Financing Economic Development

The oil price rise of 1973 provided an immediate solution to the problem of development finance in Saudi Arabia. It avoided the need for external indebtedness and the domestic use of taxation and deficit financing to promote growth and structural changes in the country. But this new found money tap had to be directed and ultimately converted into physical assets and productive capacity. Development strategy has been the responsibility of the Saudi Government and has shown itself in the First, Second and now the Third five-year Development Plans for Saudi Arabia. Implementation of the plans has also rested largely with the multitude of government ministries; but to achieve progress the government has had to build a financial structure to support the investment undertaken. Even before the oil boom the government was conscious of the necessity to strengthen the banking sector; in 1970, in the First Development Plan, it called for a ‘strong, diversified and viable banking sector that will encourage a high rate of economic growth without adverse inflationary effects’.1 The main objective of this chapter is to examine how far this has been achieved in the 1970s, to consider the deficiencies in the current financial system, and to conclude by suggesting possible improvements in the system which would not only remedy past inadequacies, but aid the future development of the country.