Saudis Aim to End Budget Deficit

But lavish subsidies make progress tough, raising US anxiety over slow payments

By , Staff writer of The Christian Science Monitor

SAUDI Arabia, in its new five-year economic plan, is moving to trim its large ,budget deficit.

That pleases United States officials, who have become anxious about the desert kingdom's slow debt payments and what they consider overly generous domestic spending. The problem has been putting strains on one of the most important US strategic relationships of the late 20th century.

This week the two nations mark the 50th anniversary of the first meeting between Franklin Roosevelt and Saudi monarch Ibn Saud. During the half century since, US-Saudi ties have developed into a mix of trade, investment, and military cooperation -- and a complicated and often troubling dependency.

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A staunch Middle East ally, Saudi Arabia is the fifth-largest US trading partner and its single largest customer for defense exports. Iraq's invasion of Kuwait in 1991 prompted the kingdom to place, almost overnight, a multi-year $35 billion order for American military hardware. Given US Labor Department estimates that $1 billion in exports equals 20,000 jobs, the Saudi's order puts tens of thousands of Americans to work.

But classified US government inter-agency memos from the past two years reflect trepidation over the Gulf State's delayed payments for US military goods and arrears to American defense firms. Both former Treasury Secretary Lloyd Bentsen and Treasury Undersecretary Lawrence Summers traveled to the kingdom in recent months to convey their concern.

Joel Johnson, a vice president of the Washington-based Aerospace Industries Association, says Washington is as much to blame as Riyadh, the capital. The Saudis, he says, ''must be impatient with the US Treasury Department telling them to be more frugal, while the State and Defense Departments are rattling a tin cup in front of their face every time there's a US foreign-policy crisis.''

With more than a quarter of the world's oil reserves, the Saudis bristle at the notion that they are a credit risk. And Saudi officials insist they're getting their financial house in order. They point to the country's industrialization, a stronger private sector, and recent economic reforms. Last month, Riyadh doubled the price of gasoline and electricity and slashed the wheat subsidy for farmers. The kingdom did not fulfill its intention to cut the government budget by 20 percent last year, but it came surprisingly close, analysts say.

Some cutbacks indicate how indulgent the government had become. Every Saudi had free call-waiting and unlimited telephone calls. Now there is a charge for call-waiting and a time limit on free long-distance calls, a Saudi diplomat says.

On Jan. 1, the government issued its sixth five-year plan, whose centerpiece is eliminating the budget deficit by 2000. That's a tall order, given the Saudi citizens' expectations for state handouts. The monarchy is wary of upsetting the delicate political support from its subjects. And it refuses to skimp on building its defense against external threats, such as Iraq.

That costly combination concerns some international financial analysts. The Gulf state's failure to broaden from a largely oil-based economy has made it too vulnerable, asserts Hansgeorg Kupper in a report this month by the German Dresdner Bank. He is concerned that the kingdom has been depleting its monetary reserves since 1985, when energy prices began their plunge. Eighty percent of government revenue comes from oil sales.

Like other Gulf states (with the exception of the United Arab Emirates), Saudi Arabia posted a severe budget deficit in 1993. Yet it did not curtail extravagant social spending. The Gulf war compounded the budget problem.

The war produced a highly coordinated effort to supply the kingdom with the most technically advanced systems the US Congress would allow. But Riyadh also had to pay off its $55 billion portion of the Gulf war's costs. To help bridge the financing gap over the medium term, the oil-rich nation became a substantial borrower in 1991. Led by Morgan Guaranty Trust Company, a syndication of banks put together a $4.5 billion loan for Saudi Arabia.

In 1993, the International Monetary Fund took the Saudis to task for continued high defense spending and huge social subsidies. But the IMF has since backed off from its criticisms.

''The Saudis have been cautious since the Gulf war,'' says one top international finance official. ''They have been quite diligent in undertaking reforms [to strengthen their financial position] that were once unthinkable.''

Indeed, IMF statistics depict an economy under steady management. Saudi gold reserves have remained constant from 1993 to 1994, at 4.6 million ounces. And the country's foreign-exchange reserves registered almost $6 billion at the end of 1994, up from $5.7 at the end of 1993. The increase is modest, but it demonstrates an important upward trend to critics who doubt the kingdom's financial viability.

The Saudis have their own ready response to any lingering concerns about their solvency. According to one government analyst, Riyadh's cash outflow is decreasing. This year, the kingdom will make two additional $875 million payments on the Morgan Guaranty syndicated loan.

In 1994, the Saudis restructured the payment agreement on 72 American-made F-15 fighter jets to slow production from two to one plane per month. Final delivery would be stretched out until 2001. Pentagon sources say that the Saudi's would have to pay at least $2 billion annually to keep the production line going and service existing aircraft.

A Saudi diplomat asserts that his country will pay $4.5 billion to US defense contractors this year; the payments will drop to $3 billion in 1996 and to under $2 billion in 1997. But a top Pentagon official insists the Saudi plans are ''optimistic'' and was surprised to learn of this payment schedule, which seems to ignore the 1994 agreement on the F-15 purchase.

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