The government's attempts to deal with the chronic budget deficits, largely through expenditure retrenchment, depletion of foreign assets, and the sale of development bonds, generally helped stabilize its financial situation by the late 1980s (see table 4, Appendix). It became clear by 1989 that the economy had weathered some of the other problems, such as the spate of bankruptcies of private companies, the growth of bad banking debts, and the massive outflow of private capital to overseas financial centers that followed the oil-price crash of 1986. During 1989 and 1990, economic planners had renewed optimism. New plans were made to put the oil and nonoil sectors of the economy on a surer footing. The perceived recovery in international oil consumption and prices provided regional policymakers the opportunity to resume spending to promote economic growth. As a result, two major initiatives became the basis of Saudi economic policy.

First, Saudi Arabia unveiled plans to raise crude oil production capacity to between 10.5 million and 11 million bpd by 1995. With the restructuring of the General Petroleum and Mineral Organization (Petromin), the creation of Samarec, which was given control over most of the kingdom's oil refineries, and the announcement of major plan to upgrade domestic and export refineries, a comprehensive picture emerged of the government's effort to promote oil investments. Another indication of Riyadh's intentions came in 1989 when Saudi Aramco purchased 50 percent of Star Enterprises in the United States, a joint venture with Texaco that signaled Saudi Arabia's pursuit of geographically diversified downstream projects.

Second, the government was not eager to continue its expansionist fiscal policies. Despite moderately higher oil prices, military outlays, oil capacity expansion plans, and current expenditures accounted for the bulk of total spending and did not permit a fiscal boost. However, because the nonoil private sector remained largely dependent on government spending, the sharp cutbacks in capital outlays hindered economic diversification. In light of this failure, the government adopted two policies to reorient and revive the private sector.

Financial sector reform was the government's main option. Since 1988 SAMA had made great strides in bolstering commercial bank balance sheets through mergers, debt write-offs, and injection of funds to prevent failures. Subsequently, banking regulations and supervision were tightened and compliance with international capital adequacy requirements enforced. The authorities also encouraged banks to take a more active role in financing private sector investments. The idea of opening a Riyadh stock exchange received renewed interest: the government sanctioned the establishment of the exchange in early 1990 and hinted it could be an appropriate venue for selling government assets.

Protectionism as a policy also gained some popularity during this period. Partly motivated by the impasse in Gulf Cooperation Council (GCC) negotiations 16f8 s with the European Economic Community (EEC), but mainly to protect domestic private investment, Saudi Arabia began enforcing some restrictive tariff and nontariff barriers that had been instituted in the mid-1980s. Under the guise of conforming to GCC-wide levels, Saudi Arabia raised its tariff rates to 20 percent on most items with certain industrial items gaining protection at higher rates. The government also began enforcing nontariff regulations such as preference for nationally produced commodities and the continued application of preference for local contractors, as well as quality standards that favored local production. In addition, the kingdom assiduously protected domestic banks from foreign competition by barring the sale of any foreign financial products and services.

The Iraqi invasion of Kuwait halted the miniboom that these policies had fostered. In the immediate wake of the invasion, the government faced two tasks. First, it had to deal with the massive outflow of assets from the domestic banking sector by liquidating the commercial banks (which lost more than 12 percent of their deposits within the first month of the crisis), encouraging a repatriation of private assets, and restoring the confidence of foreign creditors, who had canceled lines of credit as a precautionary measure. The monetary authorities reversed most of the hemorrhage caused by the loss of confidence in the Saudi riyal. Second, the government was obliged to raise oil output to levels unseen since the early 1980s. Saudi Aramco had to respond to a serious crisis without an adequate assessment of its overall production capacity. It quickly became apparent that Saudi Arabia had sufficient capacity to replace the bulk of the 4.5 million to 5 million bpd of Iraqi and Kuwaiti oil embargoed by the UN. Output rose rapidly to 8.5 million bpd, which restored some calm to the international oil market however, by the end of 1990, oil prices were nearly double those in June 1990.

Supporting the United States-led multinational forces, however, placed an enormous burden on the government's budget. The deficits for 1990 and 1991 reached record levels, so the fiscal authorities were forced again to engage in further external asset drawdowns, increased volumes of development bond sales, and a novel feature: external borrowing from commercial banks and export credit agencies. Saudi Arabia was a prominent member of the World Bank (see Glossary) but because of the nation's high per capita income, it was not entitled to borrow from that organization. Most of the major projects envisaged before August 1990 were preserved, however. But external borrowing had gained credence as the means to fund not only budgetary shortfalls but also the capital programs of major public enterprises. Notably, Saudi Aramco did not scale back its crude-oil capacity expansion plan. Rather, it appeared that new ways of financing were being sought from foreign commercial banks, multinational companies, and the domestic private sector. Sabic also moved to raise capital overseas, while Saudi Consolidated Electric Company (Sceco), the electricity conglomerate, requested foreign suppliers to help finance its expansion program.

The fiscal crisis did not cause economic problems for the private sector because the government's reduction of its budgeted expenditures was slight. Moreover, domestic government spending in support of the war effort surged, and many Saudi companies benefited from war-related contracts. Also, as a result of Operation Desert Shield and Operation Desert Storm, the more than 600,000 troops of the multinational forces increased domestic spending on consumer goods. This spending offset the effects of the fall in the number of foreign workers after the government expelled more than 1 million Yemenis, Palestinians, Sudanese, and Iraqis because their countries had not condemned the Iraqi regime. The miniboom, which was interrupted by the Iraqi invasion, was revived by this increase in government spending, and then received further stimulus by three other factors. First, the protection of the kingdom by United States forces and the perception that this would continue enhanced private sector confidence in the government. The private sector again repatriated capital, and the stock market boomed, with share issues rising to unprecedented levels. Second, changing regional politics encouraged many firms, which had set up manufacturing and processing plants for the domestic market, to seek sales in Iran, Turkey, and Central Asia. Third, the government cut domestic fees and utility charges almost in half. This increased subsidy was targeted to lower- and middle-income Saudis but had the net effect of raising domestic disposable income. As a result, it was seen by some people as a serious attempt by the monarchy to head off growing domestic demands for political participation.

Data as of December 1992