92. Intelligence Memorandum Prepared in the Central Intelligence Agency1
Prospects for the Saudi Economy
Saudi Arabia has no economic problems in the usual sense of the term nor is it likely to have any for the foreseeable future. The government is, however, being confronted with the felt need to rethink its development strategy to take account of the extraordinary increase [Page 336] in Saudi oil production and revenues that have occurred in the past three years.
As recently as 1970 the Saudis felt it necessary to cut back development and defense spending in order to conserve foreign exchange and to accumulate reserves. This concern was short lived. In 1971 oil revenues, boosted by expanding oil output and rising per barrel revenues, rose 69% and in 1972 grew another 42%.
| Million US $ | ||||||
| 1967 | 1968 | 1969 | 1970 | 1971 | 1972 | 1973 (est.) |
| 909 | 927 | 949 | 1,150 | 1,945 | 2,779 | 5,200 |
If present trends continue, Saudi revenues will approach $8 billion in 1975.
In the changing situation of the last few years the Saudis have not been able to meet even their relatively modest planned spending levels, particularly for economic development. A major factor has been a shortage of skilled workers and managers. But more importantly the idea that massive development spending was both possible and desirable had not yet taken hold in Saudi decision making circles. King Faysal was still concerned with the implications of rapid development on the traditions and character of Saudi society.
This is now changing. The Saudis have increased their budget for the year beginning this past August by almost 70% compared to last year or from $3.6 billion to $6.2 billion. While actual spending is certain to fall short of plans the budget clearly indicates a determination to get development spending into high gear.
The Saudis can further increase their spending rapidly by concentrating on capital intensive industrial projects related to petroleum, and by making needed improvements in their defense capabilities. They cannot do this, however, without substantial help from the industrial west and especially the United States. Plans are underway to expand oil production and refining capabilities and to improve the country’s transport and communications facilities. Industrial plants that are to be built include a petrochemical plant, a sulphur plant, the second stage of a steel rolling mill, and a flour mill.
Defense spending accounts for nearly a third of the Saudi annual budget. Actual spending for defense has been close to the budgeted levels, reaching $800 to $850 million in 1972–73. The rapid increase in defense expenditures reflects the pent up demand caused by years of limited spending. In the last two years construction of land, air, and naval bases has been increased, and since early 1972, Jidda has ordered [Page 337] almost $1.1 billion of military equipment and technical assistance, mostly from the United Kingdom, the U.S. and France. Large follow-on orders for naval, air, and ground force materiel seem certain over the next few years.
It is not possible that spending will approach the rapidly rising revenues. There clearly are limits to the country’s absorptive capacity. Even under the most generous assumptions, both military and development spending will fall far short of revenues if production increases to 15 million b/d as Aramco planned only a year ago and especially if output reaches 20 million b/d in 1980 as Aramco now hopes. Clearly the economic incentive for the Saudis to go along with Aramco’s production plans will have to involve spending outside the country. Actually we believe that for some time it would be difficult for the Saudis to spend at home—even with substantial US help—the revenues generated by the present level of oil production.
Summary: The Office of Economic Research prepared a memorandum on the Saudi Arabian economy for the proposed economic mission to Saudi Arabia.
Source: Central Intelligence Agency, ODI/OER Files, Job 80T01315A, Box 34, Folder 4. Confidential. Drafted on September 10. Forwarded by the Director of the CIA’s Near East and Africa Branch, Developing Nations Division, Office of Economic Research, to Robert Pelikans, Senior Economic Adviser, Department of the Treasury, under a September 10 covering memorandum.
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