Saudi Arabia’s funding deserves reciprocity
We’ll send you a myFT Daily Digest email rounding up the latest USSR news every morning.
The participation of Saudi Arabia in the G20 may have been viewed in the past with a certain scepticism. There remains a perception among western policymakers that Saudi Arabia and other Gulf states are sources of funds rather than agenda setters.
This was a common perception in the late 1970s. Saudi Arabia today stands as the fourth largest holder of net foreign reserves in the world and is one of the select number of states within the G20 that at present has few macroeconomic concerns. Within four years, Saudi Arabia’s economy has doubled to reach close to $500bn this year. The country is unlikely to face a banking crisis, currency weakness or fiscal and budget deficits in the foreseeable future. Government debt to GDP (all domestically raised) has fallen below 10 per cent from a high of 105 per cent in 1999.
The nation’s participation in solving some of the world’s most intractable challenges, including energy supply and demand, is vital. It is also in Saudi Arabia’s interest not to see the global economy suffer since demand for oil depends on its health.
Now the kingdom is being asked to make an additional contribution to the International Monetary Fund. Saudi Arabia is one of the top six contributors to the IMF and one of the largest donors of international aid when compared with GDP.
A few months ago, sovereign wealth funds were being challenged for their allegedly ulterior political motives in selecting international investments. Saudi Arabia has not created a sovereign fund as such. Instead, much of its surplus oil money has been invested abroad. At a time when other sovereign funds were on a buying spree, Saudi Arabia invested in instruments that prioritised capital preservation.
An estimated 70 per cent of the foreign reserves of Saudi Arabia’s central bank (Sama) are kept in US government paper and it has provided support and confidence to an increasingly deficit-ridden American economy. Saudi Arabia’s dollar peg has supported the greenback at a time when many were betting on a revaluation.
However, Saudi Arabia has to strike a balance between calls to support the international financial system and the need to invest within its borders to improve its education system and infrastructure and to strive for greater economic diversity.
At a time when oil prices are declining, there is concern in Saudi society about the sustainability of infrastructure projects and the economic wellbeing of its people. In this regard, China’s decision to embark on a domestically geared fiscal package provides an example that could be replicated in Saudi Arabia.
Although the nation has played the role of swing oil producer in the world economy and has striven to maintain stability of supply, consumer nations have to realise that fossil fuel consumption in advanced countries (including those of the Gulf Co-operation Council) is not sustainable in the long term. There has to be a realisation that Saudi Arabia’s hydrocarbon reserves are finite.
Moreover, the kingdom’s participation in the G20 begs the question of the extent to which it is viewed as a representative voice by the rest of the GCC and the Middle East. This requires greater harmonisation and co-operation between it and its regional partners.
But in order for greater regional integration to occur (including attaining a regional security system), the US and the European Union need to provide clear commitments that build up GCC trust rather than merely maintaining a military presence in the region.
Saudi Arabia’s willingness to participate in global economic structures should be based on reciprocity so that the kingdom makes full use of its presence, just as China and India do. Providing funding to the IMF as a one-way source of funds is not an option.
Saudi Arabia’s commitment to supply additional funding should allow for greater audit and oversight.
The IMF could be held more accountable with the creation of an audit institution, based in the kingdom or the GCC, that reviews its performance and the money it is allocated. That way the kingdom’s contributions and the IMF’s spending are made transparent. It is in this way that Saudi commitment can receive the balance it deserves.
John Sfakianakis is chief economist of Saudi British Bank
Get alerts on USSR when a new story is published