Monster Media 1993 #2/Image.iso/finance/saudiinv.zip/ECOPOL.TXT

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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