U. S.-Saudi Economics

By John Haldane

While King Fahd's recent visit to the U.S. focused primarily on political issues relating to the Arab-Israeli conflict, the close economic relations between the two countries should not be overlooked. As a senior State Department official emphasized: "Saudi Arabia remains of sustained importance to the United States and the world economy." He pointed out that it is the U.S.'s sixth-largest trading partner, the largest holder of U.S. Treasury securities, and an important leader in the Arab world. He could have added that Saudi Arabia, the size of the U.S. east of the Mississippi, is sitting on one quarter of the world's petroleum reserves and that it is, by far, the leading U.S. market in the Middle East.

American exports to Saudi Arabia in 1984 totalled $5.6 billion, a drop from the 1983 figure of $7.9 billion, but still representing approximately 18 percent of Saudi imports. When one adds U.S. participation in almost 300 joint ventures, American financial involvement in the kingdom becomes of major consequence to the U.S. On the Saudi side, investments in the U.S. by Saudi private sector businessmen have increased significantly in the past five years, particularly in banking and real estate.

Trade experts agree that U.S. exports to Saudi Arabia last year would have been higher if record-breaking dollar rates had not pushed up the purchasing price of American goods and services, which in turn enabled aggressive Japanese, West German, and French companies to move into the Saudi market. (See The Washington Report, October 15, 1984: "Dollar Up ... Exports to Mideast Down.") A second factor is that overall Saudi Arabia has been importing less as its national income has dropped because of lower oil production and falling world oil prices. However, the U.S. Department of Commerce is not giving up its fight for a larger share of the Saudi market. This year trade missions will be sent to Saudi Arabia representing the areas of management services, agricultural equipment, water resource equipment, operation and maintenance services, and renewable energy (solar and wind) resources.

Adjusting to Lower Revenues

The Saudi economy has adjusted better than might have been expected to the decline in oil income. The government has used its huge foreign assets to continue work on major infrastructure projects while promoting private industrial and agricultural development and maintaining consumer purchasing power through a variety of subsidies, loans, and welfare payments. Economic activity and government spending in fiscal year 83/84 were well below the peak reached in FY 80/81, a boom year, but to a considerable extent this reflected the winding down of large expenditures in major infrastructure projects.

Petrochemicals and agriculture are emerging as important growth sectors, while construction, non-hydrocarbon manufacturing, and private trade activities are decreasing. Nevertheless, the U.S. Department of Commerce says the outlook for FY 84/85 will be somewhat better, and the new petrochemical production and resulting exports should stimulate the economy.

The latest Saudi Arabian Monetary Agency's Annual Report describes the present phase of Saudi economic development as one of "normalization" following the unprecedented accumulation of wealth between 1974 and 1981. To the extent that prior growth rates were unsustainable in a country with a population of only seven million people, such a characterization seems fair. Perhaps the most remarkable Saudi economic achievement has been the relatively painless adjustments it has made from the boom years of the 70s to the lower income years of the 80s.

Saudi Arabia's Fourth Five-Year Plan (1985-90) deemphasizes the government's role in the economy. Instead it encourages the private sector to become an active partner by making full use of the modern infrastructure built during the three previous five-year plans. The current plan has two dominant themes: Development and diversification of the national economy to minimize dependence both on revenue from oil sales and on imports of goods and labor; and concentration on maintaining and improving the quality of systems and facilities already in place.

To lessen its almost total dependence on petroleum exports—and to make productive use of previously flared natural gas—Saudi Arabia has embarked upon an ambitious program to provide four to five percent of the world's demand. for petrochemicals. Twelve large-scale, capital intensive factories, representing the latest state-of-the-art technology, are under construction at Jubail and Yanbu at a cost of $10 billion. These include seven petrochemical plants, two fertilizer plants and three export refineries, most of which should go on line by the end of this year. Four of the petrochemical projects have American participation.

This new Saudi industrial capacity will have a substantial cost advantage over foreign competitors. It is estimated that methane and ethane, the principal feedstocks, will be priced at one-half to one-tenth the cost of feedstock used elsewhere, more than compensating for higher initial capital costs.

Joint Commission Meeting in April

No review of U.S.-Saudi economic relations would be complete without a reference to the quiet but effective efforts of the U.S.-Saudi Arabian Joint Commission on Economic Cooperation. Now it its tenth year, the Commission is preparing for its April 22-23 meeting in Washington, D.C. The new Treasury Secretary, James A. Baker, III, will host this year's session, with Saudi Minister of Finance and National Economy Muhammad Abalkhail heading the Saudi delegation. The Joint Commission was established in 1974 to "promote programs of cooperation between the two countries in the fields of industrialization, trade, manpower, training, agriculture, and science and technology." Since 1974, 28 projects have been undertaken—all paid for in full by the Saudis. It is anticipated that four new project agreements—in the areas of education, health, power and meteorology—will be signed during the April meeting.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.