A macroeconometric model of Saudi Arabia for economic stabilisation and forecasting

The purpose of this study is to construct a macroeconometric model for the Saudi Arabian economy in order to assess the effects of external shocks through such variables as the price of (oil) exports, real (oil) exports, and the price of imports. This model follows the methodology of the aggregate demand and supply. Due to the absence of interest rates, the formulation of the aggregate demand, following the monetary approach to the income determination, is done by combining the equations from the monetary sector in addition to the government and foreign sectors of the economy. The aggregate supply side of the economy is formulated by combining the equations from the oil and non-oil production sectors. The model determines the behaviours of such important endogenous variables as the real absorptive capacity, real oil and non-oil GDP, real imports, velocity of money, money supply, balance of payments, government oil and non-oil revenues, government expenditure, government deficit, and non-oil GDP and general price inflation rates. The estimated model satisfactorily simulates the reality of the economy for the estimation period of 1971-1994. This, therefore, justifies the use of the model for both multiplier and scenario analyses. The multiplier analysis evaluates the cffects of a 10% change in the price of (oil) exports, real (oil) exports, and the price of imports on the endogenous variables. The scenario analysis, however, examines the behaviours of the endogenous variables for 1999-2005 based on several scenarios on the price of (oil) exports, real (oil) exports, and the price of imports. Concentrating on three sets of scenarios corresponding to low, moderate, and high level of oil prices, our study concludes that a sound economy into the next century requires more aggressive privatisation policies. That is, the government policies should drastically limit the government expenditure and, instead, encourage the private sector to invest and participate more aggressively in the economic development projects.