Oil pulls Saudi economy down

Dubai: A 10.3 per cent decline in oil income is likely to lower Saudi gross domestic product (GDP) by 0.9 per cent this year from a 4.4 per cent increase in 2008, according to the International Monetary Fund (IMF).

The 76.86 per cent drop in oil exports, from $281.4 billion (Dh1.03 trillion) last year to a projected $159.1 billion this year, is expected to drag government revenue down by 22 per cent. It is likely to reduce the kingdom's GDP by $92 billion to $377 billion this year from a whopping $469 billion in 2008, said a latest IMF report, a copy of which was obtained by Gulf News.

According to the National Commercial Bank's annual economic report on Saudi Arabia, the steep fall in crude prices, combined with a decline in oil production and tighter credit, are primary sources of danger to the local economy.

The Arab world's biggest economy, however, refuses to concede to the workings of the global crisis, choosing instead to confront the recession with "stronger fundamentals", according to the IMF's report.

Ranked by the latest World Bank's Doing Business Report as first among Arab countries and 16th globally, the country has taken steps to consolidate its macroeconomic position, strengthen its financial sector, and boost private-sector led growth.

Real non-oil GDP is expected to increase by 3.3 per cent in 2009, an indicator of the structural reforms already underway to improve domestic growth in non-oil sectors.

Experts welcomed the steps taken by the Arab economy to improve bank liquidity and stabilise the inter-bank market. "Such measures are excellent as far as they go. What remains to be seen is with respect to transparency - how the money will end up being used. A lot of people would like to see money going into the water and energy sector, and also for oil and gas investment," said Dalton Garis, an Associate Professor of Economics and Market Behaviour at the Petroleum Institute in Abu Dhabi.

He added: "Oil is the first best energy source that we have. We have to make sure that oil production capacity always maintains a bit ahead of expected demand".

In addition, IMF directors recommend the adoption of a fiscal stimulus package to promote non-oil growth via capital spending.

IMF calls for flexibility

The International Monetary Fund, in its latest assessment, has "encouraged authorities to consider a more flexible exchange rate regime" for GCC countries.

The Gulf states have pegged their currencies to the US dollar for a long time. IMF directors believe that though the current exchange rate peg to the US dollar has provided a stable economic anchor and helped contribute to macroeconomic stability, in the long term, a more flexible exchange rate would give GCC countries more leverage over interest rates. Although experts are quick to point to policy constraints posed by the peg to the US dollar, few believe that a shift should take place immediately.

"I think that eventually we are going to need to run an exchange rate more independent from the one fixed to the dollar, but this should best wait until there is a GCC currency," Dalton Garis, an Associate Professor of Economics and Market Behavior at The Petroleum Institute in Abu Dhabi, told Gulf News.

Will this deter you from investing in Saudi Arabia? What do you think can be done by the authorities to boost the economy? Would more liquidity be the solution?