SAUDI ARABIA TRADE DIRECTORY ON DISK 1993 TRADEWARE BOX 406 WHITE MARSH, VA 23183 TITLE : Saudi Arabia Economic Policy and Trade Practices Saudi Arabia Key Economic Indicators (Billions of Saudi Riyals (SR) Unless Otherwise Indicated) 1989 1990 1991 (est) Income, Production and Employment Nominal GDP 304.0 371.0 390.0 Real GDP (1989 prices) 304.0 362.0 368.0 Real GDP Growth (pct.) 1.0 19.0 1.5 GDP by Sector: Petroleum Sector 91.0 137.0 146.0 Non-oil Private Sector 130.0 139.0 144.0 Non-oil Govt Sector 83.0 96.0 99.0 Real Per Capita GDP 21.7 25.3 25.0 (1989 prices, thousand riyals) Size of Labor Force (Millions) 5.0 5.0 5.0 Unemployment Rate N/A N/A N/A Money and Prices Money Supply (M2) 137.5 142.6 149.0 (Billion riyals, annual avg) Comm. interest rates (pct) 8.9 7.9 6.2 M2/GDP (pct) 45.2 38.4 38.2 Consumer Price Index 101.1 103.1 106.4 (1988 = 100) Wholesale Price Index 101.1 102.9 106.1 (1988 = 100) Exchange Rate (SR/US$) 3.75 3.75 3.75 Balance of Payments and Trade (US$ Billions) Total Exports (FOB) 28.3 43.9 47.8 Total Exports to U.S. (FOB) 7.2 9.0 12.0 Total Imports (CIF) 21.2 24.0 27.5 Imports from U.S. (CIF) 4.0 4.4 4.4 Aid from U.S. 0.0 0.0 0.0 Aid from Other Countries 0.0 0.0 0.0 Total U.S. Direct investment (stock) 1.9 1.5 1.8 External Public Debt 0.7 0.7 5.2 Annual Debt Service (paid) 0.0 N/A N/A Net Foreign Assets 60.0 57.0 50.0 Gold & Foreign Exchange reserves 11.5 8.8 9.9 Current Account Balance -8.4 -5.2 -15.2 1/ Data reflect rounding. Sources: Official Saudi data, international financial statistics, IMF, U.S. Embassy estimates, Foreign Commercial Service estimates. 1. General Policy Framework Saudi Arabia has an open economy with a dominant government sector, which has regulations that strongly favor Saudi citizens and the citizens of neighboring Gulf Cooperation Council (GCC) states. This bias is pervasive and reflected in virtually all government policies, including those affecting taxation, credit, investment, procurement, trade, intellectual property rights and labor. At the same time, other government objectives, including national development, defense and the technological advancement of the economy ensure that this bias towards Saudis and the GCC never rises to the point of seriously discouraging participation in the Saudi economy by other foreign nationals. The Iraqi invasion of Kuwait and the Gulf war substantially altered commercial activity in Saudi Arabia. From August 1990 to April 1991, Saudi government operations were largely concentrated on expelling Iraq from Kuwait and the aftermath of the war. Many of the standards, regulations and restrictions that hampered foreign participation in the Saudi economy had been waived, as the Saudi government sought out the lowest costs and most efficient suppliers for its troops and oil industry. U.S. firms benefited from this trend. With a return to normalcy, the Saudi government has also returned to enforcement of their previous, sometimes vexing, but not overly restrictive practices. Macroeconomic Policies: Fiscal Policy: Oil is the dominant factor in the Saudi economy. Changes in world oil prices and Saudi production levels have driven the oil sector's share of Saudi GDP from 1981's level of 65 percent (in 1981, oil accounted for current $99.9 billion out of total GDP of current $154.4 billion) to only 38 percent of estimated 1991 GDP. The statistical increase in the non-oil sector's share of Saudi GDP is, however, misleading. The change is put into perspective by the fact that annual growth rate of non-oil GDP during the ten year period between 1981 and 1991 was a mere 1.8 percent. Moreover, much of non-oil GDP is in fact tied to oil. Supplies and services are sold to the oil sector, and consumption and investment are depend upon oil receipts. Within those parameters, the government sector (which accounts for about 25 percent of GDP) plays a significant role in influencing resource allocation within the Saudi economy. Those parameters are further constricted, however, by the fact that much of this government spending is locked into Saudi "entitlements" in the form of social services, defense expenditures, salaries, foreign aid commitments and domestic subsidies. The generosity of Saudi state expenditures has been such as to place government fiscal accounts in continuous deficit since 1982-83. The added strain of Desert Storm and Desert Shield expenditures are reported to have pushed the deficit up to the equivalent of a sixth of Saudi GDP as expressed on an annualized basis. Foreign assets managed by the central banking authority, SAMA, have fallen from 1981's level of (current) $127.7 billion to 1991's figure of (current) $55 billion, while central government deposits with SAMA are reported to have fallen to less than $10 billion at the end of 1991 from $90 billion in 1982. This drawdown has led the government to turn increasingly to the use of financial instruments, including Saudi government development bonds and, beginning in 1991, weekly treasury bill issues that, since their start in November, have netted over SR 6 billion. It is highly unlikely, however, that the government can substantially increase its revenues from taxes and fees, which are imposed almost entirely on foreign entities operating within the Kingdom and currently account for about 20 percent of government revenues. Monetary Policy: SAMA oversees a financial sector which consists of 12 commercial banks, five specialized credit institutions and a variety of non-bank financial institutions. It also chairs a committee on bad debts and has used its influence to help banks and debtors settle bad debts. SAMA has the statutory authority to set legal reserve requirements, impose limits on total loans, and regulate the minimum ratio of domestic assets to total assets in each bank. It has developed the capacity to conduct open market operations through regulated repurchases of previously issued government development bonds. SAMA generally allows the growth of the money supply in Saudi Arabia to be dictated by the balance of government fiscal operations and the external payments. During times of crisis such as August 1990, however, it will intervene in credit markets through repurchase operations and direct bank deposits to ensure banking system liquidity and an orderly adjustment in the economy's money supply. There has been a marked increase in M1 in 1990 and 1991, possibly reflecting SAMA's willingness to finance the deficit in part through expansion of the money supply. Also important to the economy's credit operations are the government's specialized credit institutions. Initially funded by government appropriations, these institutions channel interest-free government funds to public and private sector investors. There are five such agencies: the Saudi Industrial Development Fund, which provides subsidized credits to the private sector for industrial investments; the Public Investment Fund, which has financed the largest public and public/private joint venture projects, and is now largely out of the market; the Saudi Arabian Agricultural Bank, which lends to Saudi agricultural interests; the Saudi Credit Bank, which grants small scale loans for periods up to five years; and the Saudi Real Estate Development Fund, which provides loans to private individuals and institutions for housing. Together, these institutions dominate medium- and long-term lending in Saudi Arabia. Their outstanding loans are triple those of the commercial banks and, while budgetary transfers to them have been limited in recent years, they have remained active by recycling funds from repaid loans. The Saudi Industrial Development Fund, for instance, has had two-thirds of its original loans paid and recycled. In addition, the Government has begun to require that government-owned industries that are profitable and credit-worthy seek loans from the private sector. 2. Exchange Rate Policies There are virtually no exchange restrictions in Saudi Arabia, beyond a prohibition against the use of the currencies of Israel and South Africa. The Saudi riyal (SR) is officially pegged to the IMF's Special Drawing Right (SDR) at a rate of SR 4.28255 = 1 SDR. However, since 1981, SAMA has ignored its SDR peg while maintaining a constant central rate against the dollar, now SR 3.75 = US$1. There are no controls on current transactions by residents or non-residents, nor are there any significant restrictions on capital movements, beyond a requirement that foreign direct investments be licensed by the foreign capital investment committee. Gold may be freely bought and sold in Saudi Arabia, though imports of low quality (14-karat or less) gold are prohibited and all imported gold is subject to a 12 percent tariff. 3. Structural Policies Pricing Policies: The Saudi government has traditionally eschewed price controls, with the exception of a number of basic utility, energy and farm products. Water and electricity are both heavily subsidized, with electricity being sold to industrial consumers at a flat rate of 1.3 cents per kilowatt-hour. Water prices vary progressively with consumption, but run no higher than $1.07 per cubic meter. This compares with production costs that can run as high as $12 per cubic meter for desalinated water. In addition, petroleum products are sold essentially at production cost, leaving domestic prices well below world market levels. In agriculture, government procurement prices for wheat (now $400 to $534 per ton) are substantially above world market levels. As a result, wheat production has risen to several times domestic demand and led to exports of wheat totaling some two million tons in each of 1989 and 1990 (expected to continue at that level in 1991). In 1989, the Government tried to restrain booming production but price support cuts have failed to slow production of wheat. Since wheat production is the centerpiece of the Saudi Government's drive for food self-sufficiency it is doubtful that subsidies will be substantially altered in the forseeable future. Tax Policies: Saudi taxes take three major forms: income taxes, various fees and licenses, and customs tariffs. Of these, the income tax is payable only by self-employed expatriates and foreign companies. The tax applied to self-employed expatriates ranges from a rate of 5 percent per month on a monthly income between SR 6000 and SR 10,000 to a maximum rate of 30 percent for a monthly income in excess of SR 30,000. Taxes on business income apply only to foreign companies and to non-Saudi shareholders in Saudi companies, with the rate running from 25 percent on profits of SR 100,000 or less to a maximum rate of 45 percent for net profits in excess of SR 1 million. Meanwhile, Saudis and Muslim residents are subject to the "zakat," an Islamic net worth tax, which is levied at a flat rate of 2.5 percent. License and registration fees are also widely applied and can reach very high levels. For example, there is an initial work permit fee for expatriate workers of SR 1000 which rises to SR 2000 and SR 3000 for subsequent renewals. Import tariffs are levied at a general minimum rate of 12 percent ad valorem with exceptions for essential commodities. In addition, there is a maximum 20 percent tariff on products which compete with local infant industries, such as steel and cement. There are also substantial tax incentives for foreign investors. These include a 10-year tax holiday for approved agricultural and manufacturing projects with a minimum of 25-percent Saudi participation. For approved projects in other sectors, such as contracting or the provision of other services, the tax holiday is five years. In addition, approved projects are eligible for exemptions on customs duties on required capital equipment and raw material imports. Regulatory Policies: Saudi regulatory policies affect trade and investment in Saudi Arabia in three ways. The foreign capital investment code requires that foreign investments be "development" projects (i.e., in line with the nation's development priorities), that they involve some technology transfer and that they include a minimum 25-percent Saudi equity participation. The requirements can be waived, but waivers generally are applied only to direct new foreign investment involving relatively high technology projects that are judged to be beyond the scope of local entrepreneurs. In addition, Saudi Arabia and the other GCC countries have adopted labeling requirements which can pose problems for U.S. exporters. Under current regulations, food products in particular must have detailed labeling which includes production and expiration dates, product name, net weight, ingredients, manufacturer's name and country of origin. Inconsistent application of these rules has reportedly created further problems. Another restrictive policy requires that all measurements be delineated in the metric system. Finally, Saudi labor law requires that 75 percent of a firm's workforce and 51 percent of its payroll be Saudi, unless an exemption has been granted by the Ministry of Labor and Social Affairs. Potential investors are also required to show plans for recruiting and training. Saudi employers must document their manpower requirements if they hire overseas. In addition, regulations introduced in 1985 now require that the Ministry of Labor and Social Affairs certify that there are no qualified Saudis for a given job, before firms are permitted to recruit overseas. 4. Debt Management Policies In the early 1980s, Saudi Arabia was a substantial net creditor to world financial markets with net foreign assets of approximately $90 billion. At this writing, the actual amount of net liquid assets owned by the government is a closely held secret. Saudi Arabia has also been a major source of development assistance, giving aid over the past fifteen years equivalent to some three percent of its gross domestic product. Saudi Arabia holds permanent seats on the boards of directors of the International Monetary Fund and the World Bank and has participated in funding several special facilities aimed at helping deficit countries, including the IMF's general arrangements to borrow. During the last four years the government of Saudi Arabia has begun to borrow. In 1988, it inaugurated a domestic bond program, under which it issued, through the close of 1989, about $22 billion in bonds to commercial banks, autonomous government funds and Saudi public corporations. The government bond program has been expanded to allow for secondary purchases of development bonds by individual Saudi and GCC citizens. In addition, in 1989, the Government indirectly borrowed a further $660 million from international banks through its wholly-owned Public Investment Fund (PIF). In May 1991 the Government borrowed $7.0 billion in hard currency ($4.5 billion abroad and $2.5 from domestic sources). The Government also issued over SR 6 billion in treasury bills to finance current deficits since the inauguration of the program in 1991. 5. Significant Trade Barriers to U.S. Exports There are significant barriers to U.S. exports in several areas. For instance, imports of selected products may be banned in the case of domestic overcapacity, although at the moment, no such bans are in effect. There are also protective tariffs, which can run as high as 20 percent in the case of infant industries like cement and steel. In addition, Saudi Arabia also participates in the Arab boycott of Israel and bans products and investment from companies that are judged to contribute to Israel's economic or defense capabilities. Government procurement regulations also strongly favor Saudi and GCC nationals. Under a 1983 decree, foreign contractors must sub-contract 30 percent of the value of the contract, including support services, to majority-owned Saudi firms, a restriction which U.S. businessmen consider the Saudi government's most serious barrier to exports of U.S. engineering and construction services. In 1987, Saudi Arabia put new regulations in force giving priority in government purchasing programs to GCC products. These items now receive up to a ten percent price preference over non GCC products in all government contracts, including subcontracts awarded by foreign contractors. Furthermore, the Government has taken steps to reserve certain services for government-owned companies. Included here are insurance services for government agencies and contractors, which are now reserved for the national company for cooperative insurance, and air transport for government employees, which is generally reserved for Saudia Airlines. Saudia is also guaranteed at least one-half of all passengers traveling for pilgrimage to Mecca. Other carriers transporting pilgrims are entitled to transport one-half of the pilgrims from their home countries. They must pay Saudia a fee for each passenger they transport above that level or for any national of any other country. Standards and labeling requirements can present difficulties as well, particularly in regard to food health requirements. As noted above, all food products must meet detailed labeling requirements. U.S. exporters believe that expiration date requirements for meat products and frozen foods are too stringent and discriminate against U.S. frozen food and fresh meat exports in favor of countries closer to Saudi Arabia. In addition, U.S. exporters have urged Saudi authorities to allow the use of the U.S.-standard phrase "better if used before," which would allow perishable goods to remain on the shelf longer than would use of the more restrictive "expiration date." Finally, electric current standards in Saudi Arabia present a difficulty. It is possible that all U.S. electric products may eventually be denied entry to the market. Saudi electric current is 127 volts, 60 cycles. Some U.S. products arrive in Saudi Arabia with certificates of conformity stating they are as low as 105 volts, 60 cycles. These products are denied entry, as are all other products of any kind that may be in that shipment. (In one case, a shipment of turbines from Westinghouse bound for Saudi ARAMCO was held in customs because there was one electric motor in the shipment with a certificate rating it at 110 volts). At this time, the Saudis are waiving the voltage requirement for goods with certifications of at least 115 volts but they have made it clear that this is temporary. Products must eventually meet the standard or the market will be closed to nonconforming U.S. goods. 6. Export Subsidy Policies Saudi Arabia's pricing subsidies encourage wheat exports. Each year's wheat crop is now purchased in its entirety by the government-owned grain silos and flour mills organization at prices which range from $400 per ton (for large producers) to $534 per ton (for small producers). Of the four million tons expected in the 1991 harvest, roughly two million will be exported at world market prices, with the Government covering the organization's losses. Government losses in this program currently run roughly $1 billion per year. In contrast, Saudi Arabia has no export subsidy programs specifically targeted at industrial products, though many of its industrial incentive programs can be seen as indirectly supporting exports. The U.S. Department of Commerce had, at one time, imposed a countervailing duty against Saudi Arabia in a case where the interest-free financing offered by a specialized credit institution was seen to give a Saudi producer of steel rods an unfair pricing advantage. This company has moved into profitability and is now required to pay the prevailing interest rate for loans to the credit institution. The countervailing duty has been dropped. 7. Protection of U.S. Intellectual Property Saudi Arabia's trademark laws and regulations generally follow internationally accepted norms. They require registration of trademarks and permit registration of service and collective marks. In February 1988, the trademark law was amended to allow the Ministry of Commerce to initiate actions against trademark violators. In addition, anti-fraud regulations permit the Ministry to penalize those who describe products deceptively as to their nature, type, kind, essential properties, origin, amount or weight. Enforcement of these regulations has improved in recent years, but still remains far short of general acceptability. In 1990, several U.S. firms initiated complaints alleging trademark infringement. Some have been successful. Saudi Arabia does not have a law protecting industrial design. The Government is currently preparing legislation to remedy that defect, and allow Saudi Arabia to accede to the Paris Act. Saudi Arabia's patent law, in effect since May 18, 1989, sets out criteria for determining whether an invention is patentable. These criteria are similar to those applied in the United States. The Saudi law prohibits the unlicensed use, sale or importation of a product made by a process subject to patent protection in Saudi Arabia. At the same time, the law contains broad provisions to allow the Government to declare unilaterally that certain areas of technology are unpatentable. It also permits the compulsory licensing of patented products and processes, with or without compensation to the patent holder, if the patent holder does not make use of the invention in Saudi Arabia within a specified time period, or if the Government chooses to issue such a license for public policy reasons. Since no patents have been granted there have been no patent infringement complaints involving Saudi Arabia. As of the winter of 1991, the Saudi Patent Registration Administration reported that nearly 950 patent applications have been registered. The patent office is proceeding with all deliberate speed to ensure the granting of bona fide patents. In December 1989, King Fahd signed a new copyright law, which went into effect in 1990. The law, a broad framework, provides comprehensive protection to covered works, but works not created or produced in Saudi Arabia are not covered. The Ministry of Information, responsible for registration and enforcement, has assessed criminal penalties in cases involving the violation of copyrights granted through the copyright office. In general, the laws provide protection for the life of the author plus fifty years in the case of books and, in the case of sound and audio visual works, for the life of the author plus twenty-five years. Computer programs are also explicitly covered, though the law does not provide for a specific period of protection. In most other respects, including its compulsory licensing provisions, the law appears generally compatible with both U.S. standards and the Berne convention, having been examined and approved by the World Intellectual Property Organization before passage. The Saudi government has stated that it will accede to the Berne Convention in the near future, which will clarify the status of international works not originating in or produced in Saudi Arabia. The Copyright Law does not address enforcement or registration procedures. According to the Saudi government, these matters will be addressed by implementing laws. However, such laws have not yet been enacted, although the copyright law was enacted three years ago. The Saudi copyright office assures that enactment is imminent. 8. Workers Rights a. The Right of Association Government decrees prohibit the formation of labor unions and strike activity. b. The Right to Organize and Bargain Collectively The right to organize and bargain collectively is not recognized in Saudi Arabia. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is generally prohibited in Saudi Arabia. However, since employers have control over the movement of foreigners in their employ, situations that can be described as forced labor, while illegal, can occur, especially in remote areas where workers are unable to leave their places of work. d. Minimum Age for Employment of Children Children under 18 and women may not be employed in hazardous or unhealthy industries such as mining or industries employing power operated machinery. In other industries, the labor law provides for a minimum age of 13, which may be waived by the Ministry of Labor with the consent of the juvenile's guardian. In general, enforcement is effective, and child labor does not appear to be a problem in Saudi Arabia. Wholly-owned family businesses or family-run agricultural enterprises are exempt from labor laws. e. Acceptable Conditions of Work There is currently no legal minimum wage in Saudi Arabia, though the labor law does provide that a minimum wage may be set by the Council of Ministers. Saudi labor law does establish a maximum 48 hour work week at regular pay and allows employers to require up to 12 additional hours of overtime at time and a half. It also requires employers to protect workers from job related hazards and diseases. However, employees engaged in private homes, agriculture, or small, wholly family owned and operated businesses are considered members of the household and are not covered by health and safety regulations. These employees, consequently, are left largely unprotected. f. Rights in Sectors with U.S. Investment Major U.S. companies operating in sectors of the Saudi economy such as oil, chemicals or financial services seek to be known as good corporate citizens. In practice, this means strict adherence to the Saudi labor law, including the ban on union activity and strikes. There is no forced or compulsory labor and any required overtime is compensated, normally at time and a half rates. Similarly, while the minimum age for employment in Saudi Arabia is 13, the practice among U.S. firms is to recruit intermediate school graduates (age 16) or high school graduates (age 18) even for entry level positions. Conditions of work at major U.S. firms are generally as good or better than those available elsewhere in the Saudi economy. U.S. firms normally work a five and one half day week (44 hours) with paid overtime. There is no minimum wage, but overall compensation tends to be at levels that make employment in U.S. firms very attractive. Major U.S. firms generally offer competitive salaries, medical insurance, generous termination benefits, and, in some cases, housing and transportation allowances to their employees. In addition, several U.S. companies provide low interest loans for employees under company managed home ownership programs. Safety and health standards in major U.S. firms in Saudi Arabia compare well with standards anywhere in the world according to U.S. managers, and accident rates are as low as or lower than rates in the U.S. Extent of U.S. Investment in Goods Producing Sectors U.S. Direct Investment Position Abroad on a Historical-Cost Basis - 1990 (Millions of U.S. dollars) Category Amount Petroleum 558 Total Manufacturing 576 Food & Kindred Products 5 Chemicals & Allied Products (D) Metals, Primary & Fabricated 6 Machinery, except Electrical 0 Electric & Electronic Equipment 2 Transportation Equipment 0 Other Manufacturing (D) Wholesale Trade (D) TOTAL PETROLEUM/MANUFACTURING/WHOLESALE TRADE (D) (D)-Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3