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TITLE:  SAUDI ARABIA ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                           SAUDI ARABIA

                     Key Economic Indicators
        (Billions of Saudi riyals unless otherwise noted)

                                  1991      1992      1993 /1
Income, Production,
 and Employment

Real GDP (1985 prices)            427.55    439.95    444.35
Real GDP Growth (percent)          9.7       2.9       1.0
GDP (at current prices) /2        431.92    453.51    464.85
By Sector
    Oil                           160.33    168.24    169.92
    Private sector                150.57    159.65    167.63
    Government                    121.02    125.62    127.30
Real Per Capita GDP /3             26,410    26,790    26,530


Money and Prices
 (Annual percentage growth)

Money Supply (M2) /4              16.6       5.5       8.2
Base Interest Rate /5              5.7       3.5       3.0
Wholesale Inflation /4             3.0       1.3       0.6
Consumer Price Index /4            4.6      -0.4       2.0
Exchange Rate (SR/$)               3.75      3.75      3.75


Balance of Payments and Trade
(billion U.S. dollars)

Total Exports (FOB)                47.6      42.8      42.0
  Exports to US (FAS) /4           10.9      11.3       5.2
Total Imports (FOB)                26.0      29.8      25.3
  Imports from US /4                6.5       7.2       3.8
Aid from U.S.                       0.0       0.0       0.0
Aid from Other Countries            0.0       0.0       0.0
External Government Debt            4.5       4.5       4.5
Debt service payments (paid)        0.0       0.0       n/a
Gold and FOREX Reserves            10.0       4.8       5.1
Trade balance                      21.6      13.0      16.7
  Trade balance with U.S. /4        4.4       4.2       1.4

1/  Embassy estimates.
2/  In purchasers' values.
3/  Based on the official 1992 census data and current GDP.
4/  For 1993, data for the first half of the year.
5/  Average annual rate for 1-month deposits, 1993 average  
    for first half of the year.


1.  General Policy Framework

    Saudi Arabia has an open, developing economy with a
dominant government sector.  Its regulations favor Saudis and
citizens of the Gulf Cooperation Council (GCC) states.  This
bias is reflected in virtually all government policies,
including those affecting taxation, credit, investment,
procurement, trade, intellectual property, and labor.  But the
government's interest in promoting economic development,
defense and the technological advancement of the economy ensure
that the favoritism toward Saudis and the GCC does not
seriously block the participation in the domestic economy by
foreign investors.

    Oil dominates the Saudi economy, comprising an estimated 37
percent of GDP, 77 percent of budget receipts, and 90 percent
of exports in 1992.  Much of the non-oil GDP is tied to oil as
services and supplies are sold to the oil sector and
consumption and investment are dependent on oil receipts.  The
government sector plays a significant role in influencing
resource allocation within the Saudi economy.  Allocation
limitations are restricted, however, because the government has
chosen to maintain spending levels of key areas of defense,
salaries, direct subsidy payments, and foreign assistance. 
Non-oil budget revenues include customs duties, interest
income, and fees and charges for services.

    The Government of Saudi Arabia has recorded budget deficits
annually for the last decade, with the shortfall for 1992
estimated at more than $10.5 billion (or nine percent of GDP). 
The government originally financed its fiscal shortfalls by
drawing down deposits in the Saudi Arabian Monetary Agency
(SAMA), the country's Central Bank, and began borrowing in 1988
to conserve its remaining assets.  Defense and security account
for nearly one-third of all expenditures, and the government
also makes large outlays for salaries, capital projects,
services, and operations and maintenance programs.  The
government foregoes a potentially significant amount of
budgetary income because it subsidizes prices for water,
energy, housing, and gasoline and free education and health
care.

    SAMA allows the growth of money supply to be dictated by
government fiscal operations and the growth of the economy. 
SAMA has the statutory authority to set legal reserve
requirements, impose limits on total loans, and regulate the
minimum ratio of domestic assets to total assets for the
banks.  It is also able to conduct open market operations
through repurchases of Saudi government development bonds and
treasury bills.  SAMA oversees a financial sector of 12
commercial banks, five specialized credit banks, and a variety
of non-bank financial institutions.


2.  Exchange Rate Policy

    The Saudi riyal (SR) is officially pegged to the IMF's
Special Drawing Right (SDR) at a rate of SR 4.28255 = 1 SDR,
with margins of 7.25 percent on either side of the parity. 
SAMA suspended the margins in 1981 and in practice pegs the
riyal to the U.S. dollar.  Saudi Arabia last devalued the riyal
in June 1986 when it set the official selling rate at SR 3.75 =
$1.00.  There are no taxes or subsidies on purchases or sales
of foreign exchange.

    Saudi Arabia imposes no foreign exchange controls on
capital receipts or payments by residents or nonresidents,
beyond a prohibition against transactions with Israel and South
Africa.  In accordance with UN resolutions, the prohibition has
been expanded to include transactions with Iraq and
Yugoslavia.  Local banks are prohibited from inviting foreign
banks to participate in riyal-denominated transactions inside
or outside Saudi Arabia without prior approval of the Saudi
Arabian Monetary Agency.  The monetary authorities and all
residents may freely and without license buy, hold, sell,
import, and export gold, with the exception of gold of 14 karat
or less, which is prohibited.


3.  Structural Policies

    The Saudi Government has traditionally eschewed price
controls, with the exception of those for basic utilities,
energy and agricultural products.  Water, electricity, and
petroleum products are heavily subsidized, with prices often
substantially below the costs of production in order to share
the wealth and spur development.  In agriculture, government
procurement prices for wheat (now $400 and $533.3 per ton to
large and small farmers, respectively) are substantially above
world market levels.  The government is adjusting agricultural
policies in an attempt to reduce wheat production and encourage
crop diversification.  Farmers must now have prior government
approval to produce and sell wheat at the support price, and
the government is no longer encouraging the establishment of
new wheat farms.

    Saudi taxes take three major forms:  income taxes, fees and
licenses, and customs duties.  The income tax is payable only
by foreign companies and self-employed expatriates.  The income
tax rate on business income on foreign companies and expatriate
shareholders of Saudi firms ranges from 25 percent on profits
of less than SR 100,000 to a maximum rate of 45 percent for
profits above SR 1,000,000.  Foreign investors receive tax
incentives, including a ten-year tax holiday for approved
agricultural and manufacturing projects with a minimum of 25
percent Saudi participation.  Saudi and Muslim residents are
subject to the "Zakat," an Islamic net worth tax levied at the
flat rate of 2.5 percent.

    Import tariffs are levied at a general minimum rate on 12
percent ad valorem, except for products originating in Gulf
Cooperation Council states and essential commodities.  There is
also a maximum 20 percent tariff on products that compete with
local infant industries.


4.  Debt Management Policies

    The country of Saudi Arabia is a net creditor in world
financial markets.  SAMA manages a foreign portfolio of over
$50 billion in its issue and banking departments and an
additional $20 billion for the autonomous government 
institutions:  the Pension Fund, the Saudi Fund for
Development, and the General Organization of Social Insurance. 
Under SAMA's current conservative definitions, only about 10 to
15 billion dollars of these foreign assets are available as the
remainder are earmarked to guarantee the currency or letters of
credit.  In addition to the overseas assets managed by SAMA,
Saudi Arabia's commercial banking system managed 28 billion
dollars in foreign assets at the end of 1992.  The Saudi
government's foreign debt is limited to a $4.5 billion
syndicated loan signed in 1991, although the domestic banks,
Saudi Aramco, and other state-owned enterprises have overseas
obligations.

    Saudi Arabia has become dependent on borrowing to finance
its budget deficits after having liquidated much of the
government's deposits in SAMA.  The Saudi government began
direct borrowing in 1988 through a domestic government
development bond program.  The bonds have a two- to five-year
maturity.  In 1991, following the Gulf War, the Saudi
government expanded its borrowing when it signed loan
syndications with international and domestic banks and
introduced Treasury bills.  By the end of 1992, total Saudi
government debt was an estimated 66.89 billion dollars, or 55
percent of GDP.  Over 90 percent of this debt is owed to
domestic creditors:  the autonomous government institutions,
commercial banks, and private Saudis.  Total interest payments
on the debt were estimated at seven percent of government
expenditures in 1992.


5.  Significant Barriers to U.S. Exports

    Although the United States is the Kingdom's largest
supplier and investor, trade and investment barriers appear in
a variety of forms.  The Foreign Capital Investment Code
requires that foreign investment be made in line with the
nation's development priorities and that they include some
technology transfer.  While there are no legal limitations on
percentage of foreign ownership, wholly foreign-owned ventures
are unlikely to receive government approval.  Limited liability
companies cannot engage in banking or insurance with less than
51 percent Saudi ownership.  Foreigners may not invest at all
in joint ventures engaged solely in advertising, trading,
distribution or marketing.  Real estate ownership is restricted
to wholly-owned Saudi entities or citizens of the Gulf
Cooperation Council.

    Saudi labor law requires companies registered in the
Kingdom to give preference to Saudi nationals when hiring.  A
company wishing to import a foreign worker must show that no
Saudi national can do the job.  In fact, the expatriate work
force in the Kingdom is approximately four million.

    The Arab League Boycott of Israel constitutes a continuing
impediment to trade and investment in the Kingdom.  While Saudi
Arabia has stopped enforcing many aspects of the boycott, it
still maintains a blacklist of over 1,000 U.S. firms.

    Import licensing requirements designed to protect domestic
industries or restrict importing to nationals are another
obstacle to free trade.  Saudi Arabia requires a license to 
import agricultural products.  In addition, contractors may not
import directly and instead must purchase equipment and
machinery from Saudi agents.

    Restrictive shelf-life standards for food products act as
de facto discrimination in favor of European and Asian
products, which take less time to ship than products made in
the United States.

    In 1987, Saudi Arabia enacted regulations favoring GCC
products in government purchasing.  GCC items now receive up to
a ten-percent price preference over non-GCC products.  Under a
1983 decree, foreign contractors must subcontract 30 percent of
the value of the contract, including support services, to
majority Saudi-owned firms, a restriction which U.S.
businessmen consider a serious barrier to exports of U.S.
engineering and construction services.  Saudi Arabia negotiates
offset requirements in connection with certain military
purchases and, recently, for some major civilian projects.

    In addition, the government reserves certain services for
government-owned companies (with important exceptions like
Aramco).  Insurance services for government agencies and
contractors are reserved for the national company for
cooperative insurance.  A fly-Saudia (Saudia Airline) policy
applies to government-funded air travel.

    Saudi Arabia applies a fly-Saudia policy to foreign muslims
traveling to the Kingdom to visit the holy city of Mecca during
pilgrimage every year, as well.  The government reserves a
percentage of foreign pilgrim traffic for Saudia Airline, and
enforces this policy by regulating the number of foreign
carriers permitted to land during the pilgrimage period.  Other
carriers must pay Saudia a fixed percentage of the IATA fare
for traffic.  The government also gives a preference to
national shipping companies:  Up to 40 percent of governmental
purchases must be shipped in Saudi bottoms.

    Saudi customs rules require that incoming goods be
accompanied by documentation certified by an approved Arab-U.S.
Chamber of Commerce and the Saudi embassy or consulate in the
United States.  The latter requirement slows shipping, adds
man-hours and fees, and ultimately increases the cost of the
product to Saudi customers.


6.  Export Subsidy Policies

    Saudi Arabia has no export subsidy programs specifically
targeted at industrial products, though many of its industrial
incentive programs indirectly support exports.  Agricultural
export subsidies are discussed above.


7.  Protection of U.S. Intellectual Property

    The United States Trade Representative placed Saudi Arabia
on the Special Section 301 Priority Watch List in 1993 mainly
because the Kingdom's copyright law does not protect foreign
works.  The Saudi market is full of pirated cassettes, videos
and computer software.  Although a member of the World 
Intellectual Property Organization, the Kingdom does not belong
to any major international intellectual property convention.

    Saudi Arabia enacted a patent law in 1989.  The criteria
for determining whether an invention is patentable are similar
to those applied in the United States.  The Saudi law prohibits
the unlicensed use, sale or importation of a product made by a
process subject to patent protection in Saudi Arabia.  At the
same time, the law allows the government to declare that
certain areas of technology are unpatentable.  It also permits
compulsory licensing of patented products and processes, with
or without compensation to the patent holder, for non-use of
the patent or for public policy reasons.  As of November 1993,
the Saudi patent office had not yet acted on any of the 2,000
patent applications it had received.

    The Kingdom's trademark laws and regulations conform to
international norms, but U.S. businesses have complained of
excessive registration and search fees, as well as problems
with enforcement.  Counterfeiting in spare auto parts, cologne,
pharmaceuticals and other consumer products is widespread. 
Infringement proceedings can take years and cost tens of
thousands of dollars.  Moreover, many Saudi judges trained only
in religious law are reportedly unsympathetic to trademark
claims brought by foreigners.

    The Kingdom's copyright law went into effect in 1990.  The
law provides protection for the life of the author plus 50
years in the case of books, and in the case of sound and audio
visual works, for the life of the author plus 25 years. 
Computer programs are also covered, though the law does not
specify a period of protection.  The copyright law's major
shortcoming, noted above, is that it does not protect works
which were not created or first published in Saudi Arabia, thus
effectively denying protection to U.S. literary and artistic
works.

    U.S. industry groups have estimated losses due to lack of
copyright protection at over $110 million in 1992.  When losses
from trademark counterfeiting and patent infringement are
included, this figure is substantially higher.


8.  Worker Rights

    a.   Right of Association

    Government decrees prohibit the formation of labor unions
and strike activity.  Men and Women may not associate outside
of family contacts.

    b.   Right to Organize and Bargain Collectively

    This right is not recognized in Saudi Arabia.

    c.   Prohibition of Forced or Compulsory Labor

    Forced labor is prohibited in Saudi Arabia.  However, since
employers have control over the movement of foreigners in their
employ, forced labor, while illegal, can occur, especially in
remote areas where workers are unable to leave their places of
employment.

    d.   Minimum Age for Employment of Children

    The labor law provides for a minimum age of 13, which may
be waived by the Ministry of Labor with the consent of the
child's guardian.  Children under 18 and women may not be
employed in hazardous or unhealthy industries such as mining. 
Wholly-owned family businesses and family-run agricultural
enterprises are exempt from the minimum age rules, however.

    e.   Acceptable Conditions of Work

    Saudi Arabia has no minimum wage.  The labor law
establishes a 48-hour work week and allows employers to require
up to 12 additional hours of overtime, paid at time and
one-half.  It also requires employers to protect employees from
job related hazards and diseases.

    f.   Rights in Sectors with U.S. Investment

    Major U.S. companies operating in the oil, chemicals and
financial services sectors are good corporate citizens and
adhere strictly to Saudi labor law.  Conditions of work at
major U.S. firms are generally as good or better than those
available elsewhere in the Saudi economy.  U.S. firms normally
work a five and one-half day week (44 hours) with paid
overtime.  Overall compensation tends to be at levels that make
employment in U.S. firms very attractive.  Safety and health
standards in major U.S. firms in Saudi Arabia compare favorably
with non-U.S. firms in Saudi Arabia.



              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (Millions of U.S. dollars)

Category                                    Amount

Petroleum                                                 D
Total Manufacturing                                     781
    Food & Kindred Products                     D
    Chemicals and Allied Products               D
    Metals, Primary & Fabricated                D
    Machinery, except Electrical                2
    Electric & Electronic Equipment             5
    Transportation Equipment                    0
    Other Manufacturing                        31
Wholesale Trade                                          22
Banking                                                   D
Finance and Insurance                                     D
Services                                                 73
Other Industries                                        128

TOTAL ALL INDUSTRIES                                  2,503



(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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