With Oil Income Slashed, Saudis Also Drill a Deficit

What happens when a financial superpower starts to borrow? What happens when it finds itself beset by massive budget deficits and shattering changes in its balance of trade? How does it adapt--and how do its friends and allies react? These questions are naturally being asked about the U.S. government--but they also need to be asked about Saudi Arabia.

The oil-rich kingdom is no longer a financial superpower. In just six years, its income has shrunk to barely a sixth of its former level--not even taking inflation into account. To help bridge the anticipated deficit in its 1988 budget, the kingdom has taken the almost unprecedented decision to borrow $8 billion. And yet it has still not compromised on major objectives. Saudi Arabia is funding Iraq’s war effort, while in 1987 it handed out a large subvention to Damascus, providing at least one major reason for Syria’s current efforts to end the Gulf War. The kingdom is a wounded giant, not a dead one.

It was severely wounded in its sustained campaigns to force the Organization of Petroleum Exporting Countries to act coherently and to inject some degree of stability into the volatile oil market over the last two years. While the rest of OPEC generally benefited from increased revenues in 1987, the kingdom’s oil income remained virtually static and may have sustained a small decline. In both 1986 and 1987, Saudi oil income totaled about $18 billion-$19 billion dollars, just one-sixth of the $113.2 billion earned during the record year of 1981.

The immediate cause of the failure to recover ground lost in the 1986 oil price crash was that several of the 13 OPEC members, Iraq being the most prominent, either ignored the quota system governing oil production or else cheated and overproduced when they thought Riyadh was not watching. But a deeper cause was the kingdom’s inability to face financial realities and move decisively in the oil markets while it still had the time, and financial resources, to maneuver.

The Saudis forced the rest of OPEC to come to heel in August, 1986, when Saudi oil production spurted above the 6 million barrels-per-day level, almost double the kingdom’s average 1985 level. But the lesson administered on that occasion was not sustained. The Saudis cut back production, giving opportunity for other OPEC nations to cheat.

In 1986 the Saudis still had substantial financial reserves accumulated in the late 1970s and early 1980s. But continuous payments to Iraq--the total now stands in excess of $30 billion--and sporadic payments to Egypt, Jordan and Syria have drained these reserves. One current estimate of the kingdom’s liquid financial reserves puts the total at no more than $31 billion, compared with estimates of $60 billion-$70 billion two years ago and about $155 billion in 1981, when Iraq began demanding financial assistance.

Saudi diplomacy and Saudi finances go hand in hand. It is an old--and in the region honorable--custom to pay gold for services requested or rendered. Iraq is seen as the bastion of the Arabs against Iran, so financing Iraq at a time when its oil outlets had been cut by Iran was a logical development. A subsidiary though unspoken assumption was that Iraq, as the recipient of substantial largess from Saudi Arabia and other conservative Arab gulf states, would not seek to export its own brand of radicalism to those states.

To begin with, Riyadh had ample funds to pursue this kind of diplomacy. During the good years, until about 1982, the Saudis were able to amass huge trade surpluses. But in 1983 the kingdom sustained an estimated $16.3-billion deficit in its balance of payments. By the end of 1986 the cumulative Saudi payments deficit for four years was $73.3 billion.

There are some signs that Saudi Arabia is moving to put its financial affairs in order. Budgeted expenditure has been cut progressively from $91.4 billion in 1982-83 to $37.6 billion for 1988. But defense spending remains high--taking up 33.8% of the budget--and there are no indications as to how King Fahd plans to control the off-budget items, accounting for considerable proportions of real Saudi expenditure. These include foreign aid, royal family expenses and various defense purchases; they could easily total $10 billion in 1988. This alone would double the 1988 budget deficit of $9.57 billion.

It might simply be regarded as a curiously ironic development that the country once regarded as the living symbol of wealth should now be reduced to borrowing $8 billion from its own people and attempting to raise further income from the introduction of income and corporate taxes on expatriate workers. But the issues carry serious implications for the United States in particular and the Western World in general.

The Saudis now run up a regular trade surplus with the United States, in contrast to the boom years, and such eminent Saudis as Prince Mohammad al Faisal, the son of the late King Faisal and the chairman of a leading Islamic financial institution, have warned bluntly that Saudi Arabia for the time being should be regarded as a dead market for most U.S. suppliers.

In the political sphere, evaporation of oil revenues means a serious weakening of the kingdom’s ability to use financial inducements to secure more acceptable policies from Syria and the Palestine Liberation Organization. For the United States, Saudi Arabia’s loss of influence and financial clout could be costly. At the same time, the rest of the world will also pay a price. The Saudis have been backing the establishment of international aid funds, and are expected to provide another $500 million for the new $8-billion kitty being established by the International Monetary Fund to help the poorest countries.

In addition they have been the biggest--indeed some would say the only--cash purchaser of U.S. military equipment and services, paying more than $20 billion between 1981 and 1985. Saudi oil policies may be controversial to a superpower which itself is reluctantly coming to terms with its newfound status as a debtor nation, but the kingdom has been a source of stability in a troubled region, and its financial straits should be a source of concern to its friends and trading partners.