.state.gov/www/background_ notes/saudi_0998_bgn.html> . Accessed September 2001.

U.S. Department of State, Bureau of Democracy, Human Rights, and Labor. Country Reports on Human Rights Practices, 1999: Saudi Arabia . Released February 2000. <http://www.usis.usemb.se/human/human1999/saudiara.html> . Accessed September 2001.

U.S. Department of State. FY 2001 Country Commercial Guide: Saudi Arabia. <http://www.state.gov/www/about_state/business/com_guides/2001/near/index.html> . Accessed September 2001.

—John Mazor

CAPITAL:

Riyadh (Ar-Riyad).

MONETARY UNIT:

Saudi Riyal (SR). One riyal equals 100 halalahs. There are coins of 5, 10, 25, 50, and 100 halalahs, and notes of 1, 5, 10, 50, 100, and 500 riyals. Since July 1986 the Saudi riyal has been pegged to the U.S. dollar at a rate of SR3.745:US$1.

CHIEF EXPORTS:

Petroleum and petroleum products (90 percent).

CHIEF IMPORTS:

Machinery and equipment, foodstuffs, chemicals, motor vehicles, textiles.

GROSS DOMESTIC PRODUCT:

US$191 billion (purchasing power parity, 1999 est.).

BALANCE OF TRADE:

Exports: US$48 billion (f.o.b., 1999). Imports: US$28 billion (f.o.b., 1999).