For most finance ministers, the budget balance is a key measure of achievement. This is not the case for Ibrahim Al-Assaf, as Saudi Arabia’s immense oil production at a time of high global fuel prices drove the budget surplus to 24% in 2006, a level almost inconceivable anywhere outside the Gulf.
Instead, for the long-standing guardian of Saudi Arabia’s finance portfolio, diversification is the true test – and this applies to the economy as well as to the budget itself. The first challenge is to avoid a cash-rich state drowning the private sector with public expenditure. Al-Assaf has ensured that there has not been a spending splurge that risks turning the oil boom into a bust.
“It is impressive how little they have raised current spending since a pay rise for the public sector in late 2005,” says Ben Faulks, Middle East sovereign ratings analyst at Standard & Poor’s, which upped its sovereign credit rating on Saudi to AA- from A+ in August 2007. Instead, extra money has been focused on capital investment, which can be cut back if a slowing world economy brings oil prices down again.
Al-Assaf is also modernizing the revenue side, so the budget becomes more resilient to oil price volatility. Corporate income tax has been cut to 20% from 25% to stimulate non-oil growth, and even the politically sensitive introduction of personal income and sales taxes is being studied by the ministry.
Al-Assaf also highlights the importance of administrative improvements: “Our tax reform includes modernizing the tax administration and upgrading the tax law, with the aim of maintaining its main features and providing the necessary incentives for the private sector to grow,” he tells Emerging Markets. “We are comfortable with the progress achieved so far, and when domestic, regional, and global conditions warrant, this agenda can be revisited.”
If the budgetary performance has been disciplined, Al-Assaf’s work on the economic side has been unprecedented. The tax reform is just one component of a general overhaul of the business environment, which helped Saudi Arabia to jump a remarkable 29 places in the World Bank’s Ease of Doing Business Report for 2007, to 38, the highest score of any Arab state in the index. “Our objectives have been to streamline business procedures and to bring them in line with best international practices. The independent and objective assessment of the World Bank report acknowledged our efforts,” says Al-Assaf. He also emphasizes the importance of far-reaching reforms to the judicial system undertaken at the start of October 2007, which should further enhance the legal environment for companies in Saudi Arabia.
The key test of whether his hard work pays off will be the results of the country’s vast new commercial project, the six “industrial cities”, designed to create specialist clusters in sectors such as IT and downstream hydrocarbons processing.
“The approach seems right: they are looking for new foreign investors and smaller local companies that want to expand, rather than trying to pressure existing players to relocate,” says Faulks at S&P. But Al-Assaf will be watching closely to see if the cities can attract sufficient investment and highly skilled staff.