Page last updated at 12:47 GMT, Monday, 1 August 2005 13:47 UK

Saudi Arabia on road to economic reform

By Ben Richardson
BBC News business reporter

Crown Prince Abdullah who will take over as King of Saudi Arabia
Prince Abdullah has been credited with starting the reform process

Saudi Arabia's deceased leader King Fahd leaves behind a country that has started along the road of economic reform, but in many ways still has a great distance to travel.

As the world's largest oil producer, Saudi Arabia is riding a wave of prosperity buoyed by record crude prices.

With the sudden windfall that has filled its national coffers, Saudi Arabia has paid off debts and driven economic growth to its fastest pace for two decades.

It has set in motion the privatisation of some of its biggest companies, tried to tackle unemployment, mulled plans to introduce income tax, modernised its financial markets, and attracted more foreign investment.

Saudi Arabia is also in the final stages of talks with the World Trade Organization, and observers believe there is every chance it could win membership this year.

'More decisive manner'

The reform process was started back in 1998 by Crown Prince Abdullah, the man who will take over as ruler of Saudi Arabia.

While progress has been slow, often hampered by the failing health of King Fahd, it would be wrong to see the reforms as stalled, said David Butter, Middle East business editor at the Economist Intelligence Unit.

Saudi woman reading a newspaper detailing health problems of King Fahd
Saudi Arabia has been trying to balance tradition with modernity

He added that as King, Prince Abdullah should be able to inject new life into the reforms once he takes over.

"Being King should mean that decisions get implemented more quickly," he explained. As King, Abdullah "should be able to act in a more decisive manner".

One of the key problems is reducing Saudi Arabia's dependence on oil revenues, which currently account for about 45% of gross domestic product (GDP).

Alleviating that reliance would give the government a steadier revenue stream less affected by global demand for oil, allowing it to continue spending on development projects even during downturns.

While crude prices are at over $61 a barrel at present and may go higher, analysts are forecasting that they probably will fall back to $40 over the next decade.

Job driver

Boosting investment in other sectors is not going to replace oil as the kingdom's main revenue source, but it could help drive job growth and increase corporate tax earnings, analysts said.

Saudi Arabia's official unemployment rate is currently at close to 9%, with an unofficial rate of twice that.

The country's limited economy is finding it hard to absorb an increasing number of young school and university leavers, while most of the lower-paid jobs are done by foreign labour imported mainly from Asia.

Young Saudi man on a beach, talking into a mobile phone
Finding enough jobs for young Saudis is proving a difficult task

In an effort to breathe new life into its biggest companies, Saudi Arabia has started selling state assets including part of phone company Saudi Telecommunications.

It has opened up the domestic market by selling mobile phone licences in the hope that the new companies will create employment opportunities.

The insurance market was also given a shake up, with shares sold in the National Company for Cooperative Insurance (NCCI) and deregulation of the market.

Previously, only NCCI has been legally allowed to offer insurance products within Saudi Arabia, but the kingdom now wants a fully functioning insurance industry.

At the same time, the country's financial markets have been liberalised with new laws introduced in 2003 making it easier for small investors to buy and sell stocks.

Short shock

However, analysts were cautious about sounding too confident regarding the future, and their concerns were reflected to a degree in the Saudi stock market immediately after the announcement of King Fahd's death.

The benchmark stock index in Riyadh, the Tadawul All Share Index, initially slumped by 5.9% before trading was suspended.

It recovered slightly after reopening to trade 1.8% lower at 12,950.12.

Crude oil prices also ticked higher, despite reassurances from Saudi Arabia that supplies would not be affected.

In New York, a barrel of benchmark light crude oil rose 1.1% to $61.23.

But any negative effect was likely to be short-lived, analysts said.

"It's not going to have a great deal of effect because Crown Prince Abdullah has been effectively running the country for several years," said Geoff Pyne, an oil industry consultant.

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A look back at King Fahd's reign

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