The Hindu Business Line : Will King Abdullah keep Saudi economy well-oiled?

WINDS OF change are set to sweep across the dunes of Saudi Arabia. With the death of King Fahd, his half-brother Abdullah, who has taken over, is expected to fan this wind so that the desert kingdom keeps pace with an accelerating global economy.

Though there is a contrarian view that no dramatic change can be expected as anyway Prince Abdullah has been running the country ever since King Fahd suffered a stroke, the 77-year-old king-in-waiting had set up a Supreme Economic Council, an elite cabinet committee, to liberalise the economy.

While the oil boom of the 1970s fetched Saudi Arabia billions of dollars to build roads, airports, and telecom systems that pushed a reluctant people into the 20th century, the worry now is that a stagnating economy is rapidly falling behind in the entrepreneurial- and technology-driven new millennium.

For, much of Saudi Arabia's industry is state-controlled monopolies. Useful when developing the kingdom, many of these organisations have become liabilities now, stifling competition and discouraging investments. Saudi Arabia's low level of investment — 16.7 per cent of GDP against an average of 27 per cent for all developing countries — is a main reason for the kingdom's disappointing economic performance, a BusinessWeek report quotes the chief economist at National Commercial Bank in Jeddah.

For the world at large, Saudi Arabia is the key to its energy security. Termed the swing producer of the Organisation of Petroleum Exporting Countries, the kingdom is thought to be the most reliable producer and supplier of crude. The kingdom produces around 9.5 million barrels per day, or 11 per cent of world supplies. But in recent times doubts have been raised about the residual life of Saudi Arabia's oil fields and the reliability of its reserve estimates; the Saudis estimate their proven reserves at 262 billion barrels, or 22 per cent of the world's total. The uncertainty is affecting the market just as oil prices have pushed beyond $60 a barrel and oil companies such as Royal Dutch/Shell Group have revised downwards their reserves.

Now, there are serious doubts if Saudi Arabia will be able to raise production as demand rises and other sources decline. According to various reports, including by the persistent energy pessimist and Houston investment banker Matthew R. Simmons, even the Ghawar Field, the world's largest, producing 5 million barrels a day, could be drying up. Many of the other big Saudi fields, including Abqaiq and Berri, are thought to be past their prime. Production, experts say, has been sustained by technology and a collapse in a field is possible.

If these experts are right, Saudi Arabia could be in trouble. If indeed the kingdom has much less oil than it claims, "the role of the kingdom would be completely devalued strategically," says a senior analyst at PFC Energy a Washington-based consultancy. With no ready alternative in sight, the world would need to look harder at other oil sources such as Russia and Iraq.

There seems to be a realisation in Riyadh too. In a move to end the complacency of sitting over the world's largest oil reserves, Prince Abdullah called Western oil companies to explore for gas, so as to end the dependence on oil.

The idea, apparently, is to use gas to power a new generation of petrochemical, desalination, and power plants that would create jobs, boost non-oil exports, and ease the strain on the kingdom's water and power infrastructure. For the companies, the quid pro quo would be access to the kingdom's oil and gas reserves. But it is not very clear how this programme will pan out. For, some companies may welcome the opportunity of exploring for gas but may not be in the business of funding utilities such as power and desalinisation plants. According to many sources, the $100-billion investment figure being bandied about is way too optimistic. More realistic are four-five gas projects amounting to $8-10 billion.

In tandem, Prince Abdullah has also set off initiatives to boost local and foreign investment in non-oil industries, especially specialty chemicals, food processing and telecommunications. The idea is to lure back the billions of dollars that Saudis have invested abroad. But more than capital, Riyadh wants managerial expertise and technology from the foreign investors. It has cleared a package of rules that would encourage investments.

Foreigners will be allowed to own businesses and real-estate in Saudi Arabia. Their foreign employees will not need a Saudi sponsor, a requirement that has hampered investment. And the tax rates on foreign companies are to be cut.

All this becomes imperative especially as Saudi Arabia has one of the fastest-growing and most youthful populations. A lakh-plus Saudis join the workforce every year, and only 40,000 get jobs, according to an estimate by Saudi American Bank. As a result, unemployment is rising, and the Saudi economy is nowhere near creating enough jobs. Joblessness, according to the Bank, may be 14 per cent overall and 20 per cent in the 20-29 age group.

The new King's initiatives for Saudi Arabia can have implications for the kingdom's neighbours and the wider world. For, if his moves succeed, Saudi Arabia could become a source of capital and an economic engine to rejuvenate a region that has, with a few exceptions, generally lagged behind the rest of the world.

On the flip side, King Abdullah's failure could plunge the country into instability that, especially as so much of oil production is concentrated in the Persian Gulf, could require external (read, US) intervention. The latter is a distinct possibility because of the extremely conservative Saudi society and the kingdom's tradition of Islamic militancy.

The latter is a key problem King Abdullah will have to handle. So long as terror happened elsewhere — in Afghanistan, Iraq or the US — the Saudi rulers could not be bothered. But when it is turning inwards, the ruling elite has begun to tackle the problem with some force. Their fear, according to Saudi observers, is that many of the jehadis, on return form various hot-spots, will try to overthrow the House of Saud.

Tackling militancy will call for some tough actions, as the new king will have to take on the ferociously reactionary Wahhabist clerics with whom the dynasty's founder, Ibn Saud, had struck a deal that kept people passive and the House of Saud in power.

King Abdullah will also have to deal with a geriatric ruling elite, mostly his extended family. Since the death of Ibn Saud, in 1953, all four subsequent rulers were chosen from among his sons. Twenty-four of these sons survive, but most are in their 60s and 70s. To get the royal family to focus on current day issues, Prince Abdullah formed a family council of 18 princes. The council was also apparently set up partly to help poorer members of the several-thousand-strong family.

Depending on his clout, each family member draws a stipend from the government. The minimum is about $3,000 a month. According to one opposition group, royal family expenditure consumes 40 per cent of government revenues. Equally controversial is the alleged involvement of family members in grabbing land and taking commissions on contracts.

Prince Sultan, who has been Defence Minister for 40-odd years, has been named crown prince.

But King Abdullah must prepare for a younger generation of princes to keep out the reactionary royal brothers, formally next in line for the throne, who may be unable or unwilling to prod the kingdom towards modernity.

Though aged, and facing pressures from various quarters, analysts think it would be a mistake to underestimate the determination of King Abdullah. He had seemed an unlikely reformer when he began running things.

He has always been considered a traditionalist, close to the kingdom's Bedouin, or tribal, peoples and fond of such activities as falconry.

Equally, say observers such as Jim Hoagland in washingtonpost.com, Abdullah has learnt the language of diplomacy, patience, and an ability to "out-flank rivals at home and in Arab councils rather than smite them, even when his preferences were otherwise..."

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