1. C hina .................................................. Page 3 2. Saudi Arabia - 1980 ...

NOT FOR PUBLIC USE

INTERNATIONAL MONETARY FUND Minutes of Executive Board Meeting 80/88 10:00 a.m., June 11, 1980

J. de Larosiere, Chairman W. B. Dale, Deputy Managing Director Executive Directors

Alternate Executive Directors

J. Amuzegar J. Anson S. Y. Cross

M. Yeganeh D. E. Syvrud H. G. Schneider

S. D. Deshmukh C. M. K. J. A.

B. J. Drabble

T. Hlrao M. B. Jalal

P. Caranlcas Casey A. Al-Eyd C. Gutigrrez Nagashima

J. R. Gabriel-PeSa B • Kharmawan G. Laske P. Mentre de Loye

G. T. S. A.

J. Muns S. Nana-Sinkam

Winkelmann Aulagnon Kllngl Bulra

T. de Vries M. Vanhala R. J. Whitelaw

R. J. Lang L. Van Houtven K. S. Friedman

1. 2. 3. 4. 5. 6. 7. 8. 9.

Secretary Assistant

C h i n a .................................................. Page Saudi Arabia - 1980 Article IV Consultation .............. Page Iran - Representative Rate for Iranian R i a l ............... Page Madagascar - 1979 Article IV Consultation Postponement........................................ Page St. Lucia - Acceptance of Obligations of Article VIII, Sections 2, 3, and 4 ................................. Page General Arrangements to Borrow - Association of Switzerland..................... ................... Page Rules N-10 and N - l l ................................... Page Approval of Minutes..................................... Page Executive Board Travel ................................ Page

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Also Present Aslan Department: Tun Thin, Director; W. J. R. Woodley, Deputy Director; L. H. De Wulf, F. Le Gall, H. Nelss. Exchange and Trade Relations Department: D. K. Palmer, Deputy Director; M. Allen, Z. Iqbal, S. Kanesa-Thasan. Fiscal Affairs Department: L* Garamfalvi. Legal Department: G. P. Nicoletopoulos, Director; J. G. Evans, Jr., Deputy General Counsel; R. C. Effros. Middle Eastern Department: A. K. El Selehdar, Deputy Director; M. T. Dajanl, S. H. Hitti, B* A. Karamali, D. B. Noursl, E. M. Taha, S. von Post, M. Yaqub. Research Department: M. Goldstein, M. D. Knight. Treasurer's Department: R. J. Famllton, Deputy Treasurer; D. Williams, Deputy Treasurer; M. N. Bhuiyan, D. S. Cutler, T. Taya. Finance and Development: S. I. Katz, Editor. Information Office: H. Hartmann. Personal Assistant to the Managing Director: C. M. Watson. Advisors to Executive Directors: T. K. Ahmad, S. E. Conrado, A. B. Dlao, J. Fajgenbaum. Assistants to Executive Directors: S. R. Abiad, E. M. Ainley, H. G. Askarl, A. F. P. Bakker, C. J. Batliwalla, L. E. J. Coene, E. P. Fine, J. U. Holst, J. M. Jones, W. A. Kabli, T. Kitamura, M. Kusakabe, S.-W. Kwon, J. E. Lelmone, G. B. Lind, V. K. S. Nalr, J. R. Novaes de Almeida, P. D. Peroz, A. V. Romualdez, M. Shadman, 0. Uqer, K. K. K. Wee, P. Wlchert, T. H. Williams.

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CHINA The Chairman made the following statement: Yesterday I received In the Fund a delegation from the People's Republic of China led by Mr. Bu Ming, Chairman and President of the Bank of China. He was accompanied by Mr. Wang Weicai, Deputy Chairman and Vice President of the Bank of China who was recently appointed Alternate Governor. They were accompanied by other officials of the Bank. This was the first visit to the Fund of officials from the Bank of China and my guests and I expressed our mutual confidence in a constructive and close cooperation between the People's Republic of China and the Fund. Mr. Bu Ming emphasized that the People's Republic of China intends to play an active role in the life of our institution. In that context, he referred to the communication dated May 28, 1980 from Mr. Li Bao Hua, the Governor for China of the Fund, requesting an increase in the quota of China in the Fund (EBD/80/153). It was the strong desire of the authorities in Peking that the Executive Board would act promptly on this request and that the Governors of the Fund would be able to adopt an appropriate Resolution before the next election of Executive Directors, which is to be held during the forthcoming Annual Meeting. In my response, I said that we would do our best to expedite the staff work; I agreed that a staff mission would visit Peking starting June 30, 1980 to collect the necessary data; I stressed that the timetable was very tight, which my Chinese visitors appre­ ciated, and they understood that a possible increase in quota at the time of a regular election of Executive Directors could raise some problems. I noted that, except if the Board decided otherwise, normally important changes in quotas were not acted upon within three months of the election of Executive Directors. Mr. Bu Ming expressed the hope that the Fund would promptly and sympathetically examine the People's Republic's request for an early Increase in its quota. He fully understood that the size and timing of an increase was a matter for the Executive Board and the Board of Governors to decide.

The Executive Directors took note of the Chairman's statement.

2.

SAUDI ARABIA - 1980 ARTICLE IV CONSULTATION

The Executive Directors considered the staff report for the 1980 Article IV consultation with Saudi Arabia (SM/80/87, 4/7/80). They also had before them a report on recent economic developments in Saudi Arabia (SM/80/95, 4/23/80).

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Mr. Jalal made the following statement: The Saudi Arabian authorities are in general agreement with the views expressed in the consultation report. It may, however, be useful to elaborate on the role of oil in the economy of the Kingdom, to discuss structural change and the Third Development Plan, and to describe the budget for 1980/81. In view of the recent announcement of the Plan and the budget, after the issuance of the consultation report, it was thought to be useful to provide the Board with this additional material. To understand the realities of the Saudi Arabian economy, the nature of the oil industry and its role should be clearly appre­ ciated. Such an understanding of the economy and its predicament takes on added importance, for us and for the international commu­ nity, in times of external imbalances, high inflation, and exchange rate instability. Oil reserves are finite in quantity and are being exhausted at a significant rate. This resource coupled with associated gas is, however, Saudi Arabia's only substantive physical resource. The availability of other resources, in particular agriculture, is limited and cannot be expected to provide sufficient and sustain­ able revenues. The recognition of these facts has prompted many observers to describe the Kingdom's preoccupation as that of trans­ forming its oil to other assets— infrastructure, light industry, developed human capital, and financial assets. Such a depiction of economic change in Saudi Arabia has numerous implications. First, revenues from oil are not a flow of income but should be viewed as a stock of wealth since oil itself is a stock of wealth. Interpretation of GNP figures for the Kingdom and for similar economies is rather unique. In the extreme, if the Kingdom were to exhaust oil reserves to satisfy consumption, this would be exactly matched by a reduction in national wealth. Under such circumstances, it would be misleading to compare Saudi Arabia's GNP to that of other countries, where output is derived as a flow from sustainable and augmentable wealth. An acceptable principle in business accounting is that no taxes are payable on the exchange of similar assets as this is not an income-generating transaction. We can only sustain our potential level of GNP if our aggregate national wealth is maintained; that is to say that the decline in our oil wealth is matched by an increase in our productive non-oil assets. Similarly, external surplus generated through transforma­ tion of a physical asset should not be compared to that of other countries, where a surplus is a by-product of a flow of exports derived from a sustainable economic base.

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A country operating under the above conditions ought, and would in fact prefer, to reduce the level of wealth transformation unless it is provided with appropriate opportunities. And for this reason, international understanding and cooperation are called for. Second, the importance of oil exports to our economy is allembracing; a good example of this is the importance of oil in government revenues. The staff estimates that 91.2 per cent of total government revenues in 1979/80 was derived from oil. Thus the Kingdom's official reserves or SAMA's available foreign asets (after appropriate adjustments for commitments), though considerable in absolute terms, are not large relative to budgetary requirements of the Kingdom. In view of the Kingdom's heavy reliance on oil as a source of revenue, reserves and available assets should be com­ pared to our budgetary expenditures and not merely to the tradi­ tional measure of imports. This and similar comparisons would indicate that the Kingdom's foreign reserves or available foreign assets are not in fact out of line with that of other countries. Third, the process of wealth transformation by the Kingdom is limited to two alternatives— construction of domestic productive capacity and accumulation of foreign assets. We are in the process of constructing the basis for a productive sector to increase non-oil GDP. This component of asset transformation can be deemed financially successful if the present discounted value of the flow of output from the investment (net of depreciation) is equal to the present discounted value of the appreciated oil asset had it not been transformed. As to the other outlet for asset transformation., acquisition of foreign assets, prevailing difficulties are well known and need no elaboration. It should, however, be again noted that the requirement that acquired asets should carry a real return (adjusted for exchange fluctuations and inflation) should be appreciated in the context of the transformation of an exhaustible and appreciat­ ing asset. Fourth, the transformation of oil reserves to a productive non-oil economic base is necessary given the special nature of the oil industry. The oil sector, no matter how large, cannot provide adequate employment opportunities for the indigenous labor force. Moreover, a purely oil-based economy will restrict employment opportunities to a limited set of skills that may not represent individual aspirations. The oil sector cannot act as a mechanism to distribute income. In addition, given that diversification is per se desirable and that the infrastructural base for the medium term is largely in place, a shift in priorities toward the expansion of non-oil productive sectors is now called for.

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Turning to structural factors, In the period 1974-77 the Saudi Arabian economy was characterized by severe supply bottlenecks. Moreover, there was excess demand for skilled and unskilled labor. During this period, the authorities adopted positive steps to relax these constraints, to increase absorptive capacity, and to set the stage for the transformation of an economy dominated by oil to one with increasing output of industry, agriculture, and services. These policies were implemented through the Second Development Plan with large financial outlays and open policies to the inflow of expatriate labor. Planned expenditures were set at $142 billion, but actual expenditures have amounted to roughly $200 billion. The Second Plan achieved its targets in the spheres of electricity, industry, agriculture, education, training, and social welfare. By 1978, the infrastructural base of the country had been developed to the extent that there was at least no short-term constraint. These achievements have been consolidated in the period 1978-80. In the long run, the Kingdom's infrastructural requirements remain substantial given the vast and rugged land mass. The authorities are now in the process of changing their emphasis from infrastructure, which has up to now taken about 80 per cent of the planned expenditures, to achieving a diversification of the economic base subject to two important constraints. First, the extent and the specifics of the diversification process will incor­ porate both long-term efficiency and social requirements. Long-term efficiency is indicated, in part, by global comparative advantage and regional specialization patterns. Social requirements are seen in an Islamic framework of providing equal opportunities to all in order to accommodate individual development and aspirations with respect to education, medical care, housing, income distribution, and other social services. Diversification will, in turn, provide a balance between efficiency and employment opportunities compatible with individual needs. Second, the authorities feel that, given the emphasis on structural change, increased dependence on expatriate labor would, at this time, be inappropriate and unnecessary. There­ fore, to maintain an acceptable rate of growth in the non-oil sector, without fueling inflation, the authorities foresee a rise in labor productivity from at least five sources: (1) the shift from con­ struction to more productive sectors; (2) the replacement of unskilled expatriate labor with more skilled labor; (3) additional efforts in educational and vocational areas; (4) an improvement in the overall skills of the indigenous employed labor force; and (5) an increase in the capital/labor ratio of the economy. The major vehicle for an orderly construction and diversifica­ tion of the productive base is the Third Development Plan. Under the Third Plan, projected expenditures for the public sector, exclud­ ing transfer payments, foreign aid, and national defense, are set at $234.7 billion (see Table 1 in Annex). Of this total, development spending will be $211.35 billion, with the remainder allocated for

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administration, local subsidies, and contingency reserve. The major thrust of the Plan is in four areas: heavy industry, light industry, agriculture, and education and vocational training. The Plan aims to establish a viable industrial and agricultural base and the required level of professional and skilled manpower to sustain the Saudi Arabian economy. At the end of the Plan, the role of the private sector is expected to increase further. Although infrastructure and transportation were stressed under the Second Development Plan, they will still require large alloca­ tions in the foreseeable future. The Third Plan allocates $11.4 bil­ lion to road construction, $1.35 billion to railroads, $10.75 billion to civil aviation and the international airport, $7.16 billion to sea ports, and $8.71 billion to wire and wireless communications. While the largest single industrial enterprise in history, the gas gathering scheme, is near completion, and Jubail and Yanbu are about to embark on their promising petrochemical careers, Saudi Arabia still requires large expenditures in electricity and industry. Under the Third Plan, an allocation of $15.8 billion has been made for increased electrification, and $60.4 billion for industrialization. The Plan calls for the development of new industries, including cement, industrial gas, intermediate petro­ chemical products, glass, metallurgy, car spare parts, animal feed concentrates, building materials, and farm products. The increase in production by Petromin, the state-owned oil company, would include an increase in output by local refineries from 120,000 barrels a day to 640,000 barrels a day by the end of the Plan period. Petromin is also to boost its export refineries' production to 1.33 million barrels a day from the present 580,000 barrels a day, while increasing its production of lubricating oils from 500,000 barrels a year to 2 million barrels a year. Also planned is an increase in the Kingdom's oil storage capacity from 9.6 million barrels to 22.75 million barrels, while the Kingdom's pipeline system for oil products is to be expanded to carry 511,000 barrels a day, up from 112,000 barrels a day. The crude oil pipe­ line system is to carry 2.2 million barrels a day, up from only 51,000 barrels a day. In view of the educational requirements of the Kingdom and its important role in future development, the Plan calls for educational expenditures on the order of $23 billion. Direct expenditures on health will amount to $11.6 billion. The Plan also attaches increas­ ing importance to agriculture and water resources; such allocations will amount to $19.2 billion. The authorities will continue to pursue flexible fiscal and monetary policies to realize the country's economic targets without accelerating the rate of inflation, which has been dramatically

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reduced from a high of 60 per cent per year to around 7 per cent per year in FY 1979/80. The goal of the authorities is that inflation is not to exceed 7 per cent per year during the period of the Plan while a 4.9 per cent annual rate of growth of productivity is achieved. Simultaneously the authorities will streamline the Government's administrative machinery to derive maximum benefit from available manpower resources, while endeavoring to ensure greater public participation in the implementation of the planned targets by means of education through the media. The projected real rate of growth in the gross domestic product of the non-oil private sector is 6.2 per cent per year over the Plan period (see Table 2 in Annex). The annual rate of real growth is expected to be 2.2 per cent in the output of all productive sectors (agriculture, mining, manufacturing, utilities, and construction) and 8.8 per cent per year in the service sectors (trade, transport, finance, government excluding military, and other services). Among the productive sectors, the contribution of construction to real GDP is expected to decline by 2.5 per cent per year, and that of the remaining four sectors is expected to increase by 15.9 per cent per year. Among the service sectors, the contribution of government (excluding military) is expected to rise at the rate of 7.2 per cent per year and that of the remaining four service sectors at 8.8 per cent per year. Manpower needs are projected to rise at the rate of 1.2 per cent per year from 2,471 million persons in 1979/80, the last year of the Second Plan, to 2,626 million persons in 1984/85, the last year of the Third Plan. Because of the decline in the output of the construction sector, it is expected that manpower needs of this sector will decline by about 5.8 per cent per year, thus relieving manpower for other productive sectors; the manpower needs of the latter are expected to rise by 5.1 per cent. The manpower needs of all service sectors are also expected to rise by an annual rate of about 3.1 per cent. Of the total projected increase of 155,000 in the need for manpower, it is expected that 146,000 will be supplied by Saudi sources leaving only 9,000 for recruitment from abroad. The rate of growth in the employment of Saudi manpower will be 1.9 per cent per year, whereas for expatriates it will be 0.2 per cent per year. Thus it is expected that by the end of the Third Plan, Saudi manpower will constitute 59.3 per cent of the total compared with 57.1 per cent at the end of the Second Plan. Turning to the budget for 1979/80, the staff estimated revenues at SRls 230.2 billion and expenditures as SRls 185.0 billion. How­ ever, actual revenues amounted to SRls 229.6 billion, and expendi­ tures were SRls 193 billion (SRls 129 billion for development and SRls 64 billion for operating costs), resulting in a smaller surplus than that projected in the report. For the new budget (1980/81), revenues are estimated at SRls 261.5 billion and expenditures are allocated at SRls 245 billion (see Table 3 in Annex).

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In general, because of the large planned development expendi­ tures and the likelihood of even higher actual expenditures, as experienced under the Second Development Plan, the authorities foresee a rapid expansion in imports of goods and services in the coming years (see Table 4 in Annex). These expectations, coupled with Saudi Arabia's comitments resulting from its policy of economic cooperation with other developing countries, should reduce its future annual surplus. Finally, our authorities would like to express their gratitude to the Fund for its assistance and valuable advice which they have always incorporated into their policy decisions.

The staff representative from the Middle Eastern Department commented that the data attached to Mr. Jalal's statement contained balance of pay­ ments estimates that were generally consistent with the data shown in the staff report. There was, however, a difference in format: in Mr. Jalal's table official foreign aid was included among the current account items, while in the staff report the comparable data had been included in the entry for the capital account. The authorities had revised their balance of payments projections for 1980, especially for the value of oil exports, as was mentioned in the footnote of Mr. Jalal's Table 4. The new data also suggested that foreign aid and grants in 1980 were now expected to be considerably larger than the staff had initially estimated. Mr. Anson said that he agreed with the general lines of the staff appraisal. The authorities were to be commended on the outstanding growth performance during the previous four years— when the rate of growth had exceeded the target figures in the Second Development Plan— and on the achievement of the targets for industry, agriculture, transport, and education. That the authorities had met the targets while reducing the rate of inflation and easing the supply bottlenecks was particularly impressive. Saudi Arabia was an interesting example of how inflation could be sharply reduced through restraint in public expenditure and a reduction in excessive monetary expansion. During the previous year, the authorities had consolidated the earlier gains and had made a very forward-looking reappraisal of their development aims. The recently announced Third Development Plan, Mr. Anson continued, seemed to be well conceived; it contained a realistic 6 per cent growth target for the non-oil sector and continued the high priority for con­ taining inflation through appropriate fiscal and monetary policies. In that context, the measures for raising productivity and the intention of streamlining the Government's administrative machinery, which should help to improve the control of development expenditure, were obviously important. Since the infrastructure foundation had been firmly established, Mr. Anson commented, the new emphasis on diversification was fully appro­ priate. The plans for exploiting natural gas reserves were particularly

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Interesting; by 1982 Saudi Arabia could become the world’s largest exporter of natural gas. The authorities also had plans for extensive development of heavy industry. There had been recent press reports about several joint venture contracts with foreign companies, and the industrial development element of the new plan seemed to have been successfully launched. The Government's policies in the investment and reserve management fields were commendable, Mr. Anson considered. Saudi Arabia's record of foreign aid was most impressive; assistance had been in the range of $3-4 billion a year since 1975 and had taken the form primarily of grants and concessional loans. The recent expansion of project aid was welcome, as was the intention recently expressed at a meeting of OPEC ministers to step up assistance to developing countries through guaranteed oil supplies and balance of payments loans. Saudi Arabia's excellent record of cooperation with the Fund was well known, Mr. Anson noted: the Government had lent or committed more than SDR 4 billion under the oil facilities and the supplementary financing facility. He looked forward to Saudi Arabia playing an important role in future recycling initiatives, and he had noted with considerable interest the Chairman's recent statement concerning his preliminary discussions in New Orleans on recycling. Despite the widespread press comment on the recently concluded OPEC meeting in Algiers, Mr. Anson said, the situation with respect to oil production and pricing seemed confused. Orderly and stable market arrange­ ments were in the best interest of all members, and the effort that the authorities had made to that end were widely known and appreciated. Mr. Al-Eyd commented that Mr. Jalal's description of the special circumstances in which the authorities' economic policies had been evolv­ ing was very useful. Saudi Arabia's social and economic problems were similar to those facing other oil exporting countries in the Middle East. As the Chairman had noted in his speech in New Orleans, the oil producing countries "are asked to produce amounts of petroleum well above their needs and thus to change their physical resources into uncertain financial assets denominated in unstable currencies undermined by inflation." In the circumstances, Mr. Al-Eyd continued, the authorities had correctly maintained a policy that was designed to transform the country's oil wealth into productive non-oil economic enterprises. Because of the: limitations on absorptive capacity, the authorities would be unable to achieve that objective in the short run and would instead have to continue to accumulate a large stock of financial assets. The real growth rate of the non-oil sector in 1979 was 13 per cent, Mr. Al-Eyd noted; and, during the period of the Second Five-Year Plan, the average rate had been much higher than had been expected, largely due to the adoption of a soundly balanced mix of demand and supply manage­ ment policies. The authorities' flexible approach had permitted a smooth

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transition from limiting the budget deficit, to keeping the budget surplus accumulated after the oil price adjustment in 1979 at as low a level as was consistent with the economy's current absorptive capacity. In the monetary field, Mr. Al-Eyd commented, the 20 per cent increase In the rate of growth of broad money was moderate in comparison with monetary expansion in previous years, with the exception of 1978-79, when the rate of increase had been around 14.5 per cent. Fiscal and monetary developments had combined with the effects of the elimination of import bottlenecks and the significant expansion in domestic production to contain the domestic inflation. The intention of the authorities to maintain flexible fiscal and monetary policies that were designed to encourage financial stability and to keep the inflationary pressures under control was certainly commendable; it was particularly important in view of the expected considerable increase in oil revenues, the main source of govern­ ment resources. In the real sector, Mr. Al-Eyd remarked, the substantial growth of non-oil GDP in 1979 was a further indication that the effort to transform the economy had been effective. The earlier growth of the sector, during the period 1974-78, had been the result of a surge in investment. The stage of investment-led growth was perhaps easier than other developmental stages; the next stage, which would be characterized by concentration on the commodity producing sector, would probably be more difficult. The authorities should prepare for the time when growth in the non-oil sector would not be as rapid as it had been in recent years, something they had apparently done by including a growth rate of 6.6 per cent under the Third Development Plan compared with a rate of 13.3 per cent under the Second Development Plan. In Saudi Arabia, as in other oil producers, the existence of bottlenecks, especially with respect to labor, meant that in coming years oil revenues might not be absorbed as quickly as they had been in the past, and that the international community would have to cooperate with the oil producers in acquiring foreign assets and in main­ taining their real value. The authorities were understandably concerned about the growth of the proportion of expatriate laborers to total labor in Saudi Arabia, Mr. Al-Eyd said; they were wisely planning to introduce policies to achieve a gradual increase in labor productivity and to train indigenous laborers to increase their participation. The authorities certainly recognized that manpower development took some time and normally paid off only in the long run. In the short run, they should expect a slower rate of growth than in recent years if they maintained a policy of not permitting the proportion of expatriate labor to increase as a percentage of the total labor force. To compensate for that policy, the authorities would probably have to concentrate on increasing the capital-output ratio. The authorities were wisely concentrating on capital-intensive projects as opposed to labor-intensive ones.

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Saudi Arabia'8 contribution to the international adjustment process had continued to be outstanding in various respects, Mr. Al-Eyd commented. The authorities had provided generous development assistance, both directly by making loans and grants through various regional and multinational agencies, and indirectly by allowing workers to remit a large proportion of earnings. In addition, the Government had maintained liberal trade relations and had permitted free capital movement with the rest of the world. It was unfortunate that a crucial aspect of the authorities' cooperation had in a sense been offset: as the staff had implied, Saudi Arabia's major effort to maintain its oil production well in excess of the needs of its economy and to keep its prices below equilibrium and world market levels was intended to benefit final consumers but had been construed by intermediaries as an opportunity to accumulate windfall profits to the detriment of both consumers and Saudi Arabia. The Govern­ ment had also contributed to the international adjustment process through its wise policy on the management of Saudi Arabia's foreign assets and reserves. Mr. Hirao remarked that the present discussion was timely, as the authorities had just approved the Third Five-Year Development Plan* Saudi Arabia, the world's largest exporter of oil, was to be commended for its considerable effort to preserve orderly conditions in the inter­ national oil market. The Government had maintained a moderate pricing policy in an attempt to avoid the severe adverse effects of steep rises in the price of oil on the international economy, an effort that was certainly greatly appreciated by all of the oil importing countries. He hoped that the country's reasonable policy would be continued in the coming months, when the world economy would probably move into a recession. The authorities were also to be commended on the high rate of real growth in the non-oil sector during the previous four years, Mr. Hirao commented. That the rapid growth had been accompanied by a substantial decline in the rate of inflation was particularly praiseworthy. The suc­ cess was attributable to the effective implementation of demand management and supply policies, and the authorities were apparently determined to avoid the re-emergence of inflationary pressures during the period of the Third Development Plan. Under the new development plan, Mr. Hirao noted, the authorities Intended to give the highest priority to diversifying the domestic pro­ ductive base, rather than to building up the infrastructure, as had been the case under the Second Development Plan. As Mr. Jalal had noted, long-term efficiency would be one of the important factors in the diver­ sification effort. Furthermore, in the light of the authorities' inten­ tion of limiting the inflow of expatriate labor, raising the level of productivity of the existing labor force as much as possible would be essential. In that connection, it was appropriate that one of the major thrusts of the Third Development Plan was in the area of education and vocational training.

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Externally, Mr. Hlrao said, Saudi Arabia's current account surplus was expected to double in 1980, to $24 billion, on the assumption of pro­ duction of 8.5 million barrels of oil a day at a price of $28 per barrel. He strongly hoped that the authorities would continue to increase their official development assistance and to make a substantial contribution to a smooth recycling process. Finally, some important data for 1979 had not been available for inclusion in the staff report, and he hoped that they would be available in the future. Mr. Mentre de Loye remarked that the consultation with Saudi Arabia had taken place at a time when the energy situation was again one of the main preoccupations of national governments and international institu­ tions. In that connection, he fully agreed with the Chairman's comments during the recent meeting in New Orleans on the impact of the energy situation on the overall international economic and financial situation. The questions of the price and the adequacy of the volume of oil available to consuming countries should be examined not only in the context of the interests of oil producers but also in the light of the long-term con­ sequences for the equilibrium of the world economy. The role of Saudi Arabia in smoothing out fluctuations that did not reflect the evolution of conditions of supply and demand in the real economy should be fully recognized, and recent statements by the authorities on the need for a degree of price stability in the long run underscored the importance that they attached to maintaining orderly conditions in the energy markets. The authorities' responsible approach to the problem of the inter­ national supply and price of oil was reflected in their approach to domestic economic policy, Mr. MentrS de Loye said. A first assessment of the achievements under the Second Development Plan indicated that the efforts that had been made to promote the growth of non-oil GDP had been active and had met with a large measure of success. The Third Development Plan was aimed at diversifying the economy, an objective that had been made possible by the successful emphasis on infrastructure development under the previous plan. The new plan correctly concentrated on heavy and light industry and agriculture to ensure the success of the present process of asset transformation from oil and oil-related wealth into a productive sector based on nondepletable resources. It was well known that reducing a country's dependency on oil was a difficult task that could be carried out only in the medium and long run. In that context, Mr. Jalal had wisely underscored the constraints facing the authorities in establishing a more viable and balanced economic base. The constraints were clearly not of a financial character; the main one had to do with the labor force. The wish of the authorities to prevent a further increase in the inflow of foreign labor could have some undesirable effects on the economy's absorptive capacity and could cause inflationary pressures to intensify, particularly because the success in reducing the excess liquidity in the economy apparently had been due in part to the evolution of the balance of payments. It would be useful to receive further infor­ mation on recent developments with respect to the balance of payments.

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Government spending during the period of the new development plan would be around SRls 800 billion in real terms, which implied that the pressures on the real economy would remain intense, Mr. Mentr6 de Loye went on. At the same time, the gradual emergence of a strong private sector would be conducive to some competition in the hiring of skilled labor, and the cost of the subsidization program designed to promote the competitiveness of new industry might absorb a growing share of budget resources. On the whole, therefore, during the period of the new develop­ ment plan the authorities would have to face the delicate problem of allocating labor and domestic financial resources between the government and private sectors. As a result, it would probably be difficult to achieve in the coming period the 15.9 per cent rate of growth of real non-oil GDP that had been recorded in the period of the Second Development Plan. Mr. Jalal had suggested that the real rate of growth in the future might decline somewhat, and any further information on the actual and likely rates of growth of non-oil private and public GDP under the Second and Third Development Plans would be helpful. Saudi Arabia's management of its considerable assets had clearly not been a source of instability in the International monetary system, Mr. Mentre de Loye considered; on the contrary, the Government's policies had contributed to the international adjustment process. The Government's contribution to financing the balance of payments deficits of the develop­ ing countries should be fully recognized. However, the likely evolution of the world economy during the coming several years would increase the international responsibility of surplus countries, particularly Saudi Arabia. Greater involvement by Saudi Arabia in world monetary affairs, particularly in recycling and the evolution of the role of various reserve currencies was desirable, and, in that context, the recent close relation­ ship between Saudi Arabia and the Fund was a very positive sign. The policy of the authorities on the international use of the Saudi Arabian riyal seemed to have become somewhat more restrictive in the recent past; in the long run, the authorities might conclude that, given the weight of Saudi Arabia in monetary affairs, they should accept a broader inter­ national role for the Saudi Arabian riyal. Mr. Yeganeh commented that the development of Saudi Arabia's economy was of special interest to the members of his constituency, some of which were oil producers themselves, and most of which had very close ties with the Saudi Arabian Government, whose prudent, realistic, and successful handling of the economy was certainly welcome. The economy was obviously heavily dependent upon its oil wealth: the oil sector constituted 57 per cent of GDP and accounted for nearly all of the commodity exports and 91 per cent of government revenues. The multiplier effect of the oil receipts on income meant that the dependence on oil was even greater than those figures implied. As Mr. Jalal had wisely emphasized, Mr. Yeganeh said, the receipts derived from the oil sector could not be considered as income. Rather, they represented the transformation of real assets into financial assets.

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Hence, it would be misleading to compare the GNP of Saudi Arabia with the GNP of other countries; the major part of Saudi Arabia's GNP represented the stock of its wealth, while in other countries GNP usually represented the income created by the use of various factors of production. He fully agreed with Mr. Jalal that, in circumstances such as those in Saudi Arabia, a government should reduce the rate of transformation of wealth unless there were appropriate opportunities for investment abroad. Saudi Arabia accounted for 15 per cent of world oil production and around one third of OPEC exports, and its present level of oil production, around 9.5 million barrels a day, brought in revenue that was far in excess of the country's financial requirements. To reduce the dependence on the oil sector and to use the oil resources to diversify the economy, the Government had embarked upon a schedule of heavy development expenditure. The recently completed Second Five-Year Development Plan had involved public sector expenditures of approximately $200 billion, primarily to construct the infrastructure to serve as the basis for productive investment and diver­ sification. The Third Five-Year Development Plan, which had just begun, would involve public expenditures of around $235 billion, with an appro­ priate emphasis on investment in the productive sector, especially Industry. In addition, there had been substantial investment by the private sector, and it was likely to increase. For some time, the absorption of the sizable investments and of other expenditures had placed a considerable strain on infrastructure, supplies of goods and services, and labor availability, thereby causing a high rate of inflation, Mr. Yeganeh noted. The authorities had succeeded in breaking many of the bottlenecks and in slowing the expansion of the economy to a manageable level by expanding the infrastructure, increasing domestic production and imports, using expatriate labor, and reducing the rate of growth of the money supply, credit expansion, and government expenditure, thereby bringing the GNP deflator down from 60 per cent in 1974 to 7 per cent in 1979. The program of heavy investments had led to a high rate of economic growth in the non-oil sector for a number of years, Mr. Yeganeh observed. However, as the basis of the economy had widened, the rate of growth had declined from 20 per cent in 1975 to 13 per cent in 1978, which was of course still very high. The rate of expansion of the economy as a whole during the coming five years was expected to be 35 per cent, while the GNP of the non-oil sector was expected to increase from SRls 135 billion to SRls 182 billion. Despite the heavy investment in the productive sector, the rate of growth of the non-oil sector was projected to decline to less than 7 per cent. The major issue in the investment field was efficiency. The capital/output ratio during the coming period would probably be around 20:1, which was quite high. Since labor and other factors of production were in short supply in Saudi Arabia, the efficiency of investment should be carefully examined, especially as the investments, after their completion, would involve considerable operating expenditure and would constitute an important drain on resources.

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The authorities, Mr. Yeganeh went on, fully understood the implica­ tions of the labor situation in Saudi Arabia, and they had wisely stressed the need to increase the productivity of the present labor force, rather than continuing to rely on a further inflow of expatriate labor. However, given the expected high level of investment, there was some doubt whether the demand for labor could be restrained. For instance, in the manufac­ turing sector the Government planned to make $60 billion in investments in the coming period, while the private sector would probably make invest­ ments of its own, and the number of workers was expected to increase only by 60,000 persons. The authorities expected the demand for labor in the construction sector to decline, but the ambitious investment plans would probably involve considerable construction activity and an increase in the demand for labor, rather than a decrease. Hence, labor would likely continue to be in short supply and would probably contribute to infla­ tionary pressures, which would also be intensified by the rising prices for imported capital goods and services. It would therefore probably be difficult to achieve a low rate of inflation in coming years. Saudi Arabia, Mr. Yeganeh commented, had made a highly commendable contribution both to short-term and to longer-term structural adjustment. The country continued to produce more oil than it needed for its own use; it had refrained from achieving adjustment by decreasing the level of oil production. Continued production to meet the consumption needs of other countries represented a considerable sacrifice for Saudi Arabia, and the consuming countries should rapidly proceed with efforts to con­ serve energy and to develop alternative energy sources. The fact that Saudi Arabia continued to sell its oil at a price that was below the world average underscored the contribution to the international economy that the country had been making. The contribution had also taken the forms of an increase in the country's domestic absorptive capacity, sub­ stantial investment abroad, and financial assistance to developing coun­ tries, thereby causing the current account surplus of Saudi Arabia to fall from $24 billion in 1974 to $3 billion in 1978. The current account surplus had risen in 1979 and would continue rising during 1980 as a result of the increased oil prices and oil exports, but much of the oil receipts would be absorbed by the rapid expansion of the domestic economy. The continuing current account surpluses in coming years would have to be invested abroad, and some of them could be rechanneled to developing countries through recycling and other measures. There was considerable room for major private sector financial institutions and the international organizations to play an important role in recycling. The Government had already made a substantial contribution through the OPEC Fund for International Development, which had substantially increased its resources and had become a permanent development body; through it and other arrange­ ments Saudi Arabia's assistance to developing countries had risen to $3.5-4.0 billion per year, which constituted a high percentage of GNP. Mr. Kharmawan considered that in his opening statement Mr. Jalal had underscored the main problems and challenges facing the economy of Saudi Arabia. The country had understandably become the envy of many

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because of the enormous inflow of resources but, as Mr. Jalal had empha­ sized, the money flowing into Saudi Arabia did not represent income, but rather a conversion of one kind of capital— namely, oil— into another kind of capital— namely, money. If a country like Saudi Arabia was to continue to help meet the energy needs of the world, the authorities had to make certain that oil was transformed into a nondepletable asset; to that end, the money flowing into Saudi Arabia had to be transformed into self-perpetuating resources to ensure the future prosperity of the country, a task that clearly was not easy. The authorities had wisely planned the growth of industry— to a limited extent, because of the natural limita­ tions on industrial development in Saudi Arabia— agriculture, and social services. The authorities had been highly successful in their efforts to manage the economy, Mr. Kharmawan continued. In the first planning period there had been some overheating as a result of sizable investments to which the incomplete infrastructure was not fully adapted, but the supply bottle­ necks had been corrected fairly promptly and the inflationary pressures had been further slowed by restraining public investment and improving the supply situation. The non-oil portion of the economy was fairly well balanced, and internal price stability had been basically achieved. Because of the transformation of oil into money, the external position had of course been quite strong, and the rate of economic growth since 1975, which had averaged 16 per cent, was certainly enviable. The author­ ities were to be commended for having achieved very rapid growth together with price stability. The labor problem was real but should not be exaggerated, Mr. Kharmawan remarked. Unlike most other developing countries, which faced balance of payments constraints and emphasized labor-intensive investment, Saudi Arabia had a strong external position and was able to make considerable capital-intensive investments. The extent of capital-intensive investment in infrastructure had diminished in recent months, but capital-intensive projects could be chosen for the manufacturing sector. The authorities had already begun to strengthen the education system to encourage skilled labor, and they could consider intensifying the training and general education of Saudi Arabian citizens. Saudi Arabia was in a better posi­ tion than many other developing countries to encourage domestic knowledge of science and technology, subjects that had to be mastered if countries hoped to make their economies more independent of outside factors than hitherto. Developing countries had to create a core of native scientists who were capable of making the best possible use of imported technology. Saudi Arabia was one of the few developing countries that was capable of establishing a center for scientific education which could benefit Saudi Arabia and other developing countries. Once Saudi Arabia had established its industrial and agricultural structures, Mr. Kharmawan continued, it would be in a good position to transform its depletable capital resource, oil, into self-perpetuating resources, thereby enabling the authorities to promote the prosperity of

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the entire population. Saudi Arabia was also In a position eventually to show the world how an effective welfare state could be established, managed, and financed. The Government should be able to develop an adequate productive base for social expenditures and Income distribution which would benefit all of the Saudi Arabian people. The Government had provided subsidies to certain sectors, Mr. Kharmawan said, and the staff considered that they should be temporary. In principle, subsidies constituted a burden on the budget and, for the sake of the most efficient allocation of resources, should be reduced and eliminated over time. However, for countries like Saudi Arabia that were able to afford them, subsidies were a useful means of redistributing income and wealth. The principle that subsidies per se were Inappropriate was not valid in all circumstances. The so-called private balance of payments in Saudi Arabia was natu­ rally in deficit, Mr. Kharmawan observed. As long as the depletable resource of the country was still being transformed into self-perpetuating resources, the deficit of the private balance of payments should not be worrying; after all, the country could easily afford to finance the deficit. Saudi Arabia was to be highly commended for having been willing to meet the oil supply needs of developed and developing countries, Mr. Kharmawan said, and for having favored moderate prices. Unfortun­ ately, as Mr. Al-Eyd had emphasized, the price restraint that had been shown by Saudi Arabia had not been translated into lower prices for consumers. In that connection, the governments of the relevant consuming countries should take steps to ensure that consumers— rather than a small group of entrepreneurs— benefited from Saudi Arabia's moderate price position. The authorities were also to be highly commended for their policies on the investment of their reserves, Mr. Kharmawan continued; they had not resorted to diversification that would upset the exchange markets. Other countries, however, had taken insufficient steps to control infla­ tion and to prevent the erosion of the value of Saudi Arabia's reserves; if other countries wished to agree on working arrangements with the oil producers, including Saudi Arabia, they would have to meet Saudi Arabia's legitimate requirements with respect to the level of production, pricing, and investment of reserves. Further serious examination was needed to improve the performance of the international monetary system in general, and of the price performance of industrial countries in particular. The Government was in the process of diversifying the economy, Mr. Kharmawan noted, but the final objectives of the effort were unclear to him. Presumably the relatively small size of the domestic market would require Saudi Arabia eventually to export manufactures, in which event it would be essential for the country to find markets abroad.

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Saudi Arabia had been playing an important role in the field of development assistance, Mr. Kharmawan stated, something for which the developing countries were certainly very grateful. While recycling would benefit a number of developing countries, it woul.d not solve the main problem facing Saudi Arabia, as it would not help to transform the coun­ try's depletable resource into self-perpetuating resources. Saudi Arabia would earn some interest on the resources that it recycled, but it could make a return on other investments. Mr. Syvrud said that he generally agreed with the staff appraisal of the successful economic and financial management of the Saudi Arabian economy. The authorities had been particularly successful in gaining effective control of the growth of money, credit, and public sector expen­ diture, thereby reducing the rate of inflation to moderate proportions. In addition, they had succeeded in recording high rates of growth of per capita GNP and an average rate of growth of the non-oil sector of almost 16 per cent. The emphasis under the Third Five-Year Development Plan had correctly been placed on achieving continued expansion of the country's absorptive capacity. The shortage of trained indigenous labor constituted a constraint on Saudi Arabia's economic development, Mr. Syvrud noted, and, as Mr. Al-Eyd had mentioned, it could not be dealt with as easily or as quickly as the other bottlenecks. The Government would have to remain steadfastly committed to the effective training and use of all its labor resources in coming years. Another problem area was the planning process, which could be tightened, and the implementation of plans, which should be monitored more closely than hitherto to avoid costly delays and mistakes in bringing major projects on stream. Furthermore, continued effective management of domestic and import demand was needed to permit the spending levels nec­ essary for the Third Development Plan to be reached without intensifying economic strains and imbalances. Given the experience of the recent past, he was confident that the problems that he had mentioned would be effec­ tively dealt with. The authorities, Mr. Syvrud commented, had shown a significant sense of responsibility to the world economic community through their positive efforts to maintain orderly conditions in the international oil markets and through their program of foreign aid. As a major surplus country, Saudi Arabia shared with other surplus countries an increasing responsi­ bility for maintaining a sound world economy in the coming period. Mr. Schneider said that Mr. Jalal's presentation of the Saudi Arabian view on the role of oil in the economy had helped Executive Directors to comprehend the Government's economic policy objectives. He agreed with Mr. Jalal that exhausted oil reserves should be compensated by non-oil income-generating investments and any other investments that would increase domestic productive capacity.

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In the light of the general economic outlook for Saudi Arabia, Mr. Schneider continued, he agreed with the staff appraisal, especially the conclusion that in setting its policies on the level of oil production and the price of oil, Saudi Arabia had acted in a very responsible way by keeping in mind the longer-term effects of oil-related developments on the rest of the world. In the field of investment expenditure, he agreed with Mr. Jalal that a shift toward a well-established non-oil economic base would constitute the most significant stage in the effort to create a self-sustaining economy. The figures in Tables 1 and 3 of Mr. Jalal's statement on government spending were quite large for any country, Mr. Schneider remarked, but the relative absorptive capacity of the Saudi economy was extraordinary. The projections for the non-oil productive sectors were promising, and, together with the complementary efforts to increase labor productivity and to meet the country's requirements in the field of education, they suggested that considerable progress would probably be made by the end of the Third Five-Year Plan period. The employment figures and GDP estimates for 1979/80 and 1984/85 clearly showed that considerable improvement in labor productivity was expected in all sectors. If the expected improvement actually occurred, it would significantly contribute to the achievement of the Government's policy aims. He was concerned about two aspects of the fiscal policy, Mr. Schneider said. First, he doubted whether the increased ceiling on authorized expenditures was in line with the additional oil revenue in 1979/80. Second, the limits on foreign manpower might not be in line with the probable demand for skilled labor. The domestic inflationary pressures had been dramatically reduced, but the factors that he had mentioned should be carefully examined lest they adversely affect the growth rate. He agreed with the staff, Mr. Schneider commented, that, for the time being, the rate of growth of money and quasi-money was reasonable, but that the effect of possible further increases in oil prices and Income should be taken into consideration. As to the management of the official foreign reserves, he had noted with satisfaction that the authorities were mindful of the needs of the international community. Maintaining stability in the exchange markets as far as possible was certainly in the interests of both Saudi Arabia and the rest of the Fund membership. Finally, the country's bilateral development assistance policy was commendable; the Saudi Fund for Development was clearly beneficial to individual developing countries and to the region as a whole. Mr. Laske considered that the authorities were to be commended for the successful formulation and implementation of their economic policies. The main signs of success were the elimination of most of the severe bottlenecks that had characterized the economy as recently as 1976-77, the decline in the rate of inflation, and the decrease in the previously rapid rate of expansion of domestic liquidity. The policy shift that had been made was sensible, commendable, and clearly successful. The recent

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emphasis on growth— which had been particularly successful in the non-oil sector— and stability was certainly welcome; it would benefit both Saudi Arabia and the international economy and should be maintained in the com­ ing period. He harbored some doubts, Mr. Laske continued, whether the under­ standably ambitious development objectives under the Third Five-Year Development Plan could be achieved without endangering the positive results that had been recently recorded. The shortage of trained labor was clearly the main obstacle to stepping up the development effort in Saudi Arabia. The authorities were understandably concerned about the large number of expatriate workers, although there was no doubt that they had helped in crucial areas, namely, the building of the infrastructure in general, and the Improvement of the transportation system in particular. Since the construction of the infrastructure base had been practically completed, the authorities had decided to give the highest priority to the development of the manufacturing sector; at the same time, they wished to avoid increasing the size of the expatriate labor force, an objective that would probably be difficult to achieve. In the circumstances, the authorities might have to review their ambitious development plans. How­ ever, they had correctly decided that increasing the emphasis on training and education was the best way to forestall the re-emergence of shortages of skilled workers, although such an effort was long run in nature and would probably not provide the increase in the number of skilled laborers that would be needed if the development effort was to be stepped up in the immediate future. It was understandable, Mr. Laske said, that at the present stage of the development of the economy the authorities wished to subsidize certain private sector operations. On the other hand, he was worried that a generous policy of subsidization might undermine the efficient use of available financial resources, and he fully agreed with the staff that subsidization of private sector operations should be maintained only as long as was needed to give the operations a good start. In the long run, the operations should be able to support themselves. The new investments in private industry were designed to broaden the productive base of the economy away from the oil sector to give the country a means of earning Income after the oil had been depleted; it was therefore essential to encourage Industries that could eventually be internationally competitive. As previous speakers had emphasized, Mr. Laske remarked, Saudi Arabia had played a vital and positive role in the fields of international cooperation and adjustment. The generous development assistance that the authorities had made available through institutions that they had estab­ lished and intended to strengthen further was particularly commendable. The Government also deserved praise for the very positive attitude that it had shown in cooperating with the Fund in providing resources under the special facilities; he hoped that the same attitude would prevail in the future, when the Fund would need to replenish its resources.

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Mr. Bulra commented that, as Saudi Arabia was the world's largest oil exporter and derived most of Its fiscal Income from oil revenues, there was an understandable tendency to discuss developments In the coun­ try only in terms of oil, without adequately considering other aspects of the economy. Mr. Jalal had wisely underscored the substantial difference between growth of output derived from a sustainable increase In produc­ tion, and growth that resulted from a transformation of a stock of oil into other assets; and he underscored the special responsibilities of the authorities of oil exporting countries, particularly the very large ones such as Saudi Arabia, which could expand domestic absorptive capacity at a rate that was far less than the rate at which oil could be produced and external revenues could be generated. As Mr. Jalal had mentioned, Mr. Buira said, international cooperation was needed both to preserve the value of the oil-generated assets and to provide them with a real rate of return, so that their value would not be less than the present discounted value of oil in the ground. That point was well taken, but international cooperation was also needed to prevent the oil exporters' surpluses from exerting an undesired contractionary influence on the level of world economic activity, a result that would follow if the surpluses were, not recycled to deficit oil importing coun­ tries. There was a clear need to develop new forms of international cooperation that would meet the requirements of individual oil surplus and deficit countries, and of the international economy as a whole and, to that end, the Fund could play an important role. The Saudi Arabian authorities were clearly willing to contribute to the search for ways to improve international cooperation. The increase in financial resources available to Saudi Arabia since 1974, Mr. Buira noted, had permitted it to embark upon a very ambitious program of construction of ports, roads, railways, airports, housing, and substantial new health and education facilities. In recent months the authorities had initiated a process of diversification consistent with the country's comparative advantages and with regional specialization; the diversification program was being made in conjunction with an effort to preserve the particular culture and religion of Saudi Arabia. Major projects in the fields of transportation and other infrastruc­ ture had been completed under the Second Development Plan, Mr. Buira remarked, and the emphasis under the Third Development Plan was on the development of non-oil industries, including heavy and light industries, and agriculture, with a view to establishing a viable industrial and agricultural base to achieve a more diversified economy. The new efforts should result in much higher employment and should provide a more perma­ nent economic base for the future. The authorities, Mr. Buira went on, felt that, given the present large proportion of expatriate labor— around 42 per cent of total labor— it would be unwise to sustain an inflow of foreign labor at the same rate as in the past, and with the completion of major construction work

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on infrastructure the objective should be achievable. Nevertheless, the authorities should be aware that, in the short run, the policy of reduc­ ing the inflow of expatriate labor might limit the possibilities for rapid growth and for domestic absorption of oil revenues and could undermine the fight against inflation. The authorities intended to increase sub­ stantially the productivity of Saudi Arabian nationals through important additional efforts in education and vocational training and by increasing the capital stock available to them. As a result of the Government's willingness to produce oil in response to the demand of the international community, Mr. Buira said, and despite the continued large foreign assistance program and private capital exports, a substantial balance of payments surplus was expected on the basis of the present level of oil production; the actual surplus might well be larger than was now forecast. Although Saudi Arabia was expanding its imports and its absorptive capacity at a rapid pace, large external surpluses could be reasonably expected during the coming years. The authorities were to be commended for their very successful eco­ nomic and financial management of the economy, Mr. Buira considered. In recent years they achieved both high rates of growth and financial stability. The elimination of bottlenecks and the introduction of appro­ priate monetary and fiscal policies had significantly contributed to the stability. He hoped that the authorities would be successful in the second stage of development, when they planned to increase the emphasis on industry and agriculture and to decrease the emphasis on construction and infrastructure projects. The international community should respond in a positive manner to Saudi Arabia's effort to sustain oil production at levels that greatly exceeded its need for revenue by providing it with adequate investment outlets and by developing mechanisms for recycling the surpluses in a way that would preserve their value and assure a positive rate of return. Mr. Nana-Sinkam remarked that analysis of the Saudi Arabian economy usually centered on oil and petrodollars. The staff report provided an opportunity to examine the working of the non-oil sector, which had clearly performed remarkably well in recent months, when the average real rate of growth had reached 15.9 per cent. The rapid growth was traceable to the high level of aggregate demand resulting from strong consumer demand and vigorous investment activity in both the public and private sectors. In the public sector, the authorities had wisely emphasized establishing the basic infrastructure and indispensable social services, while the emphasis in the private sector had been on housing, manufactur­ ing, and services. Financial resources had not constituted a constraint on development in Saudi Arabia, but the shortage of both skilled and unskilled labor had constituted a serious restraint, and the importation of labor had become an important social issue. In addition, there were strong underlying inflationary pressures, although the restricted demand management policies that had been adopted in 1976-77 had largely succeeded in keeping the pressures under check. The authorities' intention of main­ taining the counterinflation policies under the Third Development Plan was very welcome.

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In formulating the new development plan, Mr. Nana-Sinkam noted, the authorities had clearly been aware of the urgent need to broaden the absorptive capacity of the economy, and they had wisely decided to shift the emphasis from investment in infrastructure to investment in the productive sectors. There was widespread recognition that Saudi Arabia should make every effort to minimize its dependence on foreign labor. The domestic private sector should be encouraged through government sub­ sidies and protection, and improving the well-being of the Saudi Arabian people should be the major objective of government economic and social policies, but the staff had correctly concluded that efficient resource allocation should always be the main guiding principle, and that measures should be taken to ensure the international competitiveness of Saudi Arabian goods in the long run. In the fiscal field, Mr. Nana-Sinkam continued, the level of govern­ ment spending had been very high, especially during the first two years of the Second Development Plan when the ratio of government net expendi­ ture to non-oil GDP had risen from 54 per cent to 89 per cent. After the emergence of strong inflationary pressures in 1976, the rate of growth of government expenditure had been significantly reduced. Saudi Arabia had enjoyed comfortable budget surpluses in recent years, except in 1977/78 and 1978/79. The small deficit that had been recorded in 1977/78 had widened to SRls 16.5 billion in 1978/79, but a substantial surplus was expected in 1979/80. The Government had maintained a strongly expansionary monetary policy in 1975/76 and 1976/77, when the supply of money had grown by 75 per cent and 53 per cent, respectively, Mr. Nana-Sinkam went on. The adverse effect of the excess liquidity in the economy had led the authorities to adopt a restrictive policy, the positive effects of which were now evident. The authorities' intention of maintaining the restrictive policy in the coining period was welcome. Externally, Mr. Nana-Sinkam remarked, Saudi Arabia had enjoyed a very comfortable current account surplus position in recent years. The surplus had sharply decreased in 1978 but was estimated at $14.5 billion in 1979 and was expected to be larger in 1980. As previous speakers had correctly emphasized, Saudi Arabia's development assistance record was exemplary: total foreign aid was estimated at $3-4 billion a year since 1975 and had been mostly in the form of grants and concessional loans. His countries were deeply grateful for the assistance and hoped that the authorities would further diversify the recipients. Mr. Caranicas remarked that, like other oil producing countries, Saudi Arabia had experienced a very large Increase in available resources since 1974. The case of Saudi Arabia was unusual in the sense that its resources had been used with remarkable skill and efficiency to develop the physical and social infrastructure and to improve the non-oil produc­ tive sector. When inflationary pressures had started to build up, the authorities had demonstrated a commendable capacity to respond quickly; they had appropriately slowed the rate of expansion of domestic demand and had succeeded in easing the supply constraints.

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At the same time, Mr. Caranicas continued, the Government had made an outstanding contribution to the international adjustment process and to the stability of the world economy by rapidly reducing the current account surplus after 1974, providing substantial assistance to other developing countries, maintaining a prudent policy of international reserve management, and playing an important moderating role in the determination of oil supply conditions. The staff had underscored the country's contributions in the appraisal by noting that "To a consider­ able extent these surpluses result from Saudi Arabia's willingness to produce oil in response to foreign demand and severe adverse effects on the international economy would be caused by attempting to eliminate these surpluses through a reduction in oil production." The outcome of the most recent ministerial meeting of the OECD underscored the respon­ sible role that Saudi Arabia had played within OPEC, especially in moderating the rate of increase of the price of oil. The recent increase in the price of oil was further bolstering Saudi Arabia's current account position, Mr. Caranicas remarked. The reabsorp­ tion of the oil surplus would not be accomplished as easily in the coming period as it had been in the period after 1974, as various domestic con­ straints required the authorities to be cautious in expanding absorptive capacity while maintaining financial stability. The Third Five-Year Development Plan seemed to offer an adequate framework for continuing the development of the economic base by appropriately shifting priorities in the direction of the productive sectors. Beneficial effects could also be expected from continued attention to the development of financial markets in the light of the role that Saudi Arabia was playing in the international process of financial intermediation. During the meeting of the Interim Committee in Hamburg, Mr. Caranicas recalled, there had been widespread agreement that the Fund should play a larger role in recycling. Accordingly, the Fund should increase both its financial resources and its lending. As the Managing Director had stated in a speech to the Council of Foreign Relations in May 1980, "The Fund must, if need be, be prepared to engage directly in recycling activ­ ities proper, i.e., borrow funds from countries in a position to lend them." There had been a number of press reports that Saudi Arabia had agreed in principle to lend bilaterally to the Fund; such a move would certainly be welcome and commendable. His authorities were confident that Saudi Arabia would be able to continue to contribute to the recycling process and to the maintenance of orderly conditions in the oil market. The authorities' skillful management of the economy was evident in the impressive deceleration in the rate of growth of domestic liquidity, from 74 per cent to 50 per cent within three years, Mr. Caranicas com­ mented. Other evidence was the dramatic reduction in the rate of infla­ tion from 60 per cent to only 7 per cent. Finally, as Mr. Kharmawan had noted, the Saudi Arabians had drawn on their impressive achievements of the past in various scientific fields in rapidly absorbing new technolog­ ical developments.

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Mr. Gabriel-Peffa said that he agreed with the staff appraisal. Pre­ vious speakers had appropriately emphasized the success of the internal development policy and the positive role that Saudi Arabia had played in the international economy. The Government should be commended for the contribution it had made to enhancing the stability of the international markets and to Increasing the cooperation between developed and developing countries. Mr. Lang remarked that he too felt that the authorities should be commended for the outstanding growth performance, the impressive foreign aid record, and the effort to bring stability to the oil market. He agreed with the staff appraisal and had no difficulty with the Govern­ ment's policy stance. The authorities should be encouraged to increase the level of direct investment of their balance of payments surpluses, as opposed to investment through financial intermediaries. Such an approach was warranted in the light of the problems some commercial banks were likely to have in maintaining prudent capital/asset ratios during the coming two or three years, especially in view of the large amounts that would have to be recycled. Mr. GutiSrrez stated that he broadly agreed with the staff appraisal. Saudi Arabia had made an important contribution to the international adjustment process through concessional loans to developing countries, large loans to the Fund, and a reserve management policy that had per­ mitted the country to play a significant and positive role in the inter­ national financial markets. Moreover, the Government had maintained a substantial aid program and had made a further contribution through the implicit subsidy to oil consumers in the form of lower prices than those charged by other oil producers. Obviously, one could have hoped that most of the subsidy would have been directed toward developing countries to help them to solve the structural problems that high oil prices posed for them, but that was of course the donor's decision. The authorities were to be commended on their considerable cooperation, and they should be encouraged to continue sharing their wealth with other countries in the coming period. During the previous several years, Mr. Gutierrez noted, the author­ ities had successfully promoted economic diversification, achieved a high rate of growth in the non-oil sector, developed and consolidated the infrastructural base needed for further expansion, and freed the economy of bottlenecks by eliminating constraints on the flow of imports. In addition, they had introduced cautious monetary and fiscal policies that had caused an impressive decline in the rate of inflation. The recent shift in emphasis under the investment policy away from infrastructure and toward productive activities and human capital was welcome. However, the continued use of subsidies to encourage private investment in the non-oil sector involved the potential danger of resource misallocation, which would undermine the main objective of efficient asset transforma­ tion; he fully shared the staff views and endorsed the staff recommenda­ tions on the subsidies.

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He agreed with Mr. Jalal on the appropriate way of measuring the GNP of economies that exploited a depletable resource, Mr. GutlSrrez remarked. Preservation of the country's wealth represented the main instrument for achieving a sustainable level of GNP in the years to come. Given the present difficulties in preserving the wealth, and in the light of the outlook for the international economy, the authorities should speed up the development program, which would require a more rapid expansion of the economy's absorptive capacity, something that would benefit both the Saudi Arabian economy and the international adjustment process. The staff representative from the Middle Eastern Department said that there was no evidence of slack developing in the size of the balance of payments deficit of the private sector. The increase in government expenditure toward the end of the previous fiscal year and the level of expenditure under the budget for 1980/81 indicated a continuation of the expansionary stimulus in the economy. To a greater degree in recent months than in earlier months the balance of payments of the private sector had been affected by capital outflows. In the future the size of the deficit would also be affected by the level of remittances, which was expected to rise as a result of the planned replacement of unskilled labor by skilled, more highly paid labor. The authorities shared the concern of Executive Directors about the subsidies, the staff representative from the Middle Eastern Department commented. The authorities' concern related not so much to the consumer subsidies that had an important effect on income distribution; rather, they were concerned with important decisions that would have to be made in the coming years under the Third Development Plan as part of the effort to develop the productive base of the economy. The authorities wished to work out an investment policy that would not involve a subsidy burden for many years to come. Mr. Jalal remarked that the Executive Directors and the Managing Director had shown great understanding for the particular problems facing Saudi Arabia and other countries in a similar economic position. Saudi Arabia was a small country whose development process had been under way only 10-15 years. Participation in international fora, together with the effort to develop the domestic economy, constituted a heavy burden on the country. The authorities were still anxious to learn new skills and techniques, and to gain the experience characteristic of many other more developed countries. If in the future the authorities saw a need for more expatriate labor, Mr. Jalal said, there was room to increase the inflow; the inten­ tion, however, was to restrain the inflow, and the new development plan provided for a relatively small increase. The authorities did not wish to have more foreign labor than was warranted by the particular social conditions in Saudi Arabia. In any event, an increase in foreign labor had to be matched by an increase in government services; during the pre­ vious several years a large part of the new infrastructure and government

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services had been devoted to meeting the needs of expatriate laborers. The authorities felt obliged to provide the same services for domestic laborers as for foreign workers; differences in the services and facil­ ities could heighten social tensions. The rate of increase in the non-oil private sector for the coming year, 6.2 per cent, was considerably less than the average rate under the First Development Plan for several reasons, Mr. Jalal commented. First, there had been a shift in emphasis from construction— which had been undertaken by the private sector— to other productive sectors. Second, when the development effort had been initiated, the size of the private sector had been fairly small and there had been plenty of room for rapid growth; there was a smaller base for non-oil private sector growth in the future. Third, the new development plan concentrated on industry, agriculture, and other productive sectors that by nature did not grow as quickly as the construction sector. The various figures in the development plan were expressed in nominal terms, Mr. Jalal explained. Provision had been made for changing the figures in the budget or the plan; experience had taught the authorities the need for flexibility. The planning emphasis during the new plan period might well be revised and, since fiscal revenues were directly dependent upon oil income, changes in the budget might well occur. The role of the Saudi Arabian riyal constituted a difficult issue, Mr. Jalal remarked. Saudi Arabia was a small country, and the production of oil, although substantial, did not provide a diversified base to support an important role for the riyal as a reserve currency. There were a number of different kinds of subsidies in Saudi Arabia, Mr. Jalal explained. The generous subsidies on food helped to protect consumers from imported inflation and constituted an important mechanism for income distribution. The oil industry did not distribute income, and subsidies were an important way to distribute income to the general public. Investment subsidies had taken the form of interest-free loans to the electricity companies and guarantees on their investment returns. Similar subsidies were provided to local transportation companies. A country like Saudi Arabia, which had around 15,000 scattered villages, probably had no alternative to using subsidies to encourage domestic investment. Subsidies in the form of low-interest loans were also provided for industrial projects in the private sector and for agricultural invest­ ment, Mr. Jalal went on. In addition, there was a subsidy on government projects that were to be started in the near future in the petrochemical and other basic industries. The Government provided low-interest loans covering up to 60 per cent of the total cost of a project, thereby sub­ sidizing not only local investors, but also the foreign partners, who usually provided 50 per cent of the equity. In many countries, such arrangements might well contribute to a misallocation of resources. The

- 29 -

EBM/80/88 - 6/11/80

conditions in Saudi Arabia, however, were quite unusual: most develop­ ment projects cost three or four times more than similar projects in industrial countries, in part because most of the skilled labor was imported and commanded relatively high wages. The authorities, Mr. Jalal commented, were fully aware of the need for recycling, and they had discussed the matter extensively among them­ selves and had talked with the Managing Director and with the World Bank. They had also discussed their foreign assistance program with other international organizations, and they were reviewing their policy with a view to increasing the amount and efficiency of their assistance, probably through greater participation in existing organizations and by creating new facilities. Commenting on the question whether the authorities should undertake direct investment or bank deposits, Mr. Jalal said that, since all of the revenue coming into the country was used fairly quickly, the authori­ ties wished to keep their resources in a liquid form. Hence, they were most interested in depositing money in banks and in keeping money in maturities of no more than five years, with some exceptions, such as lending to the World Bank and other organizations. In the future, as conditions changed, the authorities' position might be altered. The authorities had gained some Important experience in combating inflation under the Second Development Plan, Mr. Jalal remarked. Indeed, the new development plan reflected a greater awareness of the need to control inflation. The Second Development Plan had emphasized expenditure and major projects and reflected little awareness of its inflationary impact. Henceforth, the authorities would keep the inflationary effect in mind when planning and implementing new programs. If the labor short­ age contributed to inflation, the authorities would take appropriate action. He strongly agreed with Mr. Kharmawan, Mr. Jalal commented, that developing countries should make every effort to improve their capacity to use new scientific and technological developments. Saudi Arabia had built some of the best universities in the region; the University of Petroleum and Minerals, a technological institute, was one of the leading educational institutions in the Middle East, and a number of its students came from industrial and other developing countries. As one speaker had implied, Mr. Jalal said, actual revenues during the coming five years were likely to exceed the level of expenditure under the Third Development Plan. He hoped that the Fund and other organizations could help to recycle the savings, thereby ensuring that the surpluses would have a favorable Impact on the world economy. Responding to a question by Mr. Deshmukh, Mr. Jalal explained that there were no fully accurate estimates of the total population of Saudi Arabia. There were, however, some Indicators that could be used to

EBM/80/88 - 6/11/80

- 30 -

estimate the likely size: there were 1 million pupils in the educational system, and the indigenous male labor force consisted of around 1.5 mil­ lion persons. Mr. Caranicas considered that the issue of the substantial profits that were made by intermediaries in the oil market was important and won­ dered whether it could not be the subject of a paper by the staff, perhaps in cooperation with other international organizations, particularly the World Bank. At the moment, there seemed to be no way of dealing with the problem. Mr. Al-Eyd said that there was no apparent solution to the problem of large profits by intermediaries. Saudi Arabia's Oil Minister had men­ tioned the problem several times in various interviews and had explained that the Saudi Arabian authorities had not seen an acceptable or practical solution. However, the matter was perhaps more within the jurisdiction of the consuming countries than the oil exporting countries. Finally, in the past the staff had recommended that the major oil producers should not permit their budget policy to be greatly influenced by the level of oil exports; the recommendation had not been made in the present staff report, and he wondered whether the staff had any new views on the problem. The staff representative from the Middle Eastern Department remarked that the authorities understood the issues Involved and that there had been no need to repeat them in the staff report under discussion. Mr. Jalal commented that oil producing countries were in an unusual position of relying almost entirely on oil revenues to finance their budget. Accordingly, if oil revenues significantly declined, oil export­ ing countries had to use their reserves or borrow in the international market, or face the necessity of a large cut in expenditures. Substantial borrowing by Saudi Arabia in the international market would of course be undesirable. The Chairman made the following summing up in concluding the discus­ sion: In discussing the staff report on the 1980 Article IV consul­ tation with Saudi Arabia, the Executive Directors very warmly commended the authorities on the recent favorable developments in the Saudi Arabian economy. The authorities have been successful in building up the infrastructure, in expanding the productive base of the economy, and in improving substantially the standard of living of the population. The elimination of supply bottlenecks, a consid­ erable inflow of foreign labor, and the application of appropriate controls on the growth of government domestic spending have permitted, inter alia, the authorities to reduce the rate of inflation in a dramatic fashion.

- 31 -

EBM/80/88 - 6/11/80

The Executive Directors noted that the external accounts had strengthened considerably in 1979 reflecting increases in oil prices, and some expansion in output; and they pointed out that the external surplus position is expected to strengthen further in 1980. The absorption of this surplus in domestic investments may be slowed partly by the authorities' intention to stabilize the size of the foreign labor force working in Saudi Arabia, and partly by the change in investment priorities in favor of the productive sectors. Directors expressed understanding of the reasons that led the author­ ities to make these changes in policy. They stressed that the authorities will have to be vigilant to avoid a resurgence of infla­ tionary pressures and sectoral bottlenecks, including labor, during the implementation of the Third Plan. The Directors appreciated that the authorities' willingness to produce oil at levels consistent with the requirements of the international economy was the main source of Saudi Arabia's external surpluses. They also noted that the external financial and oil­ pricing policies pursued by Saudi Arabia in recent years have been helpful to the functioning and the stability of the international monetary system. The Saudi authorities have collaborated signifi­ cantly in the flow of capital and aid and have pursued responsible reserve management policies. Executive Directors hoped that these policies would be continued and, in this respect, the importance of direct investment abroad was noted. Executive Directors commended Saudi Arabia for the contribu­ tions it had made to the International Monetary Fund, especially to the oil facilities and the supplementary financing facility. They stressed the importance of continued active financial collaboration with this institution.

DECISIONS TAKEN SINCE PREVOUS BOARD MEETING The following decisions were adopted by the Executive Board without meeting in the period between EBM/80/87 (6/9/80) and EBM/80/88 (6/11/80).

3.

IRAN - REPRESENTATIVE RATE FOR IRANIAN RIAL The Fund finds, after consultation with the authorities of Iran, that the representative rate for the Iranian rial under Rule 0-2(b)(iii) is its fixed relationship to the SDR. The value of other currencies will be derived daily from the SDR/rial rate and the SDR value of these currencies as determined by the Fund. (EBD/80/157, 6/5/80) Decision No. 6521-(80/88) G/S, adopted June 10, 1980

EBM/80/88 - 6/11/80

4.

-32-

MADAGASCAR - 1979 ARTICLE IV CONSULTATION - POSTPONEMENT Notwithstanding the period of three months specified in Proce­ dure II of the document entitled "Surveillance over Exchange Rate Policies" attached to Decision No. 5392-(77/63), adopted April 29, 1977, the Executive Board agrees to a further postponement of its consideration of the 1979 Article IV consultation with Madagascar until not later than July 11, 1980. (EBD/80/89, Supplement 1, 6/5/80) Decision No. 6522-(80/88), adopted June 10, 1980

5.

ST. LUCIA - ACCEPTANCE OF OBLIGATIONS OF ARTICLE VIII, SECTIONS 2, 3, and 4___________________________________ The Fund notes that St. Lucia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement as of May 30, 1980. (EBD/80/158, 6/5/80) Decision No. 6523-(80/88), adopted June 10, 1980

6.

GENERAL ARRANGEMENTS TO BORROW - ASSOCIATION OF SWITZERLAND 1. The Fund agrees to the extension of the Agreement of June 11, 1964 between the Swiss Federal Council and the International Monetary Fund until July 15, 1985, with an automatic extension from that date until October 23, 1985, provided that the Swiss Parliament decides to extend the Federal Decree entitled "Participation of Switzerland at International Monetary Measures” until October 23, 1985. 2. The Fund authorizes the Managing Director to exchange with the Ambassador of Switzerland to the United States, letters in the form attached to EBD/80/155 (Attachments I and II). (EBD/80/155, 6/4/80) Decision No. 6524-(80/88), adopted June 9, 1980

7.

RULES N-10 AND N-ll The consideration of a possible revision of Rules N-10 and N-ll, for which provision was made in paragraph 2 of the decision adopted at EBM/79/97 (6/22/79), shall be postponed for a further period of one year, and the waiver to Rule N-10 referred to in paragraph 3 of that decision shall be similarly extended. (SM/80/131, 6/3/80) Adopted June 9, 1980

- 33 -

8.

EBM/80/88 - 6/11/80

APPROVAL OF MINUTES The minutes of meetings 80/5 through 80/8 are approved. Adopted June 9, 1980

9.

EXECUTIVE BOARD TRAVEL

Travel by an Executive Director as set forth in EBAP/80/177 (6/6/80) is approved.

APPROVED:

December 24, 1980

ALAN WRIGHT Acting Secretary

EBM/80/88 - 6/11/80

- 34 -

Table 1.

ANNEX

Government Spending During the Third Plan Period 1/, 2 /

Billion riyals

3J

Percentage

Economic resource development

261.8

33.4

Human resource development

129.6

16.6

61.2

7.8

249.1

31.8

701.7

89.6

81.0

10.4

782.7

100.0

Social development Physical infrastructure Total development

Administration, subsidies, and contingency reserve

1/ In all conversions to U.S. dollars, a rate of $1 = SRls 3.32 has been used. 2/ Does not Include transfer payments, defense expenditure, and foreign aid. 3/ Estimates based on 1399/1400 prices with an allowance for inflation at the rate of 7 per cent per year for new projects.

-35-

EBM/80/88 - 6/11/80 ANNEX

Table 2.

Employment and GDP by Economic Sectors, (1399/1400 and 1404/05)

1399/1400_______ GDP Employment (million (thousands) riyals) 1/

1404/05 GDP Employment (million (thousands) riyals) 1/

Productive sectors 598.8 7.3 104.2 31.5 330.1

3,259.4 1,497.5 6,753.3 350.1 45,994.3

528.8 9.8 164.2 47.0 245.1

4,229.2 2,387.7 16,001.8 1,273.0 40,560.5

1,071.9

57,854.6

994.9

64,452.2

473.1

54,595.2

466.1

60,223.0

310.6 214.6 34.8 482.3 321.0

17,447.1 20,227.5 13,144.2 5,257.3 21,036.4

339.6 274.6 44.8 505.3 421.0

26,135.9 37,158.3 18,682.4 6,081.3 29,722.1

Services

1,363.3

77,112.5

1,585.3

117,780.0

Excluding government

1,402.3

56,076.1

1,164.3

88,057.9

2,435.2

134,967.1

2,580.2

182,232.2

Agriculture Mining Manufacturing Utilities Construction Subtotal Productive sectors Excluding agriculture Services sectors Trade Transport Finance 2/ Other services Government 3/ Subtotal

Total Non-oil sector Oil sector

1J _2/ 3/

36.0

In 1399/1400 prices. Includes real estate. Does not Include the noncivilian sector

46.0

EBM/80/88 - 6/11/80

Table 3.

- 36 -

ANNEX

Budget for Fiscal Year 1400/01

Million riyals

Percentage

Public administration

15,799

6

Defense

55,982

23

Security

12,963

5

Labor force

22,604

9

Social development

12,334

5

Transportation and communication

32,097

12

Economic resources

19,371

8

Infrastructure

11,764

5

Municipal services

19,745

8

Development Funds

19,500

8

Local subsidy + foreign subsidy + emergencies

23,261

9

Sector

EBM/80/88 - 6/11/80

- 37 -

ANNEX Table 4.

Balance of Payments Summary, 1976-80 (In billions of U.S. dollars)

1976

1. Merchandise trade, f.o.b.

1978

1977

1979 (Prov.)

1980 (Proj.)

25.1

25.9

16.4

32.9

56.6

35.4

40.1

36.9

57.7

89.0

0. 1

0.1

0. 1

0. 1

0. 1

-10.4

-14.3

-20.6

-25.0

-32.5

-10.8

13.1

-17.5

-21.0

-32.9

4.7

6.1

6.4

7.7

9.6

Investment income

(2.9)

(4.0)

(4.3)

(4.9)

(5.9)

Oil sector (bunkers)

(0.7)

(0.7)

(0.5)

(0.9)

(1.5)

Other

(1-1)

(1.4)

(1.6)

(1-9)

(2.2)

Oil exports

—

Other exports Imports 2. Services and private transfers Receipts

-15.5

-19.2

-23.9

-28.7

-42.3

Freight and insurance

(-2.1)

(-2.5)

(-3.5)

(-4.2)

(-5.5)

Oil sector investment income

(-2.2)

(-2.4)

(-1.2)

(-2.7)

(-4.0)

Other private services

(-2.7)

(-3.8)

(-6.3)

(-7.5)

(-10.5)

Other government services (including grants)

(-7.5)

(-9.0) (-11.1)

(-12.2)

(-19.0)

Private transfers

(-1.0)

(-1.5)

(-1.8)

(-2.1)

(-3.3)

14.3

12.8

-1.1

11.9

23.7

-14.3

-12.8

1.1

-11.9

-23.7

Oil sector capital transactions (net) (inflow +)

-0.6

0.4

0. 1

-1.9

0.7

Other private capital (net) including errors and omissions (outflow +)

-1.2

-2.0

0.5

-6.9

-7.4

Commercial banks (net) (increase - )

-0.5

-0.7

-0.6

-1.3

-2.0

-12.0

-10.5

1.3

-1.8

-15.0

Payment s

Current account balance (1+2) Capital movements and reserves (increases in foreign assets -)

Official capital and reserves (increase -)

\J

-

Oil exports, f.o.b. less bunker oil; the 1980 forecast is based on estimates for the first half of the year, plus the forecast for the second half on the basis of an assumed production of 8.5 million barrels a day and a price of $28 per barrel.