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Banking

Al Jasser: his word on reforms

In a rare and wide-ranging interview with Euromoney in Riyadh, the powerful economy and planning minister Muhammad Al Jasser reveals his priorities for reform.

In an exclusive interview with Euromoney, Mohammed Al Jasser waxes lyrical about his labour market and economic diversification plans amid questions over the Kingdom's continued dependence on oil revenues and reformist push.

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Saudi Arabia has seen non-oil economic growth for 2011 and the first two months of 2012 that is stronger, by some accounts, than at any time in the past 30 years. What is driving that? 

Saudi Arabia’s central bank governor, Mohammed Al Jasser

There are several reasons, but first and foremost, government spending, which has been higher than we have seen in a long time. Secondly, a lot of Saudi investors see Saudi Arabia as a safe haven now, as the economy looks robust and stable especially compared to elsewhere.

All the dramatic events, both in the region and in global financial markets, have shown that Saudi Arabia has proven to be a good, safe haven for investment. When you combine that with the government spending impetus, then you have a good combination.

The fiscal picture also looks great in Saudi Arabia. We have gone from having more than 100% debt-to-GDP to only 6%. Monetary policy looks very predictable, very stable. Exchange rate policy looks very robust and credible.

All the things that we have said, either about foreign investment of our reserves, or about the peg to the dollar, and our very counter-cyclical approach to fiscal, monetary and bank-capital policies – all of these have proven to be right on the dot, in spite of a lot of criticism before.

I remember somebody, a western banker, who said that our capital adequacy requirements were ‘”bordering on the obscene”. I think he now wishes that he had been under our supervision rather than somebody else’s supervision! Some were skating on thin ice. They wanted us to skate on thin ice, and we refused, thank God! 

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What about the danger that with a growing population, and consistently rising government spending, the government’s finances and the wider economy are becoming more dependent on high oil prices? 

It is difficult to say that the economy is becoming more dependent on high oil prices, because in relative terms, non-oil GDP is increasing as a percentage of total GDP (72.5% in 2011 compared to 66.8% in 2001). Also, our non-oil exports of goods – not services, just goods – as a percentage of our imports of goods, has risen to about 40% now. That figure was 35% a few years ago.

So there is growth in non-oil exports; there is more diversification of the economy, and hence from that perspective, if anything, the economy is getting less dependent on oil exports.

On the other hand, you could say that the absolute size of the government budget, which relies predominantly, if not totally, on oil revenues, is an indicator of greater dependence on high oil prices. But it is the relative terms that matter, and [spending as a proportion of oil revenue] hasn’t changed much over the years.

Essentially from a macro-economic point of view, we should ask how counter-cyclical is our economic policy? Our reserves have risen significantly, and our debt-to-GDP has declined precipitously. This indicates that we are taking into account the possibility of a decline in oil revenues in the future, God forbid that something should happen to the global economy.

From a stability point of view, which is most important for us, we are building up cushions and fortifications, if you will, to safeguard the economy in case of a decline in oil prices. 

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Do you think more needs to be done to increase the government’s non-oil revenues, and widen the tax base?

I don’t think this is in the offing in the near future. That may be because oil revenues are high. By the way, oil revenues are considered to be in lieu of taxes. The government collects all its revenues from oil, and that is in lieu of taxes on citizens. But on the GCC level, there is consideration of the possibility of VAT, but this is still under study. With VAT at GCC level we would be able to manage economic consumption and inflation with more tools in our hands. This is what the Japanese have done at a point in time. 

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Overall, do you think events elsewhere in the Arab world over the past 18 months have altered the pace of reform here in Saudi Arabia: is there a greater recognition, perhaps, that unemployment, particularly among young people, is now a major source of discontent across the region - and potentially in Saudi Arabia as well? Has this added impetus to certain reforms here, would you say? 

I think there has been a level of awareness of the need to streamline the labour market, in the sense of paying more attention to creating job opportunities in the private sector for Saudis.

This arises from the realisation that there is a demographic window opening in the Saudi economy. Those between the ages of 15 and 64 represent about 61% of the population now.

In that group, the level of participation in the labour force of women is much lower than for men. If you look at male unemployment, it is still relatively low. But taking into consideration the overall unemployment figures, you realise that we need to create, not only more jobs for males, but also a lot more jobs for females.

Females are now demanding to enter the labour market in larger numbers than was the case in the past. This is influencing policy-making. For example, now, every government department is expected to have a women’s section. In the private sector, there is also a good push to hire more women. Women, for example, now manage women’s clothing stores, so that has created more job opportunities for women.

The awareness of the need to make the labour market more flexible for Saudis is at the forefront of policy-making and discourse in this country. That is a very healthy development in terms of restructuring the economy. For example, small and medium-scale industries now are getting a lot of attention because of their ability to create more jobs. Government agencies and ministries are paying more attention to that, be it in terms of mentoring, facilitation and training, or in terms of making financing available for these enterprises.

Competition between men and women in the labour force hopefully will enhance productivity too. This is the missing link in the debate about our labour markets. We talk about compensation, the need to have good compensation for Saudi nationals to accept certain jobs. We should also say ‘okay, that’s good, but let’s see what productivity we are getting’. This is a new concept that we as the Ministry of Economy and Planning are raising more frequently now. It is not just compensation, it is also productivity. 

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What kind of policies are you pursuing to try to increase the productivity of Saudi labour?

One, we have to start with measuring it because we don’t have good measurements of productivity yet. Productivity is something that we, in this Ministry, are trying to find ways to measure. But from anecdotal evidence, we can see that greater flexibility in the labour market can help raise productivity.

Making foreign labour, especially in the lower skilled areas, more expensive will incentivise Saudis to accept those types of jobs and compete for them, because the demand for foreign rather than Saudi labour might then be less. That could mean making visas less readily available, and also charging employers higher fees for hiring foreign instead of domestic labour.

Productivity could also increase if it was easier for employers to choose from the supply of Saudi labour that is available. 

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You mean, making it easier to hire and fire Saudis?

Yes. The message we want to give is that if you want to have a better paying job, then you had better raise your productivity. This is when people will be chasing you instead of you going and chasing them to hire you. 

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 Even if they are paid more, will educated Saudis want to do lower-skilled work?

With the educational system developing as fast as it is, and having such a high ratio of high-school graduates going into college, our labour-market knowledge content keeps rising. This means you can raise the knowledge content of the jobs available in the labour market.

Making our economy more capital than labour intensive will create more jobs for Saudis who are highly educated. That should help improve the chances that these Saudi graduates find jobs.

You find a lot of the foreign labour in lower skilled jobs here, say construction, or small trading enterprises. Thos jobs should be made more fitting to Saudis by raising the knowledge content of those jobs. 

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Will there be sufficient incentives for local and foreign private-sector companies to set up, say, high-end manufacturing facilities here?

Higher labour-market productivity will make this country more attractive as an investment destination.

Saudi Arabia is an attractive economy for investment because you have a group of 61% of the population at an employable age, but also this is a consumer market. If you set up here, you have a large consumer market, and you also have a large supply of domestic labour, as well as a flexible labour market in terms of being able to bring in from outside the additional needs you have for any specialised type of labour. 

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Okay, and overall, what is your vision for how the Kingdom’s economy will have changed, structurally, in, say, five, ten or 20 years time? 

The educational attainment of the Saudi population has been rising significantly. If you just take a look at high school graduates, college graduates, in terms of numbers and specialties, it has been changing significantly. We are embarking on a strategy to become a knowledge-based economy.

The infrastructure of the economy is also changing significantly, with all of the government spending. If you look at the highways, the universities, the hospitals, the schools, the industrial zones, the number of factories, even the composition of domestic production and exports, it is all changing. 

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What kind of a job might a well-educated Saudi have in five or ten years time, or 20 years time that probably isn’t available right now? What kind of sector and what kind of role might that be?

Since we are a market-based economy, I hesitate to say we should concentrate, let’s say, on pharmaceuticals, or we should concentrate on spare parts or airplanes. I leave that to the private sector to do, but we need more industries, that is for sure.

We have done well in the oil industry, we have done well in petrochemicals, and we have done well in the financial sector. We are driving hard to do well in the mining sector with phosphate and bauxite projects and the railroad systems that are being built across the country, North, South, East, West.

All of that should put in place a system of logistics that will make the economy more attractive to new industries that will cater not only to the Saudi economy, which is the largest in the region, but also to the concentric circles around Saudi Arabia of GCC, Arab, and Islamic countries.

Just look, we have more than 140,000 college students outside the country, in the US, in Europe, in Asia, every part of the world. We have 30 universities in the country now and they are concentrating on medicine, IT, engineering, and business. So all of that should provide an entrepreneurial class in the country that will drive and attract new investments, be it in small and medium-scale enterprises or in large-scale industry.

So as a government we are trying to create a conducive environment for the creation of new industries and new businesses that will be driven and fuelled by this demographic window. So I expect the economy will become more diversified than it is now, with more diverse job opportunities. Instead of just being in the oil or in the banking or in the petrochemicals you will have jobs in other industries: maybe pharmaceuticals, maybe spare parts.

Take marine agriculture. You have huge shrimp farms on the west coast now and there are other industries that are also being built around that. Every day you read about something new, with this entrepreneurial class of young Saudis looking for ideas. You get impressed. 

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But is the momentum of real reform still too slow here? Take the stock market opening up to foreigners, or the mortgage law. Is there still too much opposition from throughout the socio-economic powers that be? Is there still too much vested interest against true reform here? 

I don’t think so, but beauty is in the eye of the beholder and speed of passing legislation is also in the eye of the beholder. I am impatient, for example, and the mortgage law, still, I would like to see it sooner rather than later because it is an important component of the financial structure of the economy.

But we are becoming just like any other country; we have a legislature that has to vote on things and they have their view, and we have to respect that. We have to create some reasonable consensus around certain issues, which is the case in other countries. So we are just becoming like any other society in terms of trying to generate sufficient support for any legislation before it is passed and promulgated. These are the elements of a mature society where it has to convince the majority of the population on this or that before you can do it. But we have achieved a lot, and we are moving.

Look at, for example, job opportunities for women. This is rising. Of course, I would say probably, not enough. But you can’t say that it is like it was three or five or ten years ago. It is moving very nicely in the right direction.

The activity of the Shura Council is very representative of how serious the debate is within society of the issues that are facing us. The internal system of consultation is taking hold and sometimes slows down the passing of legislation. But if you want that process of consultation, then you have to accept the outcome.

I don’t think the process of reform has stalled, far from it. It is moving, but the pace of it, as I said, is an issue that people will agree to disagree on. 

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The mortgage law for example, is that still a possibility? 

Yes, of course, but I have stopped giving any predictions on when. 

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The government announced a $384 billion spending programme for transport, housing, and education last year. There are certain very big, expensive, high profile projects – like [$11.5 billion] Princess Nora University in Riyadh, and the King Abdullah Economic City [near Jeddah]. But is the emphasis here too much on construction, essentially prestige real estate projects, rather than actual educational attainment, for example, or practical improvements in infrastructure and housing? 

An objective observer will realise that this society is moving into a knowledge-based economy and if you want to do that then you need universities that provide the right environment for these students to develop into knowledge workers. With women entering the labour force in the way they are, to have a fully-fledged, well-built university like Princess Noura in the capital city is a must. This is where you are going to create a conducive environment for highly skilled researchers and for ladies who will enter the labour market with a very competitive edge. The university is going to have 60,000 students. You need such campuses like this, with all the necessary facilities, if you want to create a labour force with a high knowledge content.

If you look at some of the other projects, one of the biggest projects we have is the railroads. If anything, we are behind, so it is a very significant infrastructural project to cut the country from the North to the South and from the East to the West with railroads.

These transport corridors will transform the economy and help regional development. You will be able to be somewhere other than in Riyadh, Jeddah or Dammam and be able to get your products to domestic and international markets at a lower cost. To go and develop the northern frontiers of the country with phosphates and in the central part with aluminium and bauxite and then create a new port and a new city with all the facilities on the Gulf, North of Jubail - that is a very significant infrastructural development with significant consequences for development and investment in the economy, including of course creating a new set of jobs for Saudi.

So, yes, sceptics can spend a lot of time analysing and shedding doubt. I have no doubt that these are significant projects that are needed for an economy of our size and of our aspirations.

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