Balance of Payment in Saudi Arabia - Essay Example

Balance of Payment Project Balance of Payments is an accounting record of the interaction of individual country to the rest of the universe in regard to the entire economic and financial transactions. It is commonly presented in the form of an internationally agreed statement that is based on the double entry book keeping system, which is a vital property that net sum of the prevailing debit and credit entries is essentially zero. An abstraction in the presentation of the balance of payment arises out of the deliberate attempt to classify all the underlying entries into two wide groups namely Autonomous Transaction and corresponding Accommodating Transactions. The difference within the debit and credit under the autonomous transactions whether positive or negative ought to counter balanced by the opposite differences within the debit and credit under accommodating transactions. The most used approach in interpreting balance of payment is the current account and capital account. Current account with its underlying components serve as an all understanding instrument of analysis for determination of the strength and weakness of the economy. Conversely, capital account mainly reveals developments within the financial and monetary location. 1. SAUDI ARABIC BALANCE OF PAYMENT Saudi Arabia’s population is estimated to be thirty million with the annual growth rate of 2.18 percent. The population totals encompasses approximately six million non-nationals. Over one hundred thousand foreigners normally enter the country every year mostly to occupy particular job openings (Asia, 2012). Immigrant employees come primarily from the other prevailing Arab and Muslim countries that mainly include South Asia and Philippines. Nevertheless, less than one hundred thousand Westerners work and live within Saudi Arabia. This is because most the underlying terrain is unsuitable for cultivation, the corresponding coastal locations and interior oases support the wide majority of the population. Saudi Arabia recorded a large 23.1% of GDP surplus in regard to the current account in the year 2012. The country normally records large but narrowing current account surpluses as a corresponding strong domestic demand is boosting imports. High international oil prices coupled with high oil production and corresponding surging petrochemicals exports maintain the trade balance comfortably in surplus. These prevailing surpluses are normally offset persistent deficits on the underlying services and current transfers’ accounts. Income from the investments abroad was sustained via the global economic slowdown. Saudi Arabia net direct investment flows through the financial account to the corresponding sizeable and grow within the coming years, tied to the prevailing government’ policy to attract FDI to fund the existing private non-oil sector expansion. The level of official FX-reserves increased to the USD 626 billion at the end of financial year 2012. The overall the balance of payments of Saudi Arabia is healthy shape. The main exports of Saudi Arabia are petrochemicals, construction materials, metal commodities and electrical appliances. Petroleum sector contributes approximately 93% of the underlying budget revenues thus contributing to 55% of the country’s GDP and 90% of the export revenue. 40% of the GDP in regard to exports of Saudi Arabia comes from private sector. The major categories of the Saudi Arabia entail 74.1% crude oil, 5.7 % petrochemical and plastics, 17% refined oil, and 4% other prevailing commodities. The major countries that normally consumed Saudi Arabia include USA, Germany, Japan, United Kingdom and South Korea. The mainly export Oil to United States, China, Japan, South Korea and India. The main imports of Saudi Arabia include manufactured goods, transportation equipment, processed food products and corresponding manufactured goods. The main providers of Saudi Arabia imports include United States, United Kingdom, Japan, Germany, France, South Africa and Switzerland. United States mainly export oil, military aero planes and private cars to Saudi Arabia which contribute to 22% of the country imports while Japan mainly export private cars and their accessories that contribute to 9% of the total import of the country. Analysis of balance of payment of Saudi Arabia for the last three years Saudi Arabia as realized a surplus BOP of US $ 32.3721 billion in 2010, US $ 110.368 billion in 2011, and US $ 122.157 in the fiscal year 2011. Preliminary estimates of Saudi Arabia’s balance of payments depict a rise in the current account surplus by 137.4% to Rls 594.2 billion in the year 2012, contributing 26.5% of GDP. The increase in surplus within the current account was to an increase 103.3% in the goods and services surplus to Rls 668.2 billion within the year 2011 compared to Rls 328.6 billon within the preceding year that is 2011. The surplus of goods and services was mainly due to the recovery of the global financial crisis and the corresponding increase in the exports by 47.6% to Rls 1191.1 billion. Observed changes over the three years period of Saudi Arabia and reasons for changes Over the last three year period, the surplus BOP has been on the rise. Saudi Arabia current accounts have been in surplus resulting to corresponding growth in terms of the GDP (Asia, 2012). The increase in surplus is mainly due to the increase in goods and services of surplus in the three years. Moreover, the surplus of the prevailing goods and services was majorly due to the recovery of the global financial crisis and escalation of the Saudi Arabia exports. There was increase in total volume of exports and corresponding increase in total volume of imports in the three years. Relationship between shifts in the current account and changes in savings and investments in Saudi Arabia The association amidst the saving and corresponding investment over the long term is mainly assessed in oil exporting of Saudi Arabia (Asia, 2012). This relationship offer massive outliers that are properly accounted in regard to the long run equilibrium associations amidst of saving and investment both for the total and fixed within Saudi Arabia. Since Saudi Arabia is typically large current account surpluses such association is explained on the domestic absorptive capacity. Global current account imbalances in regard to the surpluses and corresponding deficits of Saudi Arabia is averaged is estimated to be 2.5% of the GDP over the past three years. The deficits and surpluses are predominant in the country are mainly in commodity and fuel exports. Euro area the imbalances are more pronounced and the country is operation on relatively larger surpluses vis-à-vis deficit. The imbalances were on peak in the year 2011 since the underlying marked forced the prevailing deficit and external financing. Saudi Arabia saving in secure assets is substantial with the underlying spikes within the oil prices and the corresponding windfall of the government revenues (Asia, 2012). Low growth in TFP depicts that domestic investment is risky Saudi Arabia thus balancing of numerous aims at the same time, forces the Saudi government to commit to its underlying policy investment in secure assets overseas via Sovereign Wealth Funds that is approximated to be over $ 500 billion in value. The form of risky domestic investment within Saudi Arabia founds that precautionary savings that is 30% higher than investment which is 15% depicts the volatility within the exports prices and corresponding low productivity within the tradable sectors as the main contributing factors. The Saudi Arabia savings and investment pattern I justified by the volatility within the export growth that is the optimal percentage of savings for the oil exporting economy ought to solely depend on the domestic investments. This is primarily based on the modification benefits of such investments that lead to relatively lower volatility in export and more steady GDP growth. Saudi exchange rate against the dollar during 2011-2013 The yearly average exchange rates for Saudi Arabia against 1 US dollar was Riyal 3.906 in 2010, Riyal 3.904 in 2011 and Riyal 3.907 in 2012. This trend indicates that the exchange rates have been relatively stable. Saudi Arabia riyal has partially possessed inflationary effects of low interest rate and corresponding relatively lower value of the riyal as compared to the dollar within the year 2010 to 2012. This is mainly due to the gradual increase in the value of dollar due to the United States economic recovery since the global recession. 2. UNITED ARAB EMIRATES BALANCE OF PAYMENTS United Arab Emirates is a wealthy nation in the Middle East with a dynamic market. UAE has for long been recognized as the commercial hub of the Gulf. It has an enabling business environment which has seen it transform into a worthwhile international center for commerce and trade. Its stable business environment has enabled it to maintain a surplus balance of trade for years. Major providers of UAE’s imports Japan- accounts for 4.82% of total UAE’s imports. The primary products exported by Japan to UAE include transport equipment, general machinery, electrical machinery, food stuff, raw materials and mineral fuels (International Monetary Fund, 2013). They include; India – accounts for 17.5% of total UAE’s imports. The primary products comprise cotton, accessories, gems and jewelry, man-made yarn, fabrics, marine products, machinery and instruments, plastic and linoleum products and tea. China- accounts for 14% of total UAE’s imports. The primary products consists of textile products, clothes, light industrial products, handicrafts, machinery and products made from gold, silver, copper, iron, and tin. United States- accounts for 7.7% of total UAE’s imports. The products include transport equipment, machinery, computer & electronic products, primary metal manufacturing, and chemicals. Germany- accounts for 5.6% of the total UAE’s imports. The core products are machineries, electronics, chemical products, measurement and control technology, iron, and steel. Major customers for UAE’s exports The major products that UAE exports includes crude petroleum, refined petroleum, gold, petroleum gas, and raw aluminum (United Arab Emirates yearbook 2005. 2005). The major customers of these exported items include; Japan- accounts for 17.1% of total UAE’s exports. The core products include crude oil, and aluminum. India –accounts for 13.6% of total UAE’s exports. The primary products include pearls, precious and semi-precious stones, gold, pulp and waste paper, sul phur and unroasted iron pyrites, metalifer ore and metal scrap, organic and inorganic chemicals. Iran – accounts for 6.9% of total UAE’s exports. The core items include pearls, precious and semi-precious stones, gold, pulp and waste paper, sulphur and unroasted iron pyrites, metalifer ore and metal scrap, organic and inorganic chemicals. South Korea – accounts for 6.1% of total UAE’s exports. The primary items being crude oil, petroleum products includes naphtha and liquefied petroleum gas, aluminum, and copper. Thailand – accounts for 5.1% of total UAE’s exports. The core items are crude oil, scrap metal, gold and silver bar, and chemicals. Analysis of balance of payment of UAE for the last three years The decrease in the oil prices during the 2011 have resulted to noticeable decline of the UAE’s balance of payments from AED 26.9 billion in 2010 to AED 16.2 billion in 2011. This is mainly due to the decline within the underlying hydrocarbon revenues and corresponding exports. Moreover, the average price of the UAE’s Murban crude oil price escalated to USD 79.85. UAE’s current account surplus which is the main component of the prevailing balance of payments surged to the AED 41.3 billion in the year 2012 as compared to the preceding AED 28.8 billion in the year 2011. This underlying surplus was mainly attributed by the escalation in the oil exports and relatively high per barrel prices within the underlying global market. The current account balance was 3.8% of the prevailing GDP in the year 2013. Moreover, UAE’s balance of payment changed from a surplus of AED 16.2 billion in the fiscal year 2011 to the corresponding surplus of nearly Dh36.6 billion in 2012. The country’s current account had a robust surplus in the year 2013. This was due to the relatively higher oil prices coupled with the sustained recovery within the tourism, exports and the increased reputation of the volatile region. Observed changes over the three years period of UAE and reasons for changes UAE observed an increment of BOP surplus in 2010, a surge in BOP surplus in 2011 and an increased BOP surplus in 2012. The UAE realized a surplus BOP of AED 26.9 billion in 2010. This surplus was due to increase in oil exports and high prices per-barrel in the global markets. In 2011, its BOP surplus was Dh16.2 billion due to decline in hydrocarbon revenues and corresponding exports. And nearly Dh36.6 billion in 2012. This was propelled by higher oil prices and a constant recovery in tourism and export trade as well as the increase in the reputation of UA E as a safe destination in an unstable region. Relationship between shifts in the current account and changes in savings and investments in UAE Current account is the difference between value of imported goods and services and that of exported goods and services. A surplus occurs when the difference is positive, implying that a country exports more than it imports. On the other hand, a deficit would be realized when the value imports is greater than that for exports, implying that a country imports more and exports less goods and services. Similarly, the current account balance can be expressed in terms of the difference between public and private savings and investments. In this regard, a current account deficit would mean low level of national savings in relation investment or a high rate of investment or the existence of both scenarios. A government surplus budget enhances a surplus current account as resources set aside for investment is adequate, while a government deficit budget creates a deficit in the current account as investments requirements exceed the actual savings (United Arab Emirates yearbook 2005. 2005). Exchange rate of UAE against the dollar during 2011-2013 The average exchange rates of 1 AED was 0.919691 in 2010, 1.033853 in 2011 and 1.035937 in 2012. The exchange of the AED has been relatively steady within the period because of the high reputation that the country has gained and its increased export trade. References United States & Council of Economic Advisers (U.S.). (2011). Economic report of the President: Transmitted to the Congress February 2011, together with the annual report of the Council of Economic Advisers. Washington [, D.C.: U.S. G.P.O. Asia, D. I. M. F. M. E. C. (2012). Saudi Arabia. Washington: International Monetary Fund. International Monetary Fund., & International Monetary Fund. (2010). Balance of Payments Statistics Yearbook, 2010. Washington, D.C: International Monetary Fund. United Arab Emirates yearbook 2005. (2005). London: Trident Press. International Monetary Fund. (2011). United Arab Emirates: 2011 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion. Washington, D.C: International Monetary Fund. United arab emirates yearbook. (2006). London: Trident Press. International Monetary Fund, (2013). United Arab Emirates: Selected issues Fund, I. M. (2010). United Arab Emirates. Washington: International Monetary Fund Feldman, S., & Shapir, Y. (2001). The Middle East military balance, 2000-2001. Cambridge, Mass: MIT Press. Read More