A visitor to the kingdom might be startled to hear Saudis speak of a “recession” here. Non-oil growth of the gross domestic product (GDP) is proceeding at a 6 percent clip. Unemployment is nil and construction sites still appear to be eating up the desert around every major city. It hardly looks like a recession. Nevertheless, a leaner economic climate is unmistakable. Saudi and foreign contractors alike complain of a slowdown in government payments that leaves them short of cash. The private sector is pruning payrolls and expenses, and layoffs are underway at two of the country’s largest employers, Aramco and the national airline, Saudia. Demand for many key goods and services has stabilized, leaving traders in the lurch.

The real boom ended several years ago, but the adjustment to lower rates of growth has been delayed, compressed and made more painful by the Saudi government’s current revenue squeeze. Oil production, which still accounts for 75 percent of government revenue, has stabilized at around five million barrels per day (b/d) for the time being, almost half the 1981 average. Official budget figures project oil revenues at $45 billion for the fiscal year ending next April, less than half the oil revenues chalked up in 1981-1982. Even $45 billion may be optimistic, since it is based on a production level of five million b/d, and the average so far has been closer to 4.5 million b/d.

In presenting its 1982-83 budget of $75 billion, the government took pains to point out that actual spending would rise almost seven percent from 1982-83 to 1983-1984, largely because spending last year was held so far under budget. The increase is supposed to benefit nearly all aspects of the budget except subsidies on gasoline, electricity and basic commodities, which the ministry of finance is trying to cut back. Half the budget is earmarked for development projects, with $3.2 billion reserved for new projects and the rest for recurrent payments. Finance Ministry officials announced a $10 billion drawdown from the country’s foreign reserves as a means of financing the projected deficit. Recent Finance Ministry figures indicate that expenditures for the first third of this budget year -- the four Islamic months ending August 8 -- amounted to just over $20 billion, only 10 percent less in real terms than spending in the same period last year. Businessmen say the decrease has disproportionately affected contract payments. Wherever the money is going (no detailed breakdown is available), they say they are not getting it. They think that the government’s traditional fiscal caution will again hold spending below budget this year, particularly in view of lower than expected revenues and of a looming current account deficit that will also have to be financed from reserves. Saudi Arabia recorded a trade deficit in the first quarter of 1983 of $316 million, its first in many years.

One of the big family-owned conglomerates based in Jidda says that various ministries owe it $60 million, and that it had to turn to commercial bank financing for the first time since the pre-boom years. The payments slowdown has an amplifying effect: Contractors owed money are unable to pay their subcontractors and suppliers, which are then unable to make good on their letters of credit. This causes banks to clamp down on commercial lending and further restricts available cash. Much of the private sector’s wealth is abroad or tied down in illiquid assets. The construction sector has been hardest hit: contractors and suppliers of building materials and construction equipment. The construction slowdown is rippling far and wide, from the catering firms serving work camps to the agencies that supply company cars.

Government officials have repeatedly assured the public that they will cancel no major development projects, although some will be delayed or scaled back. “There are towns that require electricity, but they could do with a temporary generator for a year or two before the permanent generator is installed,” Minister of Industry and Electricity Ghazi Algosaibi said recently. “A city that needs a hospital could do with a 30-bed clinic.” He concluded that it was “a good thing to pause and go at a slower rate.” The Saline Water Conversion Corporation’s desalination and power project in the southwestern province of Asir was recently tendered for the third time, after capacities of the desalter and power plant were cut by one-third and two-thirds respectively. Projects are no longer tendered by private invitation, and are increasingly split into smaller bid packages to cut down on expensive subcontracts. This sort of maneuvering on the large state projects still to be awarded -- desalination and power plants, government housing compounds, hospitals and military facilities -- may cut as much as a billion dollars from expenditures with relatively few actual cancellations.

The showpieces of the industrialization drive -- the industrial cities of Jubayl and Yanbu&lquo; -- are taking shape more or less on schedule, with some exceptions. The residential communities planned there may be less ambitious than initially envisaged. A polyethylene complex planned for Jubayl had to be scaled down when the foreign joint venture partner, Dow Chemical, pulled out. The Public Investment Fund, the state body that is financing 60 percent of the Jubayl and Yanbu‘ heavy industry projects, is dragging its feet on two proposed lube oil refineries that applied for loans three years ago. At least one of the two, a joint venture between the state oil company Petromin and Chevron and Texaco, is likely to be dropped. Action on the other, half the size but still costing over $500 million, is hard to imagine in the current budgetary climate. A $3 billion fuel oil refinery project at Rabigh on the Red Sea coast is far behind schedule, basically for financial reasons.

The government’s main response to lower revenues has been to brake payments. This is accelerating the shakeup of the private sector that began several years ago. Scores of contracting and trading agencies that sprung up during the boom years, often based on land speculation, are folding up. These firms flourished on a diet of exorbitant profit margins and nearly insatiable consumer demand. Some have the assets and the skills to adjust to a more stable market, but many do not. Bankers and officials are seriously concerned about a wave of business failures, primarily affecting small trading operations.

One Jidda car importer gave the following illustration of how the market is, in his words, “maturing”: the Saudi car buyer in 1980 kept his car for an average of 14 months before replacing it; now he is expected to keep it for an average of 34 months. For another major import sector, building materials, the slump is well underway with the completion of major construction projects and delays in those remaining. One importer of pre-fab panels has cut prices 25 percent to stay competitive, and wonders how long he can hold out. Others who failed to anticipate the downturn are stuck with large unsold inventories.

“Trimming the fat” is now part of the business vocabulary. Expense accounts and labor costs are scrutinized. Outside consultants assess employee productivity; benefits are being cut back and layoffs are spreading. One Jidda-based contractor has slashed his work force by 40 percent over the last six months. As at Aramco and Saudia, those let go are almost invariably non-Saudis. The government appears to be relatively unconcerned about the private sector’s problems. Deputy Minister of Commerce ‘Abd al-Rahman al-Zamil said he “would love to see the Saudi business community shocked into trimming the fat, and eliminating the excesses they have in their organizations.” To hear some officials speak, the slowdown is a relief: It brings growth down to more manageable levels, furthers government hopes to “Saudize” the labor force, and helps to cultivate a “responsible” private sector.

Nevertheless, the shakeup is bound to leave scars, particularly among small businessmen and nouveau riche entrepreneurs. Businessmen speak in private about the political implications of disaffection from such quarters, who may already harbor resentments against the established merchant families on the one hand and the business interests of the royal family on the other. Certainly the payments problem has introduced new strains between the government and the private sector as a whole.

The merchant families have the clout to weather the slowdown, and may in fact consolidate their power. The rural lower class herders and peasants will, at least according to repeated official assurances, continue to receive generous cash loans and government services. The urban lower class -- drivers, office hands, craftsmen, small shopowners and the like -- may suffer some dislocation but are out of danger as long as the government remains committed to building a national labor force. Neither the very rich nor the poor are threatened. How many losers there will be in the middle depends on the direction of government spending over the years just ahead.