The 35th Annual Report of the Saudi Arabian Monetary Agency (SAMA) was presented to Custodian of the Two Holy Mosques King Fahd Bin Abdul Aziz today by Minister of Finance and National Economy Dr. Ibrahim Abdulaziz Al-Assaf and SAMA Governor Hamad Al-Sayyari in the presence of Deputy Prime Minister and Commander of the National Guard Crown Prince Abdullah Bin Abdul Aziz and other officials.
Introducing the report, Governor Al-Sayyari said that it reviews in detail monetary, financial and economic developments in the Kingdom during the fiscal year 1998 (1418/19 H), and the latest developments during the current fiscal year 1999 (1419/20 H). The recent rise in oil prices, he said, is having a favorable effect on the Saudi economy during the current fiscal year, especially on the State budget and the balance of payments. This upsurge in oil prices can be attributed to the efforts made by the oil producers, both OPEC and non-OPEC, and notably by Saudi Arabia, to reduce production and achieve a balance in the supply and demand for oil in global markets.
The report reviewed economic developments during 1998, which Governor Al-Sayyari described as an unfavorable year for many world economies due to the adverse financial crises witnessed by Russia, and by certain countries of East Asia and South America. These crises resulted in a global fall in growth rates, a decline in the level of demand for crude oil, and a drop of around 35 percent in oil prices. This had a negative impact on the Kingdom's oil revenues, resulting in an increase in the deficit of the State budget to SR 48.4 billion (U.S. $ 12.9 billion).
The position of the balance of payments was reversed from a surplus in 1997 to a deficit in 1998. Through sound monetary and financial policies, however, the Saudi economy reflected a high degree of resilience and in real terms, the Gross Domestic Product (GDP) recorded a growth rate of 1.6 percent during 1998. Both the oil and non-oil sectors registered positive growth rates of 12.1 percent and 1.2 percent respectively. The private sector showed a growth rate of 1.3 percent, and the growth rate of the government sector stood at 0.9 percent. These growth rates were achieved in an environment of lower domestic prices and the stability of the exchange rate for the Saudi Riyal. In fact, the price index declined by 0.2 percent during 1998. This stability was due to SAMA's monetary policy aimed at achieving these goals in keeping with the domestic market requirements and in close coordination with the government's fiscal policy.
Broad money increased in 1998 by 3.7 percent to SR 282.1 billion (U.S. $ 75.23 billion). The banking sector continued to expand during the year, with total deposits rising by 4.8 percent to SR 237.0 billion (U.S. $ 63.2 billion). The private sector's demand for bank credit went up by SR 27 billion (U.S. $ 7.2 billion) or 20.2 percent to reach a total of SR 160.7 billion (U.S. $ 42.85 billion). The capital base of banks grew by SR 1.9 billion (U.S. $ 0.51 billion) to SR 40.3 billion (U.S. $ 10.75 billion). The risk-weighted capital to assets ratio of banks stood at 21.2 percent, that is, more than two-and-a-half times the minimum ratio prescribed by the Basle Committee.
The report went on to say that in the area of social affairs, the government has continued to focus on its policy aimed at the development of human resources and promotion of human talent. It has accorded considerable attention in this regard to the enhancement of education, training, health and social security. Governor Al-Sayyari described the Saudi economy, which in fact has in the past achieved most of its envisaged objectives, as characterized by openness to external markets, saying that the infrastructure projects have for the most part been completed at the highest standards. He added that the private sector is playing a greater role in economic activity in an environment marked by stability in prices and exchange rates. He declared that although there is satisfaction and pride in what has already been achieved, ambitions go far beyond these achievements, saying: "We aspire to make available all the necessary conditions and requirements for the Saudi economy to achieve regular and sustained growth in keeping with the growth in population."
Governor Al-Sayyari stated that at present, the Saudi economy faces many challenges that have to be confronted with determination and persistence. The most prominent of these, apart from the continued effect on domestic economic growth of fluctuations in world oil prices, is a slow-down of real domestic product growth when compared to population growth. This, he said, constitutes a challenge to maintaining the level of social welfare, creating employment opportunities, achieving budget balance, and reducing public debt. Facing this challenge requires concentrated work in various important areas to ensure optimum utilization of available economic potentialities. The most prominent area is to continue accelerated work towards the diversification of the production base to reduce reliance on the oil sector. Although great strides have been made in this regard, there is still a lot to be done.
Another challenge, he said, is the necessity to continue enhancing the policy aimed at restoring balance to the State budget. This policy contributed to bringing about favorable results for the Saudi economy during the past year. Reforming the budget will require concentrating on rationalization of expenditure, regardless of the oil revenue situation; setting a fixed ceiling for the budget deficit and the public debt, one that is binding; and giving priority to domestic expenditure that directly contributes to economic growth.
Governor Al-Sayyari went on to say that in light of the globalization witnessed by the international economy and the challenges which it constitutes to the Saudi economy, the need arises for continued review in order to bring about structural reforms to ensure optimum utilization of available economic resources. This includes enhancing and accelerating privatization, promoting mobilization of domestic and foreign savings for investment in productive sectors, and activating Saudization programs. The report said Saudi citizens and businessmen have been optimistic about the instructions given by Crown Prince Abdullah concerning the updating of regulations related to investment, taxes and other areas that would enhance the investment environment in the Kingdom.
Paying tribute to King Fahd's order to establish the Higher Economic Council, Governor Al-Sayyari described it as giving the country's economic sector the necessary attention commensurate with its role in development and in keeping with domestic and world economic developments. Its high-ranking membership under the chairmanship of the Crown Prince will enhance coordination between the various economic sectors, and contribute to expediting the decision-making necessary to achieve set economic targets. This in turn will boost the country's welfare and enhance domestic economic growth, he said.
Governor Al-Sayyari concluded by assuring the King that preparations had been undertaken to face the Y2K problem, saying that the national committee has worked with all government organs to ensure the compatibility of their systems with the new year. SAMA and all the commercial banks have made the necessary adjustments to the computer systems in the banking sector to ensure that they are Y2K compatible.