Dr. Albassam is a professor in the Department of Public Administration at King Saud University, Saudi Arabia.
Government management of public funds plays a major role in a country’s development process. A well-managed financial system supports public-service quality and equity, enhances the efficiency and effectiveness of public programs and government work, and limits corruption. In addition, international donors (e.g., the IMF and World Bank) seek the best use of the financial and nonfinancial aid they provide to countries in need; thus, they support effective management of public funds. A budgeting system is considered a keystone for any public financial system. One could argue that, public financial management (PFM) — a government’s revenues, expenditures and budgeting process — is the primary driver of all activities in a given country, regardless of its political, cultural and economic systems. Additionally, the manner in which the public financial system is managed has a significant impact on all sectors — public, private and nonprofit.
Many studies have explored the PFM concept, introducing recommendations and models in an effort to identify the best ones. A conclusion that all these studies have in common is that each country must consider its own structure and its needs in designing a plan to manage its funds.
Saudi Arabia introduced Vision 2030 as a strategic plan to enhance and improve the country’s economic performance. Although it contains promising goals — economic diversification and support for public-sector productivity — it has been argued that the absence of a high-quality public financial system can impede their achievement. Thus, this paper addresses the following questions: 1) How different/similar are the current government financial reforms, as part of the kingdom’s Vision 2030, compared to previous ones? 2) Is there a relationship between the quality of the public financial system and the attainment of the Vision 2030 goals? 3) What are the changes that must take place in order for the vision to be achieved?
PUBLIC FINANCIAL MANAGEMENT
Public funding of projects, programs, construction and capital investments is the main driver of any economy, especially in developing countries, where the private-sector share of gross domestic product (GDP) is low. The duties of any government, regardless of economic system, include managing public finance, collecting revenues and allocating expenditures. Thus, improving the structure and management of the public financial system not only influences the public sector, in which regulations and laws are adopted by the government, but also supports the private sector.
Managing public finance is particularly important for developing nations, which tend to rely heavily on very few sources of income, particularly in a rentier state. At the same time, improving the quality of management in the public sector (planning, accurate analysis of public needs and demands, and prioritization of projects and programs) has been introduced as an important tool for providing high-quality public programs, economic diversification and sustainable growth.1 In developing countries, where the level of public participation (e.g., democracy) is low and the governing process is lacking in maturity, these factors affect efficiency and effectiveness and lead to misuse and waste of public funds.2 After reviewing emerging economies’ attempts to reform their public financial systems, Jack Diamond argues that certain elements are essential for reform to be successful:
First, any existing program structure must be set in the wider context of strategic budget planning and medium-term budget framework. Second, this typically involves redesigning and refining existing program structure. Third, existing budget-costing systems and associated skills will probably need to be improved. Fourth, and perhaps most difficult, a new system of accountability and budget incentives needs to be introduced.3
Public Finance in Saudi Arabia
Saudi Arabia, one of the world’s largest producers of oil, is part of the G-20, the top 20 economies in the world. It has the largest economy in the Middle East and North Africa (MENA) region, playing an important role in shaping the region and the world, both economically and politically.
The Saudi economy depends heavily on income from oil and gas and, consequently, is strongly influenced by price fluctuations. Oil revenue accounted for 89.70-91.78 percent of the total revenue from 2006 to 2017.4 The private sector’s contribution to the GDP is low compared to other G-20 nations. For example, domestic credit to the private sector as a percentage of GDP in 2016 was as follows: Saudi Arabia, 58 percent; European Union, 95.3 percent; United States, 192.7 percent; OECD members, 147.7 percent; the world average, 132.4 percent. 5Consequently, according to the Saudi Arabian Monetary Agency (SAMA), in 2017, at constant prices, the private sector accounted for only 39.45 percent of Saudi GDP.6 The country’s high dependence on oil income also has a significant effect on other economic indicators, such as diversification and unemployment. The unemployment rate among Saudis rose from 11.8 percent to 12.8 percent in 2018 when the price of oil was high.7 These numbers highlight the significant impact of oil income on all economic activities.
In 2017, the oil sector accounted for 43.3 percent of GDP, while the government sector accounted for 16.9 percent, and the private sector 39.45 percent, at constant prices.8 These figures have fluctuated over time, depending on the market price of oil. Additionally, the government sector in Saudi Arabia plays a major role in directing the nation’s economic and administrative activities.
A high-quality PFM contributes to the stability of government spending, especially in rentier states, since major national resources come from only a few sources, which are sometimes inconsistent. In Saudi Arabia, Capital expenditures fluctuated from 13.17 percent in 2004 (average oil price $36.68) to 30.15 percent in 2009 (average oil price $53.61) and 16.15 percent in 2016 (average oil price $38.13).9 These numbers illustrate the dependence of government spending on oil income as well as the absence of a long-term plan to stabilize government spending irrespective of oil-price fluctuations. As a result, the government changes public policies (e.g., education and health) every time oil prices change, making economic and social policies unstable and inconsistent.
Since the 1970s, the Saudi government has adopted market-based reforms such as privatization, outsourcing and public-private partnerships (PPP).10 Although the results vary among sectors and services, the outcomes of these reforms did not meet expectations. The public sector’s productivity and government effectiveness are still low,11 economic diversification has not been achieved,12 and the economy still depends heavily on oil income.13
The Saudi public financial system (PFS) is characterized by centralization; the Ministry of Finance has full control over all budgeting processes, with little participation from other government agencies. The people have no voice in controlling or monitoring government spending. The Council of Ministers has the final say on budgeting (e.g., allocations and revenues). Yet, other government agencies, such as the Shura Council and General Auditing Bureau, exercise only a supervisory role in the budgeting process. Accordingly, the budget scores very low on many indices that measure participation and transparency, such as the Open Budget Index, where it has scored 0-1 out of 100 since the OBI was launched in 2006.14 Thus, the new financial reforms (e.g., Vision 2030) include many projects such as a financial-sector development plan, a privatization program, and a fiscal-balance program where such programs promise to achieve what the previous ones have not.
INSTITUTIONALISM AND PFM
Institutions play a critical role in shaping public services, managing organizations, and implementing public-policy implementation and achieving outcomes. In addition, an institution’s structure and design influence, and are influenced by, individuals’ behavior and organizations’ performance; both contribute to the success or failure of government approaches.15 With regard to PFM, understanding how institutions work, as well as the relationship between individuals and institutions, will contribute to the high-quality management of public finance.16
March and Olsen argue that older thinking in political science relies heavily on the effect of politics on individual behavior and society, while neglecting the role of individual behavior in a political institution’s performance and structure. They argue that, under new institutionalism, “The state is not only affected by society but also affects it.”17 In addition, according to new institutionalists, an institution’s structure and design, and the relationship between them, help to explain the political process as well as an organization’s processes and outcomes do.18
Furthermore, there is a two-way relationship between governance and the structure and design of institutions. Governance is a means of including all social and political actors in the decision-making process, while institutions can be seen as deciding the rules of the game, controlling how the governance process takes place.19 According to Bell, modern governance largely occurs in and through institutions.20 Additionally, both governance and new institutionalism assert the importance of both formal and informal arrangements in shaping the political process and government work.21 Increasing the quality of institutions is an important step in taking advantage of state resources, enhancing the effectiveness and efficiency of the public sector, and diversifying the economy.22 Institutional quality has a critical influence on the governing processes of developing countries. In rentier states, for example, income flows from one or a very few sources, which makes the economy vulnerable to economic and political shocks.23 Many studies of developing countries have concluded that good-governance practices and the well-designed management of public financial systems tend to enhance resistance to crises and increase economic stability.24 Aidt, Toke, Dutta, and Sena believe that the quality of institutions drives PFM and budget processes “sound budget institutions are vital for a country’s ability to design and implement effective fiscal policies. Such institutions help ensure government accountability and prevent the leakage of public funds, increase efficiency of scarce public resources, and improve the prospects of maintaining fiscal stability and meeting social development needs.”25
Thus, the structure of, and interaction between, institutions play important roles in the quality of PFM and economic development. To manage public finance effectively, governments need to consider human behavior (behavioral economics), socioeconomic characteristics and culture in reforming its economy.
THE CASE OF SAUDI ARABIA
The public financial system is the main engine of the economy, especially in developing countries. In addition, rentier states such as Saudi Arabia suffer from the “resource curse,” a complex phenomenon in which, through several economic, institutional, and political-economy transmission mechanisms, resource abundance may translate into stagnation, waste and conflict.26 The resource curse influences the quality of institutions and sustainable development in Saudi Arabia. Hélis and Dabán Sánchez assert that PFM reform needs to be based on an institutional framework and aimed at “avoiding the development of a rentier mentality.” 27
A recent study by Albassam on the efficiency and effectiveness of the public budgeting system in Saudi Arabia shows that outdated techniques and procedures, as well as low-quality institutional structures, have all resulted in the misuse and misallocation of public funds. Ultimately, this has produced a failure to achieve the objectives of the strategic plan, Vision 2030.28 Similarly, in a study of the budgeting system, Joharji and Willoughby conclude that dependence on the current system in preparation and implementation causes flaws in the budgeting system and contributes to the low quality of public services and increased corruption. They add that relying on oil revenues significantly leads to the inflation of expenditures in the long term and difficulty in obtaining accurate revenue forecasts, due to fluctuations in world oil prices.29
Albassam studied economic diversification in Saudi Arabia since the first development plan in 1970. His study concluded that economic diversification as a main goal for Saudi Arabia had yet to be achieved, because of a lack of operational planning and ill-managed public finance. He suggested that enhancing transparency, accountability and responsibility, and having clear measurements and goals are the factors necessary for diversifying the Saudi economy. 30
In studying the public financial control process in the Saudi financial system, Alzeban and Sawan found an institutional-structural problem: many public organizations either do not have an internal audit function or have one that has not been activated.31 Furthermore, upon investigating the influence of government economic policies in Saudi Arabia, Albatel concluded that the fiscal and monetary policies have caused a “crowding out” phenomenon. Government agencies manipulate and control major economic activities (e.g., oil and gas), reducing the ability of the private sector to grow and be competitive with government and semi-government agencies in carrying out public and private projects.32 Thus, the privatization and PPP plans that have been adopted by the government have not been effective in generating a diversified economy.
Additionally, the Saudi sovereign wealth fund (SSWF) and SAMA both manage the assets of the government. While SAMA manages foreign exchange reserves (among other functions), SSWF tends to be more of a wealth-managing agency for government reserves and budget surpluses. However, the SSWF was established 40 years ago and, in contrast to similar SWFs, has not played a major role in supporting the Saudi economy or the political agenda of the government.33 According to Alsweilem, the absence of good-governance practices — such as transparency — and the lack of a long-term plan regarding financing and investment caused the SSWF to be less effective than similar SWFs in supporting the budget deficit, for example. 34
According to the World Bank, governance indicators as a measure of institutional quality show that Saudi Arabia has yet to reach a good-governance level in any of the six indicators (voice and accountability, rule of law, regulatory quality, political stability and absence of violence, government effectiveness, and control of corruption).35 Considering these results and the performance of the Saudi economy, many studies have argued that the low quality of institutions has a negative influence on the achievement of the goals of many development36 and diversification plans the government has adopted since 1970.37 It is clear that a good plan will not be effective unless it is accompanied by a suitable framework, including high-quality institutions and good-governance practices.
Another sign of unstable and inconsistent government work is the performance of Saudi Arabia in the economic-complexity index (ECI), a measure of its level of knowledge-based economy and diversification. Economic complexity can be defined as “the composition of a country’s productive output and represents the structures that emerge to hold and combine knowledge.”38 Thus, ECI measures “the knowledge intensity of an economy by considering the knowledge intensity of the products it exports.”39
Economic complexity is based on this thesis: economies that generate products requiring advanced technology and a high level of knowledge have greater potential for economic growth. These economies are also thought to be more resistant to crises than those that produce raw materials like natural gas and oil. Additionally, economic complexity leads to high levels of diversification and development. Thus, considering the economic-complexity index, the Saudi economy has yet to reach an acceptable and consistent knowledge base or economic diversification, the main goals of the government’s plans, including Vision 2030.
This analysis confirms previous studies and indicators that have shown the importance of good governance to successful financial reform. Lack of success in the past has been connected to low-quality institutions, and the absence of accountability, transparency, and public participation in the budgeting process.
Many public financial reforms (PFRs) applied in Saudi Arabia from the 1970s to the present have fallen short. For example, a main objective of the first development (reform) plan in Saudi Arabia, launched in 1970, was to diversify the economy through supporting non-oil industries such as petrochemicals. However, after more than 40 years, oil is still the country’s main source of income. In 2000, the government established the General Authority of Investment (GAI) as part of a law aimed at diversifying the economy by attracting direct and non-direct investment and supporting privatization. After 18 years, the share of the nongovernmental sector is still below the target set at the time the investment law was issued: in 2017, the private- sector share of GDP was 39.45 percent, compared to the target of 50 percent set for 10 years after the launch of the 2000 plan.40
On the other hand, attempts have been made by the government to fight corruption, including the Anticorruption Law of 2011 and the application, in 2014, of the Government Finance Statistics Manual, a budgeting technique issued by the IMF and adopted by many countries. However, none of these efforts has succeeded in increasing public-sector productivity, reducing corruption or enhancing public-finance performance.41,42,43
VISION 2030, A New Wave of Reform
In April 2016, the Saudi government announced Vision 2030, a strategic plan including measures to improve and develop the public-finance sector. Vision 2030, as the newest wave of reforms, also contains programs for privatization and fiscal balance, aimed at improving the efficiency and effectiveness of the financial sector (both private and public) in order to advance efficient and effective government.44 While this is considered progress by the government, these programs face challenges such as the low quality of the government institutions and semi-governmental agencies responsible for applying the plan.
Although it has been more than three years since the new public-finance reforms were launched contained in Vision 2030, the Saudi economy is still struggling with high unemployment (12.8 percent in 2018),45 slow economic growth despite the high price of oil,46 and no clear sign of reaching the government’s economic-diversification objective.47 Several reasons have been identified, including the lack of public-sector productivity and the failure to adopt good-governance practices, such as transparency and accountability.48
Many studies have concluded that the challenges include the lack of modernization, low institutional quality,49 and the application of market-based reforms without taking into account the country’s organizational and institutional structure.50 In addition, when we examine the management style for handling public finance and budgeting, it is understandable why the economic goals have not been achieved. One reason is the absence of a suitable framework for fixing fundamental defects such as unclear procedures, outdated regulations, the absence of efficient public participation (democracy) in running the state’s affairs, and a lack of accountability and transparency in the governing process.
Conceiving and implementing a plan for managing the public financial system is considered to be the most effective way to achieve sustainable and comprehensive development. The Saudi government must adopt comprehensive improvements in education, institutional development (government agencies), and basic fiscal reforms. In addition, Ramady argues that “any analysis of the Saudi Arabian economy must examine in depth Saudi budgetary and public-sector financing and how surpluses and deficits are invested and utilized.”51 Furthermore, after stating that the budget institution in Saudi Arabia is ill-managed and does not effectively utilize oil revenues, Eid thinks that creating an independent agency for approving and controlling the budgeting process and applying tools, such as taxes, to increase revenues from sources other than oil (economic diversification), are important ways to enhance effectiveness and efficiency in the Saudi financial system.52
Even though the Saudi government has launched a new strategic plan, institutional quality has not improved sufficiently for it to work. Many plans and programs have been adopted in the past regarding economic and financial development, including those in 1970, 1992, 2000, 2007 and 2016, but none has succeeded due to a lack of institutional quality and an inefficient and ineffective budgeting system. Thus, developing the current public-financing system and improving institutional quality are vital steps for enhancing government productivity and reaching economic and political stability. In addition, reform in Saudi Arabia must be gradual, in line with the prevailing political and economic environment.
Thus, compared to prescriptions for countries at the same stage of development, many suggestions could contribute to the development of an effective PFM system in Saudi Arabia. Institutional design and structure are the key elements in PFM, especially in developing countries. Public financial reform will not be successful or sustainable unless institutional changes and reforms are implemented in government agencies and the government work process. Thus, accountability in government work, increased application of the rule of law, and enhanced budget transparency should be adopted. Second, increasing public participation in the financial system and decentralizing it would enable local governments to manage their budgets and increase efficiency and effectiveness. Third, adopting a strong monitoring system, whereby elected and independent council (parliament) plays a role in controlling government spending, would result in effective government programs that lead to a successful Vison 2030.
Furthermore, for a well-managed public financial system to develop, other systems must be reformed, such as the civil service, government procurement and budgeting. As all such systems are interconnected, reform must also be inclusive. Likewise, investment in human capital, through support for educational quality, is key to managing public finance and executing government plans.
Having a long-term financial plan that addresses issues such as setting a targeted inflation rate and deciding on the amount of future capital investment, is another necessary step toward sustainable development. A knowledge-based economy must also be at the core of any government plan for building a diversified economy. Finally, and most important, developing a system for planning and programming budget system is essential to well-managed public finance, as it ensures control of the government budget.
1 Jack Diamond, From Program to Performance Budgeting: The Challenge for Emerging Economies. (International Monetary Fund, 2003).
2 Salvatore Schiavo-Campo and Hazel M. McFerson. Public management in global perspective (Routledge, 2014).
3Diamond, From Program, 1.
4Fifty-Third Annual Report, Saudi Arabian Monetary Agency (SAMA), last modified November 27, 2018, http://www.sama.gov.sa/en-US/EconomicReports/AnnualReport/Fifty%20Third….
5 World Bank. (2017). Domestic Credit to Private Sector (% of GDP). Last Modified November 7, 2017, https://data.worldbank.org/indicator/FS.AST.PRVT.GD.Z.
10 Mohamed A. Ramady, The Saudi Arabian economy: Policies, achievements, and challenges, (Springer Science & Business Media, 2010).
11Worldwide Governance Indicators (WGI), World Bank, last modified May 15, 2018, http://info.worldbank. org/governance/wgi/#home.
12 Bassam A. Albassam, “Economic diversification in Saudi Arabia: Myth or reality?.” Resources Policy 44 (2015): 112-117.
13 Abdulaziz Aldukheil, Saudi government revenues and expenditures: a financial crisis in the making. (Springer, 2013).
14International Budget Partnership (IBP), Country Report-Saudi Arabia, last modified Jun 12, 2018, https://www.internationalbudget.org/opening-budgets/open-budget-initiat….
15 Douglas North, Institutions, Institutional Change and Economic Performance (2nd ed.), (Cambridge University Press, 2009).
16 Bassam Albassam, Governance and economic growth during times of crisis: The influence of the global economic crisis on the relationship between governance and economic growth, (Lap Lambert Academic Publishing, 2013).
17 James G. March, and Johan P. Olsen, “The New Institutionalism: Organizational Factors in Political Life.” American Political Science Review 78, no. 3 (1984): 734-749, 738.
18 Eirik Furubot and Richter Richer, Institutions and economic theory: The contribution of the new institutional economics, (2nd ed. University of Michigan Press, 2005).
19 Gerry Stoker, “Governance as theory: five propositions,” International social science journal 50, no. 155 (1998): 17-28.
20 Stephen Bell, Institutionalism: Old and new, last modified November 17, 2011, http://espace.library.uq.edu. au/eserv.php?pid=UQ:9699&dsID=Institutionalism.pdf.
21 Torgeir Nyen and Jan-Erik Lane,“Towards an Economic Organization Theory of the State.”Statsvetens Kaplig I Tidskrift 95, no.4 (1992): 359-375.
22Jean-Luc Hélis, and Teresa Dabán Sánchez, A Public Financial Management Framework for ResourcesProducing Countries, (International Monetary Fund, 2010).
24 Aart Kraay and Daniel Kaufmann. Growth without governance, (The World Bank, 2002).
25 Toke Aidt, Jayasri Dutta, and Vania Sena. “Governance regimes, corruption and growth: Theory and evidence,” Journal of Comparative Economics 36, no. 2 (2008): 195-220, 198.
26 Hélis and Dabán Sánchez, A Public Financial Management, 9.
27 Ibid, 14
28 Bassam Albassam,“The efficiency and effectiveness of the public budgeting system in Saudi Arabia,” Institute of Public Administration, 2017.
29 Ghazi Joharji and John Willoughby. “The Saudi Arabian budgeting system: an institutional assessment,” Public Administration and Development 34, no. 1 (2014): 63-80.
30Bassam Albassam, “Economic diversification in Saudi Arabia: Myth or reality?.” Resources Policy 44 (2015): 112-117.
31 Abdulaziz Alzeban and Nedal Sawan, “The role of internal audit function in the public sector context in Saudi Arabia,” African Journal of Business Management 7, no. 6 (2013): 443-454.
32 Abdullah Albatel, “Government budget deficits and the crowding out of private sector investment in Saudi Arabia,” Journal of King Saud University, Administrative Sciences, 17, (2005): 1-28.
33 Khalid Alsweilem“A Stable and Efficient Fiscal Framework for Saudi Arabia: The Role of Sovereign Funds in Decoupling Spending from Oil Revenue and Creating a Permanent Source of Income,” Belfer Center for Science and International Affairs and Center for International Development: Harvard Kennedy School, 2015.
35 World Bank, Worldwide Governance Indicators.
36 Albassam, The Efficiency.
37 Joharji and Willoughby, The Saudi Arabian.
38 Birol Erkan and Elif Yildirimci. “Economic Complexity and Export Competitiveness: The Case of Turkey.” Procedia-Social and Behavioral Sciences 195 (2015): 524-533, 524.
39 Economic Complexity Rankings (ECI), Observatory of Economic Complexity, last modified December 21, 2018, https://atlas.media.mit.edu/en/profile/country/sau/.
40 Saudi Arabian Monetary Agency, Fifty-Third Report.
41 Saudi Arabia 2018 Article IV consultation-press release: And staff report, International Monetary Fund, last modified December 12, 2018, https://www.imf.org/en/Publications/CR/Issues/2018/08/24/Saudi-Arabia20….
42 The Middle East and North Africa Risks Landscape, World Economic Forum, last modified April 4, 2019, http://www3.weforum.org/docs/WEF_MENA_Risks_Briefing_Paper.pdf .
43 Saad A. Alshahrani, and Ali J. Alsadiq, Economic growth and government spending in Saudi Arabia: An empirical investigation, (International Monetary Fund, 2014).
44Saudi Vision 2030, Financial Sector Development Program, last modified December 12, 2018, 12/12/2018 from https://vision2030.gov.sa/en/FSDP.
45 Saudi Arabian Monetary Agency, Fifty-Third Report.
46 IMF, Saudi Arabia 2018.
47 World Economic Forum, The Middle East.
48 Albassam, The Efficiency.
49 IMF, Saudi Arabia 2018.
50 Muhammad Biygautane, Paula Gerber, and Graeme Hodge. “The evolution of administrative systems in Kuwait, Saudi Arabia, and Qatar: the challenge of implementing market based reforms.” Digest of Middle East Studies 26, no. 1 (2017): 97-126.
51 Ramady, The Saudi Arabian Economy, 42.
52 Eid, Ashraf Galal. “Budgetary institutions, fiscal policy, and economic growth: the case of Saudi Arabia,” Economic Research Forum Working Paper, no. 965, (2015).
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