A Saudi Arabian economist has described how letter of credit (L/C) business has increased significantly in the kingdom this year.

According to Dr Said Al-Shaikh this is because of an increasing call on banks to finance rising private sector imports.

Import spending

Dr Said makes the point that Saudi Arabia has recorded eight years of current account surplus amounting to over US$90.7 billion in 2005 along with holdings of net foreign assets worth US$244 billion.

But by end June 2006 the rising imports bill will likely erode some of these surpluses he says unless there is a corresponding surge in exports earnings.

New L/Cs opened

One product of Saudi Arabia's rising imports bill is an increase in the value of new L/Cs opened by banks for private sector imports. This value increased by 21 per cent to 51.6 billion Saudi riyal (SR51.6 billion) during the first six months of 2006 compared with the same period in the previous year, according to Dr Said.

He says in an article for Arab News that for the whole of 2006, new L/Cs opened for private sector imports are expected to reach SR115 billion.

Construction boom

New L/Cs for motor vehicle imports accounted for nearly 16.7 per cent of the total value of L/Cs and increased in value by 13.2 per cent to SR8.63 billion in the first six months of 2006.

The kingdom's construction boom is creating an even bigger surge in L/Cs with private sector imports of building materials up 42.3 per cent in the first-six months of this year.

Machinery imports

New L/Cs opened by the private sector to import machinery increased by an even bigger margin, up 74.3 per cent to SR5.55 billion in the first six months of this year compared with the SR3.18 billion recorded in the same period a year ago.

Dr. Said is chief economist at the National Commercial Bank based in Jeddah.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO