The Kingdom of Saudi Arabia Economic Outlook- 2015

The Kingdom of Saudi Arabia Economic Strategy for 2015… An Economic Outlook….

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The change of leadership in the Kingdom of Saudi Arabia is to be not associated with the control of command but of the team concept and creating an inspirational vision. Leaders have to focus on moving forward through cooperation, coordination and collaboration with other countries to improve the state of the economy of the country. The job of the leader is encourage and challenge the bureaucracy that create an environment to develop the skills though transparency and openness for the welfare of the people as well as with the development of human resources and financial aspects. With the advent of Knowledge Economy, the country will be gearing to enhance their intelligence and capacity to develop their talents and potential which can improve greatly in the economic affairs of the country.

The new leadership can inspire their people and will recognize their leadership potential both collectively and personal which is the factor of deciding at what it does to achieve greatness. A leader’s behavior can be influenced by their personality, knowledge, experience and background. These are the driving force to move the economy to the highest. A leader must possess the value system, inclinations to be a good leader, confidence, and a secured feeling in time of uncertain situation.

The increase of oil brings a surprise all over the world. The year 2014, the Brent crude was around $115 per barrel but has fallen to $49 per barrel as of January 23, 2015. For more than a decade, prices soar high to $100 per barrel due to increase consumption of China because industrialization and the conflict in Iraq.

The economic shifts rapidly. US and Canada started drilling for difficult to extract crude in North Dakota and Alberta followed by the weakening of economy in Asia, Europe and US, thereby provides them a productive efficiency. By late 2014, supply is greater than demand causing the prices to falls sharply.

On the other hand, Saudi refused to cut down their oil production to maintain their market share. Saudi needs a high price in order to balance their budget, Saudi therefore will have an inevitably will result to budget deficit due to the following pressures:

1.       Sixty percent of their employees are working in the government thereby drained the budget.

2.       The government has to sustain their government spending to stimulate the economy.

3.       Ninety percent of the revenue originates from oil.

4.       There are unfinished infrastructures that are needed to be finished like railways and causeway services and the sustained social welfare.

The Kingdom of Saudi Arabia must have a combination of monetary policy and fiscal policy. Firstly, there will be a sound monetary policy to manipulate the economic variable with the instrument of macro-economic policy such as a stable price, low unemployment, a balance of payment equilibrium and economic growth.  A budget deficit will create a vacuum of increased interest rates which in turn reduces the aggregate demand for the reason that consumer may spend less due to increase in price. Budget deficit will also give rise to exchange rates which most likely to provide for export less price competitive and import are highly priced.

 Also, the change of interest rates will have an impact on wealth and change the price of stocks and shares. The increased interest rates due to budgetary constraints only fixed the money market called the repo rate which has based in commercial banks. On the longer run affects loans to the customers. If it wants the interest to fall, it can increase the supply of money and buy out bills or government assets it owns. Through this, the Saudi Central Bank can issue government bonds and other forms of government debts. The amount of money supplied is therefore reduced. This is known as the open market operations. But if the central bank wanted to increase the supply of money in the market, they can buy back part of its debt.

The Kingdom of Saudi Arabia has to borrow money in order to fill the gap caused by budget deficit due to the slump of oil. This method is called public sector net cash requirement, the PSNCR. There are two methods in how to raise money. The first is to borrow money from the general public which is called non-bank sector. This method does not affect the money supply but it also affects the rate of interest. If the government wanted that the amount should be increased, it will be able to compete for the funding with firms and consumers. This triggers the price to increase thereby the rate of interest rises.

The second way is through financing the PSNCR. The government will choose to print the money. This is done by selling the debt of the government to the public sector. To understand fully is when the central bank sells $100 million of the debt of government to the banks. They pay for this and in turn the government uses this instrument to finance its spending. Since approximately 65% of Saudis are working in the government sectors it might use it to pay the wages of the government employees. In fact, the bank itself will have a deposit inflow that match the loan they have done to the government by buying its debt.

The central bank that sells its debt to the banking sector causes the money supply to increase which a method of money printing. Conversely, when the central bank sells its debt to non-banking sector, it withdraws money in their account for the payment of the debt purchase. The spending by the government results to the money coming back in the form of deposits. Both the withdrawals and the new deposits cause the cancellation of each other out resulting to the no money supply increases. This instrument results to no increase of the rate of interest rates because once the money supply increased; there will be a fall in interest rate.

Therefore, monetary policy is being used by controlling the real variables such as unemployment, economic growth, and inflation. The KSA Central Bank must have specific targets to achieve this target like 2 percent inflation rate. There are many instruments the central bank has to use in order to reach its objectives, to summarize the use of interest rates and supply of money.