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SAUDI ARABIA
Saudi Arabia's economy is 62.8 per cent free,
according to our 2008 assessment, which makes it the world's 60th freest
economy. Its overall score is 1.2 percentage points higher than last year,
reflecting improved scores in four of the 10 economic freedoms. Saudi
Arabia is ranked 6th out of 17 countries in the Middle East/North Africa
region, and its overall score is above the regional average.
Saudi Arabia scores very well in fiscal freedom, labor
freedom, and business freedom. Except for a mandatory 2.5 per cent Islamic
zakat charitable contribution, the government imposes no taxes on personal
or corporate income. The labor market is flexible. Saudi Arabia is weak in
investment freedom, financial freedom, and freedom from corruption. As in
many other Gulf oil states, high government spending is supported by a
large state-owned energy sector. The monarchy has begun to liberalise
aspects of foreign investment, but immense barriers remain in effect.
Financial markets are distorted by government influence, and the legal
system is similarly subject to political influence.
Background
Saudi Arabia, the largest Persian Gulf oil kingdom,
has been ruled as an absolute monarchy by the Saud dynasty ever since
1932, when it was founded by King Abdul Aziz al-Saud. Crown Prince
Abdullah officially became monarch in August 2005 following the death of
King Fahd. Saudi Arabia possesses roughly one-quarter of the world's oil
reserves and, as the world's leading oil producer and exporter, plays a
dominant role in the Organisation of Petroleum Exporting Countries.
Accession to the World Trade Organisation in 2005 has led to gradual
economic reforms, and the government has sought to attract foreign
investment and promote diversification. The government's efforts to
integrate Saudi Arabia more fully into the world economy have been opposed
by Islamic extremists who have targeted Saudi oil facilities and foreign
workers for terrorist attacks.
Business freedom - 72.5%
The overall freedom to start, operate, and close a
business is relatively well protected by Saudi Arabia's regulatory
environment. Starting a business takes an average of 15 days, compared to
the world average of 43 days. Obtaining a business license takes less than
the world average of 19 procedures and 234 days. Bankruptcy proceedings
are relatively straightforward.
Trade freedom - 76.8%
Saudi Arabia's weighted average tariff rate was 4.1
per cent in 2005. Import bans, export controls, service market access
barriers, non-transparent regulation and import licensing, domestic bias
in government procurement, and weak protection of intellectual property
rights add to the cost of trade. An additional 15 percentage points is
deducted from Saudi Arabia's trade freedom score to account for non-tariff
barriers.
Fiscal freedom - 99.7%
Saudi Arabia has no income tax or corporate tax for
Saudi nationals or citizens of the Gulf Cooperation Council (GCC).
However, a fixed 2.5 per cent religious tax (zakat) mandated by Islamic
law is applied to Saudi and GCC individuals and corporations. Saudi Arabia
has no value-added tax (VAT) or estate tax. In the most recent year,
overall tax revenue as a percentage of GDP was 5.1 per cent.
Freedom from Government - 69.1%
Total government expenditures, including consumption
and transfer payments, are high. In the most recent year, government
spending equaled 32.1 per cent of GDP. State participation in the economy
remains substantial.
Monetary freedom - 76.7%
Inflation is low, averaging 1.7 per cent between 2004
and 2006. Relatively stable prices explain most of the monetary freedom
score. Islamic law forbids direct price controls, but the government
influences prices across the economy through regulation, extensive
subsidies, and state-owned enterprises and utilities, and a government
purchasing agency controls prices for wheat and barley. An additional 15
percentage points is deducted from Saudi Arabia's monetary freedom score
to account for policies that distort domestic prices.
Investment freedom - 30%
Many sectors are still off-limits. Foreign investment
projects require a license from the government, and most are joint
ventures. Residents may hold foreign exchange accounts, but approval is
required for non-residents. The SAGIA is the sole investment approval
authority . In accordance with WTO accession, the government has
heightened the allowable foreign equity in telecommunications and several
other sectors. Regulations clarifying and liberalising investment in
insurance and tourism were issued in 2003 and 2006, respectively. There
are no controls or restrictions on payments and transfers. Credit
operations must be approved.
Financial freedom ñ 40%
Financial markets are constrained by government
influence, Islamic financial principles, and barriers to foreign
participation, and services are insufficient. Banking-sector health is
largely tied to oil earnings. Regulatory, supervisory, and accounting
standards are generally consistent with international norms. Foreign
ownership of financial institutions is limited. Of the 11 domestic
commercial banks, four are locally owned, and two are Islamic banks. Seven
banks are dual ventures with foreigners. The first Western bank began
operations in 2005. At the end of 2006, there were 10 foreign branches.
The government owns a majority of the largest domestic bank and 34 per
cent of the majority foreign-owned Gulf International Bank and offers
subsidised credit to preferred sectors. All insurance companies must be
locally registered and must operate according to the cooperative insurance
principle. Insurance has undergone some liberalisation. Capital markets
are relatively well developed, and commercial banks may conduct
transactions.
Property rights - 50%
Investors question the ability of Saudi courts to
enforce contracts efficiently. The court system is slow, non-transparent,
and influenced by the ruling elite. Laws on intellectual property rights
are being revised to bring them in line with the WTO's Trade-Related
Aspects of Intellectual Property Rights (TRIPS) agreement, but enforcement
is weak, and procedures are inconsistent.
Freedom from corruption - 33%
Corruption is perceived as significant. Saudi Arabia
ranks 70th out of 163 countries in Transparency International's Corruption
Perceptions Index for 2006. Foreign firms view corruption as an obstacle
to investment. Government procurement is often cited, as is de facto
protection of businesses in which senior officials or elite individuals
have a stake. Bribes, often disguised as "commissions," are
reportedly commonplace.
Labour Freedom - 80.6%
Flexible employment regulations enhance overall
productivity growth and employment opportunities. The non-salary cost of
employing a worker is low, and dismissing a redundant employee is not
difficult. Regulations relating to the number of work hours are relatively
flexible.
— Courtesy: The Heritage Foundation
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