Ambitious plans for further investment in the development of the petrochemicals, oil refining, phosphates and gas sectors could further increase the percentage of oil and oil derivatives in export revenues. The growing economy has been matched by an increase in demand for imports, driven largely by massive construction projects.
As to ranking among the world, Saudi Arabia is the first in oil production and reserves, fifth in natural gas reserves, ninth in natural gas production.
Set up by Royal Decree in It was thus engaged in the production of natural resources including, for example, the engagement of foreign partners , in the exploitation of natural resources such as the evolution of a wide range of hydrocarbon products, like petroleum, LPG and asphalt , and in the marketing, both domestically and internationally, of these products.
Its range of activity was therefore vast. Industry in Saudi Arabia is related to oil and natural gas: refining and petro chemistry. Along with that, Saudi Arabia is currently witnessing a significant growth in agro-industries — food and consumer goods industry, which is based on private capitals. To this end, the government has encouraged the development of a wide range of manufacturing industries. The government has provided a range of incentives to encourage the private sector to participate in the national industrial effort.
Eight industrial estates provide private Saudi manufacturing companies with the necessary infrastructure and services at a very low cost. Credit facilities on generous terms are readily available for such enterprises. Saudi Arabia has adopted a free market economic model. The financial, industrial and trade sectors of the economy have made rapid progress, enabling the private sector to play an increasingly important role in the development and diversification of the economy, especially in the fields of construction and farming.
The Ministry of Economy and Planning formulates economic and social development plans that set long-term economic goals. Additional sectors of the economy are overseen by individual ministries, such as agriculture, energy, transportation, communications and finance. The private sector is playing an increasingly larger role in the Saudi economy — it now accounts for 48 percent of the gross domestic product GDP.
During the pilgrimage season the increased demand for the riyal tended to raise its exchange value, but with the introduction of paper receipts SAMA was able to stabilize the exchange value and, in addition, familiarize the Saudi Arabian people with the use of paper money.
In January , a number of decrees were promulgated to provide the legal framework for monetary reform. Decree No. Briefly, this decree designated the Saudi Arabian riyal as the currency unit and legal tender, with the parity fixed at the equivalent of 0.
The riyal was to have per cent cover in gold and convertible foreign exchange. The cover was to be valued at the new par value. Outstanding Saudi Arabian gold sovereigns were to be withdrawn from circulation, and holders of these coins could exchange them for riyals at the rate of 40 riyals to the sovereign within a period of two months from the date of publication of the decree. SAMA was required to publish in the Official Gazette a fortnightly statement containing information on the amount of currency issued and its cover.
In addition, it was to publish an annual report on its operations and position, together with authenticated accounts. A new feature of the decree was the provision allowing SAMA to invest its exchange holdings in foreign government securities.
The balance of the revaluation profits was to be credited to the general government reserves. The charter of SAMA stipulates that the Agency shall regulate commercial banks and exchange dealers as may be found appropriate.
Apart from a provision requiring the banks to provide SAMA with financial statements and from a provision permitting SAMA to impose reserve requirements, the charter does not spell out in detail its banking control powers. The law provides that banks must be licensed by the Minister of Finance and National Economy after approval of the Council of Ministers. Applications for licenses are to be submitted to SAMA, which studies the application and submits a recommendation to the Minister of Finance.
Saudi Arabian banks may be licensed only as joint stock companies with a minimum of paid-up capital of SRls 2. Foreign banks wishing to open up a branch in Saudi Arabia may be granted a license subject to appropriate conditions to be laid down by the Council of Ministers.
All banks operating in Saudi Arabia when this law was promulgated were considered as having been licensed. Exchange dealers were to be permitted to continue engaging in the money-changing business, but they were prohibited from undertaking any banking business. The law stipulates that deposit liabilities of a bank may not exceed 15 times its reserves and paid-up capital; when deposits exceed this ratio the bank must, within one month, deposit 50 per cent of the excess with SAMA.
The banks are required to maintain with SAMA deposits equivalent to 15 per cent of their total deposit liabilities; 16 this action may be varied within the range of 10 to In addition to the statutory deposit, banks are required to maintain liquid assets equivalent to not less than 15 per cent of their total deposit liabilities; SAMA may increase this ratio up to 20 per cent.
The law permits SAMA to place restrictions on the volume and uses of credit and to specify the conditions and terms of credit. The law specifies what transactions may not be undertaken by banks and provides for submission of all information requested by SAMA, for auditing of their accounts, and for penalties in cases of contravention of the law. Some important restrictions on SAMA remain: it may not extend credit to the Government or to private entities including banks , and because it may not contravene Islamic laws, it may not use the discount rate as an instrument of monetary policy.
These restrictions obviously place limitations on SAMA in implementing its monetary policy and are reflected in the structure of its assets and liabilities. Its domestic assets consisted mainly of deposits with certain banks. Since SAMA is barred from lending to the banks, or from rediscounting commercial papers, the only way it, as a central bank, can provide accommodation to a commercial bank, where appropriate, is to place a deposit with that bank.
On the liabilities side, at the end of June , 70 per cent of its liabilities were in the form of government deposits. Other liabilities consisted of the currency issue of the deposits of commercial banks, which was made up of reserve requirements equal to 10 per cent for demand deposits and 5 per cent for time and savings deposits, as well as the special deposits of certain banks whose deposit liabilities exceeded 15 times their capital. In recent years SAMA has pursued a neutral monetary policy in the sense of permitting private demand for credit to find its own level.
On the other hand, SAMA has placed strong emphasis on close supervision of the banks in order to ensure sound banking practices. Commercial banking activity has expanded at a rapid pace in recent years. The total assets and liabilities of the commercial banks have increased from SRls 1.
Total deposits with banks, which increased by SRls million during the five years ended December , jumped to SRls 1, million during the 30 months ended June The flood of deposits to the banks has reduced the return to depositors to a range of 1. The limitation on deposits has been necessitated by the inability to find suitable domestic outlets for investments of the new funds. The banks have increased their investments abroad considerably, but they are reluctant to expand such investments further in view of the risks inherent in the unsettled international monetary situation.
With respect to domestic lending, despite the relatively low cost of borrowing per cent , the demand for credit by the private sector has increased only by 6 per cent during to SR1s 1.
The low demand for credit by the private sector, despite a high level of activity, probably reflects a substantial degree of liquidity in private hands as well as the practice of advance payments by the Government to contractors undertaking public development projects.
The continuing increase in deposits, coupled with the stagnation in advances, has resulted in a substantial increase in the liquidity position of the banks. The ratio of reserves and foreign assets of the banks to their liabilities excluding capital and unclassified liabilities , which increased from 35 per cent at the end of to 38 per cent at the end of , rose further to 46 per cent at the end of December and to 71 per cent at the end of June S audi A rabia : M onetary S urvey , J une 1.
Regarding the distribution of credit to the private sector, it is estimated that import financing usually accounts for about one half of total credit extended to the private sector, advances to contractors account for about 20 per cent, and advances to industry as well as financing for other activities account for the remainder about 30 per cent.
The Agricultural Bank, established in with a capital of SRls 10 million, has expanded its credit operations steadily in recent years. The Bank has undertaken a review of its operations to date with the idea of improving and expanding its credit operations in the agricultural sector. The rate of expansion in private liquidity money plus quasi-money averaged The average growth rate for the four years ended in was over 10 per cent; in and private liquidity increased by 14 and 41 per cent, respectively.
The growth rate in money and quasi-money was in line with the rate of growth of GDP at current prices, which expanded at an average annual rate of The sharp increase in liquidity in was mainly composed of a large increase in money particularly currency , which possibly reflected increased hoarding of Saudi Arabian riyals.
The rate of expansion in liquidity was 14 per cent during the first six months of , compared with 15 per cent in the corresponding period of Topics Business and Economics. Banks and Banking. Corporate Finance. Corporate Governance. Corporate Taxation. Economic Development. Economic Theory. Economics: General. Environmental Economics. Exports and Imports. Finance: General. Financial Risk Management. Foreign Exchange. Industries: Automobile.
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Micronesia, Federated States of. Nauru, Republic of. Saudi officials are particularly focused on employing its large youth population. In , the Kingdom incurred a budget deficit estimated at 8. The quest for economic development and growth began in earnest with the introduction of the First Development Plan in This began a series of five-year plans that continues today.
The first phase of this process was to establish an infrastructure that could support a modern economic base. The next was to develop the human resources necessary to help bring about the planned economic transformation. Finally, the focus could shift to economic diversification, including expansion of the industrial, agricultural and other sectors, an expansion that is now well advanced.
The establishment of the physical infrastructure was accomplished in stages during the first three development plans. As the infrastructure was taking shape, the government launched a major effort to expand the industrial base. This was done along two separate, but parallel, courses.
One aimed at the expansion of the country's oil industry and the other at establishing a modern non-oil industrial sector. In addition to optimizing revenues from Saudi oil production, the modern oil industry plays an equally important role in the development of the non-oil industrial sector by providing the raw materials and feedstock that facilitates this growth. By , with most of the physical infrastructure in place, attention shifted to diversifying economic sources.
The Fourth , Fifth , Sixth and Seventh Plans all emphasized strengthening the growing private sector and increasing the efficiency of the industrial sector. The Eighth Five-Year Development Plan was devised with a focus on increasing foreign as well as national investment, and on developing human resources. Throughout the course of the development plans, Saudi Arabia's steady but dramatic industrial and economic transformation has been accomplished through the careful guidance and active support of the government.
To judge the success of this effort one need only consider that in the 25 years from to , the non-oil sector's share of GDP increased from 46 percent to just over 70 percent, and that this GDP tripled, to By , the GDP had reached billion dollars.
The Ministry of Economy and Planning assists in formulating the five-year development plans that set long-term economic goals. The Ministry of Finance supervises implementation of the nation's economic policies. To facilitate the expansion of the private sector's role in the national economy, the government established five specialized credit institutions, which provide economic opportunities to many Saudis who were previously unable to compete in the marketplace. These financial institutions have provided loans to citizens for development projects in agriculture, industry and construction.
In , the Saudi Industrial Development Fund SIDF was the first government agency set up to provide interest-free soft loans to enable Saudi businessmen to establish industrial plants. These loans can be used to finance up to 50 percent of the capital for a new factory.
SIDF loans have helped launch thousands of new factories and expand hundreds of existing facilities. Since it was founded in , the Saudi Arabian Agricultural Bank SAAB has provided loans for agricultural projects, farm machinery and production requirements.
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