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government maintains price controls for basic utilities, energy, and
many agricultural products. Water and electricity, for most consumers,
are subsidized, with consumer prices often well below the cost of
production, especially for potable water. Petroleum products and
feedstocks for petrochemical industries are provided at below world
market pricing, reflecting discounts for efficiencies in production and
transport. The government maintains that local petroleum prices that are
below world market averages (e.g., a gallon of gasoline sells for $.60
at the pump) reflect the low costs of production. Nonetheless, the
effect of these low prices is that petroleum products, including many
petrochemicals, are sold in Saudi Arabia at prices that effectively
eliminate competing imports. Agricultural subsidies were dramatically
curtailed in the early 1990s and have been reduced in the two most
recent budgets, in line with the government's deficit reduction plans
and its goal to reduce water consumption. The Saudi Arabian Government
imposes few taxes, relying on oil revenues, customs duties, and
licensing fees for most government revenue. Saudi Arabian nationals pay
no income tax, but are obliged to pay "zakat," a 2.5 percent
Islamic assessment based on net wealth (not income). Zakat is designed
to support the Islamic community (e.g., to pay for hospitals, schools,
support for the indigent). Foreign companies and self-employed
foreigners pay an income tax, but do not pay zakat. Business income tax
rates range from 25 percent on annual profits of less than $26,667 to a
maximum rate of 45 percent for profits of more than $266,667. Some
foreign investors avoid taxation either in part or totally, by taking
advantage of various investment incentives, such as 10-year tax holidays
for investments in approved projects meeting specified requirements.
Import tariffs are generally 12 percent ad valorem (CIF), except on
products imported from other member states of the Gulf Cooperation
Council, which pay no tariff. Certain specified essential commodities
(e.g., defense purchases) are not subject to custom duties. Saudi Arabia
also levies a maximum 20 percent tariff on products that compete with
local "infant" industries. 4. Debt Management Policies Saudi
Arabia is a net creditor in world financial markets. SAMA manages
foreign assets of over $50 billion in its issues and banking
departments, and an estimated $20 billion for autonomous government
institutions, including the Saudi Pension Fund, the Saudi Fund for
Development, and the General Organization for Social Insurance. Under
SAMA's rules, about $17 billion of the $50 billion in foreign assets is
designated to guarantee the Saudi Riyal. In addition to overseas assets
managed by SAMA, the commercial banking system has an estimated net
foreign asset position of $12.0 billion. Foreign debt, which stood at a
level of $1.8 billion at the beginning of 1995, was retired in May of
that year. Domestic banks, Saudi ARAMCO, and other state-owned
enterprises, however, have overseas liabilities. Government domestic
borrowing has a short history in Saudi Arabia. The government began
borrowing to finance budget deficits in 1987 by selling government
development bonds having two-to-five year maturities. After the massive
defense expenditures of the 1991 Gulf War, the government expanded its
borrowing by signing loan syndications with international and domestic
banks, and by introducing treasury bills. This debt, owed almost
entirely to domestic creditors, such as autonomous government
institutions, commercial banks, and individuals, ballooned to about $120
billion by mid-1998, or near the GDP level. In addition, the government
issued a series of bonds to farmers and some other private sector
creditors (mainly contractors) for past due amounts. Paying down this
debt is now a focus of government concern.
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