SAUDI ARABIA'S CHANGED FINANCIAL OUTLOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010021-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 21
• Publication Date: April 1, 1970
• Content Type: IM

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Secret
25X1
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Saudi Arabia's Changed Financial Outlook
Secret
ER IM 71-70
April 1971
Copy No. `i
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WARNING
This document contains information affecting the national
dense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended,
Its 'transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1971
INTELLIGENCE MEMORANDUM
SAUDI ARABIA'S CHANGED FINANCIAL OUTLOOK
Introduction
1. Like other Middle East oil producers, Saudi Arabia will receive
markedly larger earnings during the next several years as a result of recent
agreements signed with the major petroleum companies.. These windfalls
will end Saudi Arabia's concern over the strain recently put on its revenues
and foreign exchange holdings by outlays on defense, economic
development, and foreign aid. Indeed, there will be considerable scope for
increased spending on old and new programs and an enormous addition
to the country's foreign reserves. This memorandum examines the
government's finances before the new oil agreements, the prospective gains
in revenues, and the possible magnitude and composition of spending
increases.
Financial Position in 1970
2. Prior to the recent oil agreements, Saudi officials were deeply
concerned with what they saw as a growing financial problem. They were
alarmed by three consecutive years of small budget deficits - the first
deficits since 1959 - and, even more, by the associated 17% drop in the
country's traditionally large foreign exchange holdings* from 1967 to
* Foreign exchange holdings include gold and foreign currency held by
the Saudi Arabian Monetary Agency (SAMA) and SAMA investments
abroad, which generally are highly liquid.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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1969. End-of-year reserves had fallen from $944 million to $785 million
because of sharply increased imports for development and defense, expanded
payments on military 'debt, and aid to Egypt and 'Jordan induced by
the Arab-Israeli War. Outflows for aid and arms alone increased
Faced with
continued large foreign exchange obligations, the financially conservative
Saudis became increasingly apprehensive about their reserves. Although
enormous by normal international standards - well above the amount
legally required to fully cover the currency - reserves by early 1970 were
substantially below the level of one and one-half times annual imports that
the Saudis consider desirable.
3. In response to financial difficulties, the government took several
steps to strengthen the budget in fiscal year 1970/71.* To bolster revenues,
it introduced a personal income tax. On the expenditure side, the
government planned to reduce foreign exchange outlays by making half
" From 2 September 1970 to 21 August 1971. The Saudi "N!/ra" fiscal
year Is shorter than the Gregorian year, hence its Gregorian equivalent
changes each yew
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of its Khartoum aid* payments to the UAR and Jordan in oil rather than
hard currency. By this move, the Saudis hoped to save about $70 million
in cash. In addition, Riyadh pressed Washington for a slight reduction in
repayments on arms credits over the next two years. No significant efforts
were made, however, to curb military purchases and other defense costs,
which were budgeted at 40% of total outlays in FY 1970/71, compared
with 28% in FY 1965/66.
4. At the same time, development expenditures were budgeted at
$276 million - some $78 million less than in FY 1969/70 and less than
half of planned defense spending. Only $22 million was alloted to new
developmental projects, compared with an estimated $100 million the year
before. This cut, in particular, promised to reduce foreign exchange
drawdowns, since most Saudi development projects rely heavily on imported
equipment and technical assistance. Some projects such as
the Petromin/Occidental sulfur plant and the Riyadh airport were canceled
or postponed indefinitely, and work was slowed on the Jidda airport project
and on Bedouin housing and job programs at the Faysal Model Settlement
Project.
5. Lowered development expenditures caused economic growth to
slow in the second half of 1970. Real GNP nose only about 4.5% in 1970
compared with an 8.5% average during the previous decade. The slackening
economic tempo was reflected in a one-third reduction in import growth
and an immediate improvement in balance of payments. Foreign exchange
holdings climbed by $65 million, to about $850 million, by the end of
1970.
The Oil Agreements of 1970-71
6. In late December 1970, Riyadh completed the first of a series
of negotiations for increased oil revenues from the foreign producers.
Following the successful Libyan accord with foreign oil firms in September
1970, the Saudis obtained an agreement that boosted oil revenues by about
8%. The agreement, retroactive to 14 November 1970, raised posted prices
(the prices used in calculating revenues) by 9 cents per barrel for medium
and heavy crudes and increased the government's take from 50% to 55%
of profits. This agreement alone will provide the government with estimated
revenue increases of $145 million in 1971 (including $15 million in
retroactive payments for 1970) and about $250 million by 1975 (see Table
2).
In September 1967, Saudi Arabia agreed at the Khartoum conference
to extend annually $41 million to Jordan and $99 million to lfgrpt until
"the effects of the Israeli aggression are e!%minated. "
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Oil revenues anticipated under pre-September
agreements
Additions from new agreements
30 December 1970 (retroactive to
14 November 1970)
Late 1970 (Libyan settlement applied to
Saudi Tapline shipments) J
i February 1971 (increased Tapline transit
fees instigated by Syria)
Retroactive payments
14 February 1971 (OPEC - major company
agreement on Persian Gulf oil)
Saudi share of increased revenue for neutral
zone (assuming cquai treatment)
Tripoli agreement (estimated minimum terms) If
Estimated new od revenue schedule
622 376
15 J 130 167
18 20
12 12
362 360
51
C/
1,223
2.07E 2.720
+15 a1
2,053
a. To be paid in 1971 as the result of increased payment for 1970 production under terms of :he agreement.
b. Tapline was closed from 4 May 1970 until I February 1971.
c. Not applicable.
d Final detaiLr as applied to Saudi Arabian oil delivered directly so the Mediterranean are not yet formalized but are
expected to approximate the Libyan agreement of April 1971.
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1,191
1,464
1,790
205
228
252
20
21
21
13
13
13
812
1,033
1,305
62
75
87
78
94
112
3,433
3.948
4.527
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7. Further oil . revenue increases occurred In late 1970 and early
1971, when the posted price of Mediterranean oil was increased at Libya's
instigation and transit fees were raised on oil passing through the 540-mile
Saudi portion of Tapline to the Mediterranean. The increase in posted price
will bring Saudi Arabia an extra $18-$21 million annually from Tapline
shipments in 1971.75. The oil companies' settlement with Syria in February
1971, providing higher transit fees in exchange for reopening the damaged
Tapline pipeline, was immediately extended to Saudi Arabia. Increased
transit fees will provide the Saudis with an additional $12-$13 million
annually in 1971-75. Saudi Arabia will also receive a cash payment of $9
million to cover retroactive Tapline claims, two-thirds of which will be paid
in 1971 and the remainder in small installments through 1973. In all, Saudi
Arabia will receive at least $52 million in additional revenues from its oil
deliveries to the Mediterranean in 1971.*
8. By far the largest revenue increase will come from the 14 February
OPEC** agreement with the major compank., overing oil produced in
all the Persian Gulf countries. Under this agreement, Saudi Arabia will
receive about $400 million ir, additional oil revenues in 1971. In addition,
the 14 February agreement calls for escalation of revenues each year through
1975, when Saudi Arabia will receive an extra $1.4 billion. Beyond the
increases already agreed to, Saudi Arabia should receive gains rising at least
from $60 million to $112 million daring 1971-75 from other agreements
currently being negotiated on Mediterranean oil exports.***
9. Saudi Arabia, not only will gain major revenue increases from each
barrel of oil produced under their agreements, but also tots: revenues will
be greatly enhanced by rapidly rising output. On the basis of present Aramco
plans,t oil production during 1970-75 is expected to grow about 15.5%
a year. At present, Aramco is rapidly expanding production facilities in
anticipation of increasing output. This planned output
rowth
g
apparently
is based on company estimates that demand, especially in Western Europe
and Japan, will continue to rise sharplytt and that Libya will hold
* Includes $16 million for Mediterranean oil obtained under 30
December 1970 agreement.
" The Organization of Petroleum Exporting Countries consists of Iran,
Iraq, Saudi Arabia, Qatar, Abu Dhabi, Indonesia, Venezuela, Libya. Kuwait,
and Algeria, which together account for 90% of the Free World's oil exports,
""" Agreement already has been reached with Libya, but final arrangements
between the oil companies and Saudi Arabia have not been settled.
t Aramco (Arabian-America: Oil Company) produces 94% of Saudi
Arabia's oil output. Other companies also plan to raise output .cienircantly.
tt During the past few years, demand for oil in Western Europe has grown
by about 10% annually and in Japan by about 18%.
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production levels constant as it has in the recent past. It is also influenced
by Saudi Arabia's political stability.
Post-Agreement Financial Situation
10. As a result of these agreements and the increase in production,
the Saudi financial position has been considerably strengthened for 1971
and has exceptionally favorable prospects through 1975. The added oil
revenues will total some $6 billion in 1971-75. Revenues in 1971 from
the agreements alone will be about $620 million - or 44% - larger than
previously anticipated, and a further gain of 115% in total revenues is in
view fo- the next four years. By 1975, oil revenues will be nearly two-thirds
larger than they would have been under tho old agreements. Because of
the extraordinary rise in oil revenues, the government will be able to carry
out existing development and defense programs, 1o initiate new ones, Ind
to raise Khartoum aid payments to Egypt and Jhordan (if desired) -- at the
same time regi^tering budget surpluses and greatly enlarging foreign exchange
holdings.
11. So far, the government seems to have proceeded cautiously with
its spending, letting foreign reserves accumulate. Although the economy
remains sluggish, indications of a quickening pulse are beginning to appear.
Some spending expansion is apparent on the municipal level. The business
community expects major increases in government spending under the FY
1971/72 budget, and private investment is beginning to rise, especially in
the Eastern Province, in anticipation of heightened economic activity. The
expected relaxation of import controls likewise should stimulate the
economy. With the oil industry also experiencing rapid expansion, the
annual growth of GNP could easily recover by 1972 to the 10% average
of the mid-1960s and may go even higher.
?robable Financial Developments
12. A major policy question for the Saudis during the next several
years will be what to do with their vastly increased oil revenues. The way
is clear for moving ahead decisively with existing economic development
programs. The military should be able to get some equipment that it has
wanted but has been unable to afford. Increased aid for Egypt, Jordan,
and other Arab states will pose no problem. Even so, the prospective
spending increases arising from programs suggested in the past by Saudi
officials 'ill absorb only a fraction of the additional revenues. At this point,
it is difficult to say how much and what kind of additional expenditures
will be undertaken during 1971-75.
13. Cut back in recent years because of heavy foreign aid and defense
outlays, economic development expenditures probably will be raised at least
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particularly the hierachy's "5% men" and the foreign munitions salesmen.
The $3.1 billion program was conceived during a time of financial difficulties
and was designed to meet only so-called "basic military needs." Saudi
$900 million above the $2.5 billion allocation in the 1971-75 development
budget. The resulting amount is the optimum initially sought by Saudi
planners. Although planning delays and other administrative problems may
hold back spending for a year or two, part of the windfall from the oil
revenues probably will be flowing into development projects by the
mid-1970s. Saudi Arabia apparently is willing to import the skilled labor
(its principal resource limitation) that it needs for accelerated development
spending. Most of the additional spending would be used to resume currently
suspended and deferred projects and to implement new projects, most likely
in transportation and the petrochemical industry.
14. Increases in defense spending beyond the $3.1 billion previously
proposed for 1971-75 are nearly inevitable under the strong pressure of
special interest groups within and outside the government -- most
"nut? M-
Arabian officials, however, have expressed keen interest in a considerably
expanded military development program that would include a much larger
,.... ~. a~ .--_
miscellaneous vehicles, and substantial investme t
the Saudis opt for the total package, they could spend an additional $100
million or so on the air force and $500 million on the other items. It
is doubtful whether the Saudis have the technical capacity to maintain and
operate all this equipment, but they may well buy it anyway.
15. Saudi Arabia is likely to be pressed for increased foreign aid in
view of its improved foreign exchange situation. Riyadh already has yielded
to repeated Jordanian pleas for full payment of Khartoum aid in hard
currency. In addition to giving Jordan and possibly Egypt more financial
support, the Saudis could also increase aid to Yemen in its campaign against
their mutual antagonist, Southern Yemen. Other neighboring Persian Gulf
States also might receive more assistance as the Saudis compete with the
Shah for influence in this area while the British withdraw. In all, some
$200 million in additional aid might be disbursed during 1971-75. Even
if Saudi Arabia makes all the additional expenditures outl?ned above for
economic development, defense, and foreign aid in 1971-75, it still will
have several billion dollars in oil revenues to spend for new programs or
add to reserves (see the chart).
16. Of the aforementioned projected increase in Saudi spending of
about $1.7 billion during 1971-75, most will consist of foreign exchange.
Because the country must import nearly all its capital goods and because
foreigners constitute about half of the industrial labor for.
in cantonments, airfields, and modern aircraft maintenance facilities Should
7 -
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Estimated Budget Trends
million US Dollars
5,000-r
r ruhdt wilaglo for now
68/67 67/68 68/69 09/70 70/71 71/72 72/73 73/74 74/75
511128 4-71 (Saudi Fiscal Years)
perhaps 60%-70% of all development spending would consist of foreign
exchange. Similarly, military expenditures would be largely in foreign
exchange as all weaponry must be imported and foreign firms would have
to construct the new bases, cantonments, and other facilities. Again, much
of the labor for these projects would have to be imported. All foreign aid
presumably would consist of foreign exchange. Saudi Arabia will be able,
however, to meet all these exchange requirements with ease. Taking into
account the new oil agreements, the prospective increase in oil export
volume, and projected increase in government expenditure requiring foreign
exchange, it still would be in a position to raise foreign exchange reserves
from an estimated $850 million in 1970 to a whopping $7.8 billion in
1975 (see Table 3). Even if major new expenditure programs are initiated,
the country's finances still promise to be very strong during the next several
years. Indeed, Saudi Arabia will be a financial power to be reckoned with.
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M
M
Table 3
Saudi Arabia: Projection of. Major Balance-of-Payments Items
1910.
1971
1972
1973
1974
1975.
Receipts
2,220
3,360
4,430
5,640
6,530
7,540
Exports, f.o.b. pj'
1,960
3,020
4,030
5,160
5,960
6,810
Oil royalties from companies
60
100
120
140
160
180
other than Aramco
Pilgrimages, transportation,
200
240
280
340
410
490
and other
Payments
2,190
2,650
3,270
3,990
4,980
5,630
Imports
870,
960
1,070,
1,270
1,690
1,860
Investment income
790
1,060
1,450
1,880
2,190
2,540
Government NIE e /
270,
300
320
330
520
550
Tapline expenses L/
10
30
30
40
_40
40
Travel 1/
90
110
120
140
160
190
Other b /
160
190
280
330
380
450
Foreign exchange surplus
30
710
1,160
1,650
1,550
1,910
Reserves on hand
850
1,560
2,720
4,370
5,920
7,830
a. Derived from estimated petroleum production (oil makes up 95% of exports).
b. Projected from past trends.
c. Imports regressed against government spending (1965-70. R2 of 0.969, students' T value
11.11, average deviation only 2,25%). Future government spending was based .on plans plus
estimated add-on expenditures.
d. Derived from estimated petroleum production; profits per barrel assumed to be constant.
e. Derived from planned military expenditures plus 70% of estimated add-on expenditures.
f. De e:ed from terms, of new agreement, assuming capacity. operation.
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Conclusions
17. Revenue increases generated by recent oil p cts between Saudi
Arabia and private oil firms will improve. Riyadh's financial situation
enormously. In contrast to the earlier concern over funding, Saudi officials
now face the happy prospect of having considerably larger revenues than
they can possibly spend during 1971-75. Expectations are that total
government revenues during the period will be about $17 billion, or 55%
more than originally anticipated.
18. Considering the new revenue outlook, the Saudis almost certainly
will reinvigorate spending on economic development, which recently has
been somewhat neglected. More money probably also will be devoted to
defense, despite the hefty sums already programmed for the armed forces.
Foreign aid increases probably will also absorb some of the additional
revenue. No longer will the Saudis be able to claim economic hardship as
a reason for cutbacks in the level of hard currency payments to Jordan
and the UAR.
19. Even though projected expenditures will require large foreign
exchange outlays, this spending will pose no problem for the Saudis. In
fact, at the maximum level of spending suggested by past Saudi desires,
they will accumulate about $7 billion in additional reserves during 1971-75.
With such financial resources available, the only real limit on Saudi spending
is its ability to absorb development imports and additional military
hardware.
20. As Saudi Arabia's prime supplier, the United States stands to
benefit significantly from additional procurement as well as from the trade
indirectly generated by increased public investment and accelerated
economic growth, Moreover, a large part of the increased reserves - both
public and private - probably will be invested in the United States and
other Western countries.
21. Although the Saudis may increase spending above the totals
projected above, they almost certainly will build reserves to at least $6-$7
billion by 1975.
.these large sums are not likely to
be recklessly spent. In the unlikeiy event a radical regime took over, the
Saudi potential for. mischief beyond its borders would be very large. Saudi
Arabia could finance insurgencies abroad; could suddenly unload large
portfolios ,of European money or securities, causing havoc in international
10
SFC,R F.T .
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financial markets; or could demand con;rersion of large amounts of foxeign
exchange into gold in the United States. Such actions would be especially
serious if they were coordinated with other rich Arab states, such as Libya,
which is expected to have reserves of its own of perhaps $6 billion by
1973.
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