Saudi Arabia's fiscal options: 1986–1992

Abstract

Fluctuating and declining oil revenues after 1982 have meant that Saudi Arabian planners have had to revise their long running development strategy. Instead of high growth, industrial diversification, and rapidly increasing standards of living, the government's main concerns now center on how best to utilize the country's dwindling oil revenues to generate positive overall rates of economic growth while at the same time meeting to the fullest extent possible the basic needs of the majority of the population. The purpose of this paper is to examine the fiscal dilemmas that volatile and declining oil revenues are likely to pose over the remaining part of the 1980s, and up to 1992. In particular an assessment is made of the magnitude of the tradeoff between increased government expenditure (and thus growth) and the size of the country's outstanding portfolio of foreign assets. Using an optimal control macroeconomic model of the economy, and likely assumptions concerning oil markets, the economy will be hard pressed to maintain existing standards of living without completely depleting its foreign portfolio by 1992. On the other hand, if the country is willing to accept modest reductions in growth and development, it may be possible to preserve a portion of its portfolio for future contingencies.