KC Johnson

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HISTORY

In 1990-91, King Fahd played a key role before and during the Gulf war, helping consolidate the coalition of forces against Iraq and define the tone of the operation as a multilateral effort to reestablish the sovereignty and territorial integrity of Kuwait. Acting as a rallying point and personal spokesman for the coalition, King Fahd helped bring together his nation’s GCC, Western, and Arab allies, as well as nonaligned nations from Africa and the emerging democracies of Eastern Europe. He used his influence as Custodian of the Two Holy Mosques to persuade other Arab and Islamic nations to join the coalition.

King Fahd suffered a stroke in November 1995. From 1997, Crown Prince Abdallah took on much of the day-to-day responsibilities of running the government. Upon King Fahd’s death on August 1, 2005, Abdallah assumed the throne as King. Prince Sultan, Minister of Defense and Aviation, became Crown Prince and First Deputy Prime Minister. Since ascending to the throne, King Abdallah has continued to pursue an incremental program of social, economic, and political reforms. In September 2009, he inaugurated the King Abdallah University of Science and Technology (KAUST), a graduate-level research institution and Saudi Arabia’s first co-educational university.

GOVERNMENT AND POLITICAL CONDITIONS
The central institution of Saudi Arabian Government is the monarchy. The Basic Law adopted in 1992 declared that Saudi Arabia is a monarchy ruled by the sons and grandsons of King Abdul Aziz Al Saud, and that the Holy Qur’an is the constitution of the country, which is governed on the basis of Islamic law (Shari’a). There are no officially recognized political parties. Following the first municipal elections in 2005, elections to select half of all municipal councilors have been scheduled for September 2011. The king has broad powers with limitations coming from a need to observe Shari’a and other Saudi traditions. He also must maintain consensus among the Saudi royal family, religious leaders (ulema), and other important elements in Saudi society. In the past the leading members of the royal family chose the king from among themselves with the subsequent approval of the ulema. In November 2006, King Abdallah established an Allegiance Commission that will select future kings and crown princes, a step designed to help formalize the selection process.

Saudi kings gradually have developed a central government. Since 1953, the Council of Ministers, appointed by and responsible to the king, has advised on the formulation of general policy and directed the activities of the growing bureaucracy. This council consists of the king (as prime minister), the first and second deputy prime ministers, 20 ministers, two ministers of state, and a small number of advisers and heads of major autonomous organizations.[1]

investment Environment: The Kingdom is open to foreign investment in most sectors, with the exception of several industries (e.g. upstream oil exploration) which are part of the gradually shrinking “negative list” of protected sectors. Saudi Arabia has taken great strides to ease regulatory restrictions and to reform the tax system, propelling it to a highly competitive position in the World Bank’s annual Doing Business rankings.

Saudi Arabia’s key economic priorities are job creation and the diversification of its oil-based economy. To this end, the Saudi Arabian General Investment Authority (SAGIA) is undertaking a multi-billion dollar development strategy centered on the building of greenfield economic cities and industrial zones around the country. The cities are designed to attract foreign and domestic investment into the downstream energy, transport and knowledge-based sectors through various incentives. In addition to welcoming foreign investment, the government plans to spend USD 385 billion on infrastructure and human resource development from 2010 to 2014.

The Saudi legal system, which is viewed as slow-moving and biased against foreign firms lacking strong local connections, remains an obstacle for investors. Saudi Arabia has undertaken some legal reforms to meet conditions imposed upon its accession in 2005 to the World Trade Organization. The country still lacks commercial courts versed in business issues. Legal reform remains controversial due to religious sensitivities.

Skill shortages and the dependence of the economy upon expatriate workers remain a challenge given government regulations that require employers to comply with local hiring quotas. Starting in June 2011, companies that do not comply with the quotas will not be able to renew work visas for their foreign employees following a six-month grace period. The Kingdom will invest half of its 2010-14 development plan in education to address the issue.

Political Violence: Saudi Arabia saw a wave of terrorist attacks in 2004. Since then, counterterrorism efforts have greatly improved and the ability of terrorist groups such as al-Qaida in the Arabian Peninsula (AQAP) to launch terrorist attacks within the Kingdom has been weakened. However, terrorists remain intent on attacking Westerners, local authorities and major oil and infrastructure facilities.

Fiscal policy: The fate of government revenues is tied directly to oil prices and production levels. This sector accounts for 85% of government revenues and 45% of GDP. Production slipped a notch in 2009 alongside weaker prices and 2010 witness only a moderate 3% rebound in production as prices snapped back 30%. However, both production and prices were weaker than the recent 2008 peak. Expenditures continued to advance – growing 5% last year and on the back of growth ranging between 10-20% dating back to 2003. Against this backdrop, the budget surplus has been whittled back, but remains in a comfortable surplus position. Further recovery on the revenue side and notwithstanding the infrastructure spending plan, will mean that the surplus cushion continues to grow over the coming years. Government debt is not an issue at 17% of GDP. Government indebtedness has gradually recovered from over 100% of GDP to current levels thanks largely to the recovery in oil prices since about 2003.

External sector: Crude and refined petroleum exports are a key driver of the trade and current account surplus. They account for about 85% of merchandise exports.           Export performance, like government revenues will depend on the level of oil production and external sales and the price of oil. The outlook over the forecast horizon calls for continued gains in petroleum export earnings. Import growth remains linked to the intensity of capital imports tied to the investment activity and the more fixed component of food imports. Machinery and equipment account for about 30% of imports, while transportation equipment accounts for 18% and food and agricultural products 15%. External debt levels are not excessive.[2]

Saudi defense strategy to confront regional risk

Riyadh: Saudi Arabia has prepared a plan to “rebuild and modernise” its armed forces as it confronts regional risks, military Chief of Staff General Hussain Al Qubail said.

The Saudi military “is closely following the successive developments in the Middle East and is fully aware of and understands the risks surrounding our country, which may pose a threat to national security”, Al Qubail said in a speech, according to the official Saudi Press Agency. “With the support of our government [we] will be able to address those risks.”

Deputy Defence Minister Prince Khalid Bin Sultan Bin Abdul Aziz oversaw the preparation of the plan, which will be presented to Defence Minister Prince Salman Bin Abdul Aziz at a later date, the Riyadh-based news service cited Al Qubail as saying.

King Abdullah appointed Prince Salman as defence minister on November 5 after naming Nayef Bin Abdul Aziz, 78, as the crown prince. The appointments followed the death of Crown Prince Sultan, who was also the defence minister, on October 22.

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Tensions between predominantly Saudi Arabia and Iran have escalated this year. On October 11, the US accused Iran of plotting to assassinate Adel Al Jubair, the Saudi ambassador in Washington. A week earlier, Saudi Arabia accused an unidentified foreign country of seeking to undermine the stability of the kingdom after an attack on security forces in the Shiite village of Awwamiya.

The “surrounding circumstances require” increasing efforts “so that the Saudi armed forces be in the highest degree of combat readiness”, Al Qubail was cited as saying by the news service.[3]

New Cities to Contribute $150B to Kingdom’s GDP

Saudi Arabia’s economy is booming and along with any boom comes development plans for the future. There are many ways in which countries can develop. According to SABB’s [Saudi British Bank] Q4-2007 report, for Saudi Arabia to continue its integration with the world economy, it must continue to expand its non-oil export options. As Saudi Arabia is trying to diversify its economy away from oil, it has embarked on a major plan to build economic cities which has generated a lot of foreign interest.

Dr. John Sfakianakis, chief economist of SABB, said “Jubail and Yanbu developed as a result of the industrial attractiveness of these two areas.

The industrial rise of these two zones gave helped build the real estate component, mainly housing, of Jubail and Yanbu. The growth of Jubail and Yanbu is noteworthy with sizeable capacity remaining to be tapped.

The port of Yanbu, for instance, can increase its current capacity three folds. Unlike Jubail and Yanbu, the six economic cities are all-inclusive, trying to incorporate industries, real estate development, education and sea port and dry port development.”

According to the Saudi Arabian General Investment Authority (SAGIA), the new cities will contribute $150 billion to the country’s GDP by the year 2020.

The cities are also expected to provide job opportunities for 1.3 million people and an increase in per capital GDP to SR125,625 for those living in the cities.

It is envisioned that the economic cities alone will have three times the population of Dubai, a GDP equivalent to that of Singapore and an area four times the size of Hong Kong. In developing the cities, the government will play the role of regulator, facilitator and promoter with the private sector providing the capital, the land owners and the developers.

The SABB report said at the core of economic cities projects is the question of job creation for Saudis. Employment generation is a must in order to achieve sustainable development as the private sector is highly dependent on foreign labor.

The King Abdullah Economic City (KAEC) is located mid-way between Makkah and Madinah and the commercial hub of Jeddah. It encompasses some 168 square kilometers, equivalent to around 65 percent of the total area of the emirate of Ajman in the UAE or about the size of the Principality of Liechtenstein. KAEC is being developed by Emaar the Economic City, a Saudi listed company.

The Knowledge Economic City (KEC), situated in Madinah, seeks to develop the Kingdom’s technology base.

The investment cost of the city will amount to around SR25 billion, creating some 20,000 job opportunities. An IT studies institute is planned, as well as a center for Islamic studies.

Prince Abdulaziz bin Mousaed Economic City (PABMEC) is in Hail, 720 kilometers north of Riyadh, and is slightly smaller in land size than KAEC, covering an area of 156 square kilometers. PABMEC estimates that the cost of the city will reach SR30 billion by its completion date in 2016. The city will be developed by the private sector, headed by Rakisa Holding Company.

Jizan Economic City (JEC) is intended to become another all-inclusive city similar to KAEC. JEC is some 725 kms south of Jeddah and will have its own desalination plant and a power plant generating 4,000 MW of electricity.

It will cover an area of 100 square kilometers or two-thirds of the entire city. Heavy industry will be a key sector for investment in JEC with plans in hand for a privately owned oil refinery, a 500,000 tons per annum steel rebar and DRI factory; a copper smelter and an aluminum complex.

Employment generation in Jizan is one of the biggest challenges for that region, as it has a population of more than 1.2 million people. Greater employment opportunities would also bring about a rise in per capita income.

The biggest challenge for JEC, and for the rest of the economic cities, is enticing enough investors to establish sufficient business presence to provide the projected number of jobs.

Sfakianakis said: “Regional development is paramount to the Kingdom’s growth and KAEC, together with the rest of the economic cities, is conceptually at the heart of an effort to bridge regional disparities.”

Economic opportunities in the main cities have helped perpetuate internal migration over the past three decades, with the result that Riyadh, Makkah and the Eastern Province now contain 64.5 percent (2004 census) of the Kingdom’s population. According to the Ministry of Economy and Planning, about 74 percent of the total number of operating businesses (570,000 firms in 2003) were located in these regions (Riyadh (30 percent), Makkah (28 percent) and Eastern Province (16 percent), as are a majority of industrial estates.

There are no industrial estates in Najran or Al Jawf, just one in Tabuk and three in Hail. The average number of industrial jobs per 10,000 people ranges from 237 in the Riyadh region to only 7 in the Northern Border region; and the Riyadh region accounts for about 75 percent of total milk production, whilst Qassim and Makkah regions account for 40 percent and 24 percent respectively of total poultry production.[4]