SAUDI CENTRAL BANK GOVERNOR MUSES ON FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 001540

SIPDIS

NEA FOR ARP

E.O. 12958: DECL: 11/20/2019
TAGS: EFIN ECON SOCI PREL SA
SUBJECT: SAUDI CENTRAL BANK GOVERNOR MUSES ON FINANCIAL
HISTORY AND GENERATIONAL CHANGES IN THE KINGDOM

Classified By: Ambassador James B. Smith, reasons 1.4 (b and d).


1. (C) Summary: Muhammed Al-Jasser, Saudi Arabia's Central
Bank Governor, recently reviewed for the Ambassador the
Kingdom's last fifty years of Saudi financial history, which
he stressed plays an important role in shaping Saudi economic
policy on issues like the dollar peg. Overspending Saudi
Arabia's initial oil boom in the 1950's halved the value of
the Riyal, a lesson that the Kingdom "has never forgotten."
Saudi Arabia also learned the importance of maintaining a
financial reserve through the oil price collapses of the
1970's and mid-1980's. Saudi Arabia has learned the hard way
that it needs to use any additional revenue from oil price
rises to bolster its cushion and pay down debt, while
investing in long-term development projects at home.
Al-Jasser said these lessons have helped the Kingdom weather
last year's financial crisis. He also said his generation
feels very lucky it had the chance to study abroad and
participate in so much of the Kingdom's development, which
has taken it from being "just like Yemen" to a prosperous
country in only 35 years. This account offers some
interesting insights into the world view of senior Saudi
economic policy makers. End Summary.


2. (C) Saudi Central Bank (SAMA) Governor Muhammed Suleiman
Al-Jasser briefed the Ambassador on Saudi Arabia's financial
history over the last fifty years, which he said has a
powerful influence on how the Kingdom reacted to last year's
financial crisis. He noted that many people in the world
think that Saudi Arabia is just like Switzerland. While this
is a tremendous compliment on one hand, it does not
accurately reflect the reality that in the 1970's, Saudi
Arabia was "much like Yemen." As an illustration of the
enormous transformation the Kingdom has undergone over the
last 35 years, he cited his own vivid memories of growing up
without electricity, running water and indoor plumbing, while
contrasting this to the view of skyscrapers from his office
window.

History of SAMA:
- - - - - - - - -


3. (C) Al-Jasser said that the Kingdom has learned, after
several painful experiences, the importance of maintaining
fiscal discipline. SAMA was founded in 1952 to bring some
regularity to the Kingdom's finances. Al-Jasser said its
first five years were traumatic, as "imprudent fiscal policy
was followed by imprudent monetary policy." While King
Abdulaziz "only spent what he had, King Saud spent more than
the income he received." The Central Bank ended up lending
increasing sums to the government to sustain high levels of
government spending. The result was that the Saudi Riyal
collapsed from 3.5 riyals per dollar to 7.5, despite being on
the gold standard. This policy began to change with the
accession of King Faisal, who brought in IMF experts who
advised SAMA not to lend to the government. Thanks in part
to the team's advice, in 1958 a law was passed that made SAMA
independent, and made the SAMA Governor the chairman of its
board, vice the Minister of Finance. (The board includes the
SAMA governor, the SAMA Vice Governor, the Minister of
Finance and three businessmen).


4. (C) Al-Jasser stressed that SAMA has never forgotten the
"horrors" of what happened in the 1950's to the Saudi Riyal.
Al-Jasser stressed that the Kingdom's culture of financial
conservatism is a result of the turmoil of the 1950's, and
continues to have an effect in making senior government
leaders very sensitive to any financial turmoil and its
effects on society.

Importance of Financial Reserves:
- - - - - - - - - - - - - - - - -


5. (C) The 1973 oil boom increased spending, but Al-Jasser
stressed that SAMA also increased its reserve cushion, as the
Kingdom's leaders did not know how long the boom was going to
last, and did not want to get caught unable to complete
development projects they had started. In an effort to make
the spending more sustainable, the Kingdom set up a number of
institutions, such as the various credit and development
funds, that continue today. As oil prices declined in the
late 1970's, Saudi Arabia dipped into its reserves,
reinforcing the lesson of the value of maintaining a cushion.
This financial cushion helped smooth out the drop in
government spending in the "devastating" oil price collapse
of 1985-7.


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6. (C) Al-Jasser noted that in only one year (2000) between
1983-2000, the Saudi Government avoided having a budget
deficit. The deficits peaked in 1987 at 25% of GDP, and much
of these deficits was financed by international lending.
Beginning in 2003, as the oil price again rose, the Saudi
Government focused on paying down its debt and rebuilding its
reserves. Thus, the Kingdom was in good shape to cope with
the financial downturn in 2007-8. Al-Jasser said that Saudi
Arabia has been practicing the "counter-cyclicality" that
many countries are now trying to pursue for years. The
problem is that it is not possible to apply in a downturn,
only in an economic upturn.

... and of Coordination with Ministry of Finance:
- - - - - - - - - - - - - - - - - - - - - - - - -


7. (C) According to Al-Jasser, one of the other lessons Saudi
Arabia has learned over the years is the importance of close
cooperation between SAMA and the Ministry of Finance. In
Saudi Arabia, fiscal policy is clearly the main driver of the
economy. The revenue the Kingdom earns from oil is the
primary determinant of money supply in the economy, as
mediated by Finance decisions on how much to spend. Monetary
policy is also somewhat "neutralized" by the hard peg to the
dollar.


8. (C) The importance of these lessons was shown last year,
as the entire globe was "close to the abyss." Al-Jasser
noted that there are a number of other countries that had
similar development profiles to Saudi Arabia in the 1960's
and 1970's, like Zimbabwe. He pointed to a Zimbabwean 150
billion dollar banknote, which was worth approximately $1.50,
as an illustration of what can go wrong in a country. He
noted that even some oil exporters have mismanaged their
development, such as Nigeria, Venezuela, and Libya.

Oil Boom Generation:
- - - - - - - - - -


9. (C) Al-Jasser commented extensively on the importance of
generational changes in Saudi Arabia. He said he was very
lucky to be part of the Oil Boom Generation, which he said
benefited from the increase in prices in 1973, which led the
"floodgates to open" in 1974 in terms of new opportunities
for Saudis to study and work abroad. This converted what had
been "a trickle" of students in the 1950's to tens of
thousands of Saudis, many of whom studied and lived for years
in the United States. Al-Jasser noted that the Oil Boom
Generation is still the biggest generation of Saudis who have
this international exposure. Al-Jasser said that his
generation tends to be proud of their achievements and that
of their country, but the overwhelming feeling is that of
having been blessed to have a chance to participate in such a
momentous time. He is still a big believer in the U.S.
education system, which he said is "the only one" in the
world that allows students to stumble or fail and still
support their development. He is delighted that King
Abdullah has resumed the flow of Saudis going abroad.

No Brain Drain:
- - - - - - - -


10. (C) Contrary to many other developing countries, Saudi
Arabia has not suffered from a brain drain from those
students who have gone abroad. Al-Jasser attributes this to
more than just strong family bonds, which are present in many
other developing countries. The main reason, he thought, is
the absence of an economic drive away from Saudi Arabia that
tends to overcome the strong attraction of family ties in
other countries. For his own generation, Al-Jasser noted
that any educated Saudi who wanted to return found a job
easily; indeed, they were in huge demand as the economy grew
rapidly. He also thought the government's behavior helps,
including the ability of commoners to approach senior members
of the ruling family and the feeling that all elements of
society, whether liberal or conservative, have access to make
their views heard. The net result is that Saudis feel a
pride in their history and regard the government as
legitimate. Al-Jasser summed it up by arguing that Saudis
come back to the Kingdom because there is hope of upward
mobility.

Islamic Banking:
- - - - - - - -


11. (C) When asked what was important to know about Islamic
Banking, Al-Jasser quipped "not much." He dismissed it as an

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effort to satisfy the emotional desire to feel closer to God
by suggesting that "God likes some transactions" and is less
supportive of others.

Comment:
- - - - -


12. (C) Al-Jasser's comments are valuable for the insight
they provide into the thinking of senior Saudi economic
policy makers. At several points in the last thirty years,
the Kingdom's financial management looked anything but stable
or on track. The comments about the importance of avoiding a
collapse in the value of the Riyal and of building up
financial reserves against the return of the day when oil
prices might not be so high are very instructive and add
perspective on issues like Saudi attitudes towards the dollar
peg. His comments about his generation are also interesting,
particularly for the sense that his generation was very
lucky, rather than entitled to its opportunities, and the
implication that successive generations of Saudis have
suffered by having less access to the rest of the world.

Bio Note:
- - - - -


13. (C) Born in 1953, the voluble and personable Al-Jasser is
proud of his long association with the United States, which
he said has often led to accusations that he is "just like an
American" within the Saudi system. He persuaded his father
in 1974 that he wanted to study medicine in Egypt. His
father, an auto dealer in Riyadh, had hoped he would follow
something more practical, but supported his plans as long as
he got on with it. Al-Jasser persuaded the Ministry of
Defense to give him a scholarship for an Egyptian university.
After one term, he decided to pursue a different degree
track in Germany ("I would have studied anything to get out
of Egypt"),which led him later to pursue training in the
U.S. He began his American academic peregrinations in
Chicago, and then proceeded through several schools, ending
up in California, graduating with his PHD from University of
California at Riverside, which had the best development
program when he was in school. He had taken a two year break
in 1981-3 to work in Riyadh for the Ministry of Finance,
which helped him focus on his PHD research areas, and allowed
him to gain his final degree in only 2 and a half years.
After finishing his PHD, he returned to Saudi for a couple of
years, and went to Washington in 1989-1995 as the Saudi
representative to the IMF, where he ended up working closely
with and living in the same neighborhood as Ibrahim Al-Assaf,
the Finance Minister. He has two daughters, the oldest of
whom is 26, and a son, who is 22 and studying at Marymount
University in the Washington area.

SMITH