Saudi Government Revenues and Expenditures

A Financial Crisis in the Making

A. Aldukheil

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781349466771, 9781137346025
• eBook ISBN: 9781137342928
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Will history repeat itself, leaving Saudi Arabia to face another financial crisis due to drastic overspending and/or a dramatic drop in oil revenue? If the situation remains on its current trajectory, by 2030 government debt due to rising expenditures over revenues will be too overwhelming for the government to cope with.

CHAPTER 1

Anatomy of the Saudi Economy

The Saudi economy is large in size but simple in structure. It is best described as a government economy within the frame of a market economy. The government owns and manages the oil and gas sector, the principal driver of the economy. The government provides a variety of public goods and services, including education, healthcare, housing, utilities, loans, subsidies, etc.¹ Moreover, the government owns major equity shares in private sector mega joint-stock companies, such as the Saudi Basic Industries Corporation (SABIC) and the Saudi Electricity Company (SEC).²

The private sector is heavily influenced by government subsidies, price controls, and government expenditures. The IMF has repeatedly noted in its country reports on Saudi Arabia that there is a robust relationship between government expenditures and the rest of the economy.³

In this chapter, I show the government’s classification and measurement of the Saudi GDP; I then introduce some amendments to the government’s segmentation of GDP between government and nongovernment economy to illustrate the actual size of government GDP relative to the rest of the economy. Government GDP data leans toward underestimating government’s share of GDP and overestimating the private sector’s share of GDP thereby hiding the enormous size and role of the government in the economy and exaggerate the role of the private sector in the economy. At the end of this chapter, I critique the government’s use of GDP as a criterion to determine the status and growth of the Saudi oil-dependent economy instead of the genuine savings theory, which is more suitable to the Saudi economy.⁴

Saudi National Accounts Classification of GDP

The Trilateral Classification

The National Accounts System⁵ of the Saudi government divides the country’s GDP into three main sectors: oil and gas sector GDP, private sector GDP, and government sector GDP.

In algebraic form, the GDP at time t is:

Y_t=OY_t+GY_t+PY_t

where Y_t is GDP at time t, OY_t is oil and gas GDP at t, GY_t is government GDP at t, and PY_t is private GDP at t.

Figure 1.1 shows the composition of the Saudi GDP in 2010, according to the three-sector classification:

1. Oil and gas sector GDP . . . . . . . . . . $220,682 million (51.2 percent)

2. Private sector GDP . . . . . . . . . $127,416 million (29.57 percent)

3. Government sector GDP . . . . . . . . . $82,834 million (19.22 percent)

The Flow Process

The three major components of the Saudi GDP are highly interdependent; the oil and gas sector owned and operated by the government provided 93 percent of government revenues in the Saudi budget for the year 2012.⁶ The government uses this revenue to finance its expenditures on public goods and services. Government expenditures are the driving force behind private sector economic activity and have direct and strong stimulus effects on private sector production levels. Figure 1.2 depicts the “flow” of goods and services between the three sectors. Oil and gas exploitation is the initial process, which can be said to start off the economic chain of events in most cases. Crude oil constituted 85.8 percent of total exports in 2010, and 93 percent of government revenues in 2012, and it is the catalyst of the flow process.⁷

Figure 1.1 Composition of the Saudi GDP in 2010.

The government uses its oil and non-oil revenue to pay for its current and capital expenditures in local and international markets. The private sector supplies the government with the goods and services it demands, either from local production or imports (amounting to $106,9 billion in 2010).⁸ Thus the dynamic of the economic flow in the Saudi economy starts by excavating resources (crude oil and gas) and then spending the revenue earned from the sale of these resources on public and private consumption and investment. While this is a simplified version of the Saudi economy’s flow process, it presents the essential structure.

Figure 1.2 Flow of goods and services.

The Dual Classification of GDP

The National Accounting System also divides the country’s GDP into two categories⁹: oil and gas GDP and non-oil GDP.

In algebraic form, Saudi GDP (Y_t) at time t is:

Y_t = OY_t + NOY_t

where OY_t is oil and gas GDP at t and NOY_t is non-oil GDP at t.

The government’s reasoning behind the dual classification system is to create the image of an enhanced non-oil GDP by adding government GDP to private sector GDP. In this way the government can claim that the non-oil GDP (including import duties) is equal to or larger than oil and gas sector GDP. Such a classification is misleading, as it gives the impression that the economy has achieved a high level of diversification, while it essentially remains an exceedingly oil-dependent one.¹⁰ Non-oil GDP in Saudi Arabia is basically government GDP plus private sector GDP, and both are heavily dependent on oil revenues.¹¹

Oil extraction is erroneously labeled oil production and included in the GDP, while it is actually depletion of an existing stock of oil.¹² “Capital theory” rather than “production theory” provides the proper theoretical basis for dealing with capital stock depreciation, especially when natural resource capital is a major component of the economy.¹³

Figure 1.3 shows Saudi GDP, including import duties, pursuant to the dual classification system (year 2010).

Figure 1.3 Saudi GDP, including import duties.

The GDP dual classification system does not affect the flow process. It only combines the private sector GDP and government GDP together as one group, which is labeled non-oil GDP.

Government Sector GDP

My aim in this chapter is to illustrate the actual size of the government sector in Saudi Arabia by adjusting economic figures to reflect the actual contribution of the government to GDP. I will trace various contributions of the government to the economy, as well as its ownership of loans and equities, in both the oil and private sectors. To this end, I examine the following factors: government ownership and management of the oil and gas sector, government expenditures and its contribution to private sector GDP, government ownership of loans and equity in the private sector, and government subsidies to the private sector.

Government Ownership of the Oil and Gas Sector

The Saudi government legally owns all oil and gas reserves in the country (discovered or not yet discovered), and Aramco, the Saudi government oil and gas giant, operates all oil and gas facilities, including refineries. Aramco is also charged with the domestic and international sale of all petroleum and gas products, crude or refined. The company reverted to full government ownership in 1980.

Government Expenditure and Its Contribution to Private Sector GDP

The government’s direct expenditures cover many parts of the economy, including defense and security, education, health, transportation, agriculture, trade and industry, housing, and communication. As a result, the Saudi government materially influences the Saudi economy in both the public and private sectors. To assess the relationship between government expenditures and private sector GDP, the IMF undertook a cointegration analysis in 1998. The cointegration analysis sought to model this relationship using “time-series” for the period between 1969 and 1997.¹⁴ The study was based on official data with respect to private sector GDP using 1970 prices applied constantly, and actual budget expenditures at constant prices, deflated by the implicit GDP deflator for the non-oil sector. The main conclusion of the analysis was that “for the entire period 1969–97, growth of non-oil private GDP in Saudi Arabia seems strongly and positively correlated with budget expenditure. An increase of 1 percent in total government expenditure may generate about 0.5 percent increase in private sector GDP.”¹⁵ In 2005, another IMF report asked the same question...

Table of contents

• Cover
• Title
• Introduction
• 1 Anatomy of the Saudi Economy
• 2 Government Expenditures and Revenues, 1960–2010
• 3 Forecasting Government Expenditures, Revenues, and Gaps, 2011–2030
• 4 Forecasting Government Expenditures, Revenues, and Gaps, 2031–2050
• 5 Financing the Gaps
• 6 Are Saudi Government Expenditures Sustainable? (The Genuine Savings Criterion)
• 7 Is a Saudi Financial Crisis Inevitable?
• Summary and Conclusion
• Notes
• Bibliography
• Index