Binzaid, Badr Abdulaziz A (2019) Empirical Evidence of the Effectiveness of Fiscal and Monetary Policies on Saudi Arabia GDP Sectors. PhD thesis, Victoria University.

Abstract

The economic framework of the Kingdom of Saudi Arabia (KSA) presents unique challenges because of its absence of taxation and peg to the United States dollar (USD). Accordingly, it is important for policy-makers to examine the effectiveness of monetary and fiscal policy to achieve their economic objectives. Specifically, this research examines the relative effectiveness of monetary and fiscal policies on Saudi Arabian total gross domestic product (GDP), oil GDP and non-oil GDP. The data employed included GDP, money supply, interest rates, commercial bank claims on the private sector, inflation, merchandise exports, merchandise imports, government expenditure and government revenues. Annual data for the period 1980–2017 were employed for the analysis, obtained from the Saudi Arabian Monetary Authority (SAMA) and the General Authority for Statistics (GASTAT). An autoregressive distributed lag (ARDL) bounds test was estimated to investigate the effectiveness of monetary and fiscal policies on Saudi GDP sectors, in the short-term and long-term. Several robustness tests were also employed. The estimation results for total GDP and oil GDP shared similarities. For instance, fiscal policy, represented by government expenditure and revenues, were shown to have a positive and significant impact in the long-term. In the short run, however, fiscal policy via government revenue was indeterminate for both total GDP and oil GDP, while government expenditure had a significant negative impact on total GDP. For oil GDP, government expenditure had a significant and positive effect in the first lag but a negative and significant impact in the second lag. For monetary policy, the estimation results demonstrated that the interest rate, commercial bank claims on the private sector and inflation had a significant positive effect in the long-term on total and oil GDP. However, in the short-term, monetary policy produced a significant negative impact only for inflation; for the other variables, it was shown to be indeterminate. In addition, money supply had a significant negative effect on oil GDP but an insignificant negative effect for total GDP in the long-term, while it was indeterminate in the short-term. Openness to the world was represented by merchandise exports and merchandise imports. The former had a positive and significant effect for the long-term and the short-term, while the latter was shown to have a significant negative effect in the long-term as well as in the first lag of the short-term; however, the second lag of the short-term was positive and significant. For fiscal policy, the estimation results for non-oil GDP had negative and significant effects in the long-term for both government expenditure and government revenues. However, in the short-term, government revenues had significant and negative effects in the first lag but significant and positive effects in the second lag, while government expenditure was indeterminate. With respect to monetary policy, money supply had a significant and positive impact for both the long-term and the short-term in the first lag, but a negative and significant effect in the second lag. For the variables interest rates and commercial bank claims, the results were positive and insignificant in the long-term, and indeterminate in the short-term. In addition, inflation was shown to have a significant and negative effect in both the long and short-term. With respect to openness to the world, merchandise exports and imports were found to have positive and significant effects on non-oil GDP in the long-term, and the short-term for merchandise exports; however, merchandise imports were indeterminate in the short-term. The potential policy implications arising from the study include the following. First, fiscal policy should be enhanced to engender a significant impact in the short-term; for instance, fiscal policy should centre on attracting more private investors to mitigate crowding-out effect outcomes related to non-oil GDP. Second, further enhancement of monetary policy tools to assist the Saudi government in achieving economic diversity given their impact on non-oil GDP is required. Third, refining the use of fiscal policy to impact non-oil GDP is also required. This would contribute to achieving the goals of Vision 2030, and could take the form of the adoption of a modern taxation system that could provide a more stable source of income to help insulate the KSA from plunging oil prices. Finally, greater consideration should be given to the adoption of monetary policy tools that comply with Islamic principles. This could assist the government to assert greater control over its monetary policy.

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