Saudi Arabia - Five Year Plans

Five-year plans

The kingdom first established a planning agency in 1958 in response to suggestions of International Monetary Fund (IMF) advisers. Planning was limited in the 1960s partly because of Saudi financial constraints. The government concentrated its limited funds on developing human resources, the transportation system, and other infrastructure aspects. In 1965 planning was formalized in the Central Planning Organization, and in the 1975 government reorganization it became the Ministry of Planning. The Ministry of Finance and National Economy controlled funding, however, and appeared to exert considerable influence over plan implementation.

The First Development Plan, 1970-75, was drafted in the late 1960s and became effective on September 2, 1970, at the start of the fiscal year (FY). Drafted during a period of fiscal constraint, gross domestic product (GDP) was to increase by 9.8 percent per year (in constant prices) and show the greatest increase in the nonoil sectors. Planned budget allocations for the five years were US$9.2 billion, 45 percent of which was to be spent on capital projects. Planned expenditures were concentrated on defense, education, transportation, and utilities. The unanticipated great expansion of crude oil production, accompanied by large increases in revenues per barrel, contributed to an exceptionally high rate of economic growth, far beyond the planners' expectations. Nonoil real GDP increased by 11.6 percent per year. As oil revenues grew, budget allocations increased, totaling about US$27 billion for the five years; actual budget expenditures amounted to US$21 billion.

The Second Development Plan, 1975-80, became effective on July 9, 1975, at the start of the fiscal year. The plan contained numerous social goals similar to those of the first plan, but it also set forth goals that reflected decreased fiscal constraints. Social goals included the introduction of free medical service, free education and vocational training, interest-free loans and subsidies for the purchase of homes, subsidized prices for essential commodities, interest-free credit for people with limited incomes, and extended social security benefits and support for the needy. The plan also outlined several economic goals and programs. GDP was to grow at an average rate of 10 percent a year. The nonoil sector's real planned rate of increase was 13.3 percent per year; the oil sector's projected rate of growth was 9.7 percent, although actual growth would depend on world markets.

The government's planned expenditures totaled almost US$142 billion, plus additional private investment. As the size of oil revenues became clearer during the plan's preparation, the final investment figure was more than double the initial sum. The planners acknowledged that spending of this magnitude would create various problems, and they anticipated shortfalls in actual spending. The largest share of planned government expenditure, 23 percent, was allocated for continuing development of ports, roads, and other infrastructure. Expansion of industry, agriculture, and utilities received 19 percent of expenditures, and defense and human resource development--essentially education--each received 16 percent.

The planners were correct in anticipating problems. An increasing flood of imports after 1972 proved too great for the transportation system to handle. Ports, where ships waited for four to five months to unload, were bottlenecks, but storage and distribution from the ports were also inadequate. Government spending contributed to the problems. By 1976 the clogged ports, an acute housing shortage, skyrocketing construction costs, and a growing manpower shortage caused prices to accelerate at what some observers estimated at about 50 percent a year, although the official cost-of-living index did not reflect these rates.

By 1977 second plan projects and ad hoc measures, such as the government's spending less than planned, had relieved many problem areas. Construction of additional ports, which contributed to almost a fivefold increase in the number of ship berths and paved roads, which increased by 63 percent to more than 22,000 kilometers as well as other substantial additions to the transportation and communications system occurred during the second plan period. More than 200,000 housing units were built over the five years.

Actual government expenditures during the second plan reached US$200 billion, about 40 percent above the planned figure and almost ten times the level of the first plan. As the transportation bottlenecks were removed, annual budget expenditures increased. Expenditures for salaries and other operating costs increased more rapidly than expected, whereas capital investments rose more slowly than budgeted. Over the course of the plan, between 20 percent and 33 percent of national income was devoted to investment. The private sector accounted for 27 percent of fixed capital formation; government ministries and agencies outside of the oil and gas sector invested 61 percent, and the public oil sector accounted for 12 percent. The bulk of fixed capital formation was in construction.

Despite the massive increase in government expenditures, overall real GDP growth at 9.2 percent average per annum was below the planned 10 percent rate. This lower growth resulted from a slower-than-anticipated growth in petroleum production, a function of international market conditions and political factors. Nonoil GDP grew at an average annual rate of 14.8 percent per year compared with a planned rate of 13.3 percent. The producing components grew at 16.6 percent per year on average (the plan rate was 13 percent), with most components outpacing their targets. The following components all exceeded their targets: agriculture, manufacturing, utilities, and services (including trade, transport, and finance). Construction paralleled the planned growth rate, and mining other than oil and public sector projects did not meet targets.

The Third Development Plan, 1980-85, took effect May 15, 1980. The third plan featured a modest rise in government expenditures reflecting stabilization of oil revenues and a desire to avoid inflation and disruptions to society from an unduly rapid pace of development. The planners expected construction activity to decline, but unfinished projects were to be completed and industry developed. Lower construction levels were expected to require only a small increase in the number of foreign workers. However, requirements for highly skilled workers and technicians, Saudi and foreign, to operate and maintain plants and equipment were expected to require shifts in the composition of the work force.

Total planned government civilian development expenditures during the third plan amounted to US$213 billion, plus an additional US$25 billion for administrative and subsidy costs. Third plan expenditures were categorized differently, making comparisons with the second plan difficult. Civilian development expenditures planned for 1980-85 were US$79 billion for the economy, primarily industry (37 percent of the total in the third plan; 25 percent in the second plan), US$76 billion for infrastructure (36 percent in the third plan; 50 percent in the second plan), US$39 billion for human resource development (19 percent in the third plan; 16 percent in the second plan), and US$18 billion for social development (close to 9 percent in both plans).

The third plan coincided with the sharp downturn in Saudi oil production. The oil sector's output fell on average 14.2 percent per annum. As a result, during the five years of the plan the average annual real GDP growth rate declined 1.5 percent compared with a planned annual increase of 1.3 percent. The principal factors behind the continued positive rates of growth in the nonoil sector (6.4 percent on average per annum) were the relatively few cutbacks in government expenditures and the continuation of major infrastructure and industrial projects despite declining oil revenues. The nonoil manufacturing sector and utilities expanded at 12.4 percent and 18.6 percent, respectively, but at annual growth rates well below their targets. The construction sector contracted but only at half the rate planned. The agricultural sector grew rapidly, surging to 8.1 percent per annum. The service sector maintained its momentum during the third plan, with trade and government services leading the way. The transportation and finance subsectors, however, fell well below their targets.

The Fourth Development Plan, 1985-90, budgeted total government outlays at SR1 trillion or almost US$267 billion, of which about US$150 billion was budgeted for civilian development spending. Most cuts were to come from reduced expenditures on infrastructure and a shift to developing economic and human resources. Concern for preserving the government's new investments was reflected in increased budgeted spending on operations and maintenance. The plan also emphasized stimulating private sector investment and increasing economic integration with members of the GCC.

During the period of the fourth plan, oil revenues plummeted following the oil-price crash of 1986. Overall real rates of GDP growth averaged a positive 1.4 percent per annum, far below the 4 percent programmed. The revival in crude oil output from the low levels of 1986, however, boosted oil sector growth rates to 3.6 percent per annum. The sharp decline in external income caused lower rates of output expansion in the producing sectors. Construction and other mining sector growth rates fell by 8.5 and 1.9 percent, respectively. Other manufacturing continued to grow modestly at 1.1 percent per annum, but well below the 15.5 percent target. Trade, transport, and finance reflected the financial setbacks in the government's program with annual average production declines. Two surprises helped to offset the depressed growth rates: agriculture, which had shown steadily higher rates of output growth in the second and third plan, rose by 13.4 percent per annum on average during the fourth plan, nearly double its planned rate, and the utilities sector's ability to surpass its planned target of 5 percent per annum.

Constrained resources shaped the Fifth Development Plan, 1990-95, with committed funds for the civilian program falling by nearly 30 percent to approximately US$105.4 billion for the period. The bulk of the cuts were in government investment in economic enterprises, transportation, and communications. Human resources development, health and social services, and municipality and housing all maintained their fourth-plan levels. Overall, the fifth plan called for consolidating the gains in infrastructure and social services of the previous twenty years and emphasized further economic diversification. The principal means for achieving this goal was expanding the productive base of the economy by encouraging private sector investment in agriculture and light manufacturing. The private sector was allowed to purchase shares in the larger industrial complexes and utilities. For example, Sabic may be further privatized as well as some downstream refining assets. In addition, there was greater emphasis on financial sector reform and development through the establishment of joint stock companies and a stock market to trade shares and other financial instruments. Another objective of the plan was greater government efficiency in social and economic services.

Fifth-plan targets envisaged a 3.2 percent per annum growth rate. Oil sector output was expected to increase 2.2 percent per annum, while nonoil sector growth-rate targets were 3.6 percent. Agriculture, other manufacturing, utilities, and finance were to pace the economy while other sectors would show only modest growth rates of 2 percent to 4 percent per annum.

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