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IMPRESSIVE TRENDS
Saudi Arabia’s economic performance has been impressive as a result of
record high oil prices, increased oil production, sustained structural
reforms, and continued macroeconomic stability. Real GDP growth in 2005
was strong (6.6 percent) with oil and non-oil GDP growing at 5.9 percent
and 6.8 percent, respectively. Inflation remained very low at 0.7
percent, reflecting mainly the very open and flexible labor market and
the open trade system.
Economic Growth
External and fiscal developments were dominated by the high world market
oil prices. The external current account surplus increased by 8.6
percentage points to reach 29.3 percent of GDP in 2005. The central
government overall surplus almost doubled to 18.4 percent of GDP,
despite a sharp increase in expenditures. A part of the surplus was used
to reduce central government debt by 25 percentage point to 39.6 percent
of GDP. The Saudi Arabian Monetary Agency’s (SAMA) net foreign assets
increased by $66 billion to $150.5 billion, an equivalent of around 16
months of imports of goods and services.
Strong economic fundamentals, high investor optimism, and a rapid
expansion of credit to the private sector (39 percent) helped sustain
the stock market boom in 2005. The Tadawul All Share Index increased by
104 percent in 2005, and further by 24 percent to reach its peak on
February 25, 2006. Thereafter, the index declined by about 45 percent
through end-May 2006 (33 percent below the beginning of the year level),
but still remained at 3½ times above its end-2002 level. The banking
sector performance strengthened further in 2005, partly due to income
from stock market-related activity. SAMA introduced measures to limit
bank credit exposure to the equity market and strengthened oversight.
Despite increases in international interest rates, SAMA did not revise
the benchmark interest rates from February to June 2006, but increased
the repo and reverse repo rates by 20 basis points on June 29, 2006,
broadly in line with the latest increase in the Fed funds rate. The
Saudi riyal appreciated by 3.4 percent in real effective terms during
the 12-month period through March 2006, reflecting the movement of the
U.S. dollar against other major currencies.
The Future
Prospects are very favorable in light of the expected sustained increase
in global demand for oil. Real GDP growth is expected to remain robust
at almost 6 percent despite lower oil sector growth (1.6 percent).
Inflation in the first quarter of 2006 was about 2 percent (on an annual
basis). Both the external current account and the central government
overall fiscal balances are expected to register substantial surpluses
of 31.1 percent of GDP and 17.2 percent of GDP, respectively. Reflecting
the government policy to use a part of the fiscal surplus to reduce
public debt, central government debt is projected to decline by around
23 percentage points to 17 percent to GDP. SAMA’s net foreign assets are
projected to increase further to $167 billion, equivalent to 15 months
of imports of goods and services.
Steady implementation of structural reforms has improved the investment
cli mate
and paved the way for Saudi Arabia’s accession to the WTO in December
2005. In order to sustain the momentum, privatization of government
activities is being advanced steadily and a large number of mega
projects in the nonoil sector are being implemented through
publicprivate partnerships. The Saudiization policy, aimed at creating
private sector employment for Saudi nationals, continued to be applied
in a flexible manner, thus contributing to wage and price stability in
an environment of accelerating economic growth.
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