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Saudi Arabia Table of Contents

Saudi Arabia

Economic Policy after the 1986 Oil-Price Crash

The general thrust of Saudi economic policy underwent a fundamental change after the oil price crash of 1986. The serious depletion of foreign assets, combined with the extensive decline in oil revenues, necessitated a revised economic policy. The depreciation of the United States dollar on international financial markets also hurt Saudi purchasing power abroad. The kingdom's external terms of trade deteriorated rapidly because oil exports were largely denominated in United States dollars, and the bulk of Saudi imports came from countries whose currencies were appreciating relative to the United States dollar.

Reappraisal of the development program became necessary. The most urgent task was shoring up government finances, yet domestic constraints allowed only a few options, especially in terms of raising nonoil revenues. Imposing an income tax, for example, was out of the question partly because of its political dangers in a country where it was an unknown procedure likely to raise questions of income distribution and taxation without representation. Also an income tax appeared impractical because the bureaucratic difficulties involved in collection would be more expensive than the intake would justify. King Fahd's shortlived idea of taxing foreign workers' income was retracted after a public outcry. The government froze some current account spending and cut capital spending, partly by delaying projects and also by canceling some programs. The was informed that subsidies of private sector vast capital expenditures had ended for the present, and, whereas certain major projects would be completed, the governments' emphasis would shift to improving the efficiency and maintenance of its public assets. In addition, major defense contracts would include a provision whereby foreign equipment and service contractors would be required to allocate 35 percent of the cost of their projects or services for industrial investments in Saudi Arabia.

Data as of December 1992