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29 March 2024

Saudi high public spending stifles private sector

Published
By Nadim Kawach

Saudi Arabia is expanding the state control of the economy by sharply boosting public spending and this is stifling the private sector and obstructing diversification plans, a key bank in the Gulf Kingdom said on Wednesday.

Banque Saudi Fransi 9BSF) was referring to a steady large increase in public expenditure over the past few years and a recently announced royal bonus for citizens involving the spending of more than $130 billion.

The downward effects on the private sector have also smothered any real rise in the real GDP per capita income in Saudi Arabia, the largest Arab economy and the world’s dominant oil power, BSF said.

“The Saudi government’s substantial state spending programme unveiled this year to support its citizens has left a question mark over the matter of whether the country will be successful in promoting diversification away from its predominant reliance on oil by spurring greater private sector activity,” BSF said in a study sent to Emirates 24/7.

“After exceeding five between 2004 and 2007, private sector GDP growth slowed to below four per cent for the past three years, a rate that fails to encourage an adequate level of job creation for the kingdom’s youth.”

The report expected private sector real GDP growth to accelerate only slightly to about 4.2 per cent this year while government sector GDP growth holds above five per cent for the third straight year, tipping the balance in favour of continued state-dominated development.

It said growth rates of at least six per cent are necessary for the private sector to be in a position to engage adequately in building a more-diversified economy, adding that growth must exceed 6.5 per cent a year to generate enough jobs.

“The emphasis on state funding has in many respects hampered the government’s endeavour to stimulate the private sector. The trend toward relying on government cash to push forward crucial infrastructure projects has to some extent stifled the rebound in bank credit and restrained private sector investment,” BSF’s chief economist John Sfakianakis said in the report.

“Fiscally speaking, Saudi Arabia is able to afford for this scenario to continue in the medium term given the rebound in oil prices by almost a third in the past year. With oil prices around $100 a barrel and crude oil output gaining, the kingdom’s public revenues are poised to grow 23 per cent this year to SR904 billion, providing it plenty of flexibility to finance new initiatives for Saudi citizens, take the lead in building homes, and raise public sector wages.”

But it noted that public expenditures this year would likely triple what they were in 2004 adding that it will become critical in the coming years to transfer a good deal of the financing and expansion burden to the private sector, including both domestic and global players.

Its figures showed that since 1990, the private sector’s contribution to non-oil real GDP has barely moved, accounting for 66.7 per cent of non-oil GDP in 2010, just 2.3 percentage points more than its contribution 20 years earlier.

While the private sector’s share of the non-oil sector forms the majority, investments of the private sector, as measured by its gross fixed capital formation, have in recent years decelerated as government funding swung
substantially higher, the report said.

In addition to the lack of private sector momentum, growth of real incomes of citizens has lagged many of the country’s global peers due to comparatively fast population growth and lower-than-optimal private sector GDP growth.
“These challenges highlight the need to ensure government policies avoid having a crowding out effect on the private sector or discouraging enlargement of the small-and medium-sized enterprises sector.”

According to the report, after years of posting fiscal deficits, the Saudi government found itself possessing surplus capital with which to pay off debts, invest in infrastructure and build its foreign assets.

As a result of this shift, the government took on a very important role in domestic investments, with the government’s investment rising from only around 14 per cent of total gross fixed capital formation in 2001 to 35 per cent in 2009.

The private sector, meanwhile, saw its share of fall to 49 per cent from 75 per cent.

“The government’s strategy has been one that attempts to generate momentum by pouring its own funds into key projects, on the assumption that the private sector will reciprocate with a similar level of capital,” BSF said.

“That has not, however, happened as extensively as policymakers might have hoped hope. Government GFCF surged eight-fold between 2000 and 2010. Private GFCF, by contrast, expanded less than 94 per cent over that period.”

The figures showed that between 2006 and 2010, private GFCF grew 38.5 per cent versus the government’s 140.4 per cent.

“Failing to build the private sector more quickly is also taking its toll on improvement of real incomes among Saudi citizens and residents. Looking at nominal GDP figures, which fluctuate widely based on oil prices, per capita
GDP figures have shown a distinct improvement in the last decade,” it said.

“Each Saudi resident earned $16,039 in 2010, a surge of 74 per cent since 2000.

Yet these data can be viewed as unrepresentative. Per capita income measured at constant prices, to account for inflation, tell a very different story. According to this measure, real per-capita growth has been stagnant since mid-1980s. Adjusted for inflation, each resident was earning $8,550 in 2010, virtually on par with the level in 1991 and below a 1980 peak of $14,773.”

BSF said the reasons behind this sluggish trend in real income have been rapid population growth occurring without a correspondingly large expansion in the economy, particularly the non-oil economy.