GCC insights: Saudi Arabia's economic reforms progress at a snail's pace

Economic reforms are taking place at a slow pace in Saudi Arabia. This denies the kingdom the opportunity to benefit from its vast economic potential. Also, announced economic plans are only implemented leisurely.

Prince Abdullah bin Faisal bin Turki has recently acknowledged that Saudi Arabia tends to be slow in carrying out economic reforms.

He made the remarks during a conference in London last week organised by MEED to discuss investment opportunities in Saudi Arabia.

Prince Abdullah heads the Saudi Arabian General Investment Authority (Sagia). He is a dynamic professional having previously served as governor of the Royal Commission for Jubail and Yanbu.

The Saudi government set up Sagia in April, 2000, to regulate and promote foreign investment. Since its inception, Sagia has granted permits for some 2,000 projects worth more than $14 billion. Of these, 1,170 projects covered the services sector, besides 825 in industrial ventures and five in agriculture.

Foreign investors constituted a critical part, accounting for more than 85 per cent of total planned investments. However, it is believed that many of these have failed to materialise, thus making it impossible to judge the performance of Sagia.

Sagia has an ambitious goal, aiming at attracting a hefty $1.2 trillion within 20 years. Realistic or not, the authorities need to address concerns raised by foreign investors including the critical issue of taxation. The foreign investment law (FIL) fixes 30 per cent tax on net income of foreign firms operating in Saudi Arabia.

Appreciation

Foreign investors have demanded an end to this discriminatory practice. Fortunately, Sagia officials appreciate the need to amend the law. But the cabinet must approve any law. To be sure, the FIL contains a number of positive characteristics including granting local and foreign investors access to soft credit extended by the Saudi Industrial Development Fund.

The FIL has become particularly famous for the negative list. The initial list contained 22 areas that prohibited foreign investment including exploration, drilling and production of oil. Contrary to earlier promises, the list has remained largely intact.

Disgracefully, foreign investors, including those from the fellow GCC states, were barred from the initial public offer of the partial sell off of Saudi Telecommunications Co late last year.

The authorities have not fixed a timetable for the planned privatisation programme, thereby making it difficult to ascertain its success. Some 20 sectors including telecommunications, electricity, industrial zones, ports, airports, airlines and a host of others are on the privatisation agenda.

In June, the Supreme Economic Council (SEC) approved the capital markets law as part of efforts to set up a fully regulated stock exchange within a two-year span.

Crown Prince Abdullah heads SEC, which is mandated to devise economic strategies for the kingdom.

Statistics

Economic reforms are essential, at least judging by vital statistics, as measured by the Human Development Index (HDI) published by the UNDP. Although Saudi Arabia controls a quarter of the proven oil reserves in the world and ranks fourth in terms of gas reserves, it scores poorly in key economic results as compared with fellow GCC states.

In 2001, the average life expectancy stood at 71.9 years, only better than Oman and Qatar; the adult literacy rate averaged 77.1 per cent, only better than Oman; and the GDP per capita at purchasing power parity amounted to $13,330, again only better than Oman.

In a recent review of the Saudi economy, the IMF has urged the authorities to encourage private sector investments and to reduce dependence on oil given its volatility in the international markets. The Saudi economy is particularly dependent on oil, which constitutes more than 70 per cent of income, 85 per cent of exports and 35 per cent of the GDP.

The writer is assistant professor, College of Business Administration, University of Bahrain