The New Nation - Internet Edition

Dr. Saleh uddin Ahmed

Governor, Bangladesh Bank (Central Bank)

One has to agree that no economy can grow and improve the living standards of its population in the absence of a well functioning and efficient financial sector. Improvement of the financial sector can create a conducive environment to enable the poor and disadvantaged to get the benefits of accelerated growth.

The financial sector of Bangladesh is composed of Bangladesh Bank (BB, the central bank), scheduled banks (or, deposit money banks, DMBs), non-bank financial institutions (NBFIs), insurance companies, micro-finance institutions (MFIs), credit rating agencies and stock exchanges. Direct regulatory and supervisory responsibility over DMBs and NBFIs rest with BB.

As banks dominate the financial sector of Bangladesh like many other developing countries, we would keep our discussion confined to the banking sector. Banks at the early stage of history of Bangladesh were nationalised and gradually assets and liabilities faced mismatches. The banking sector had to finance fiscal deficits and fund the state owned enterprises (SOEs). Political influence eventually became dominant in lending decisions, as all the banks were owned by the government. Loan recovery rate drastically fell. Lack of good governance resulted in rise in non-performing assets.

The central bank of the country had limited tools to manage monetary policy. Central bank often had to take the recourse of so-called moral suasion, supported by other direct tools namely determination of SLR/CRR and administered interest rate policy.

There was a major policy shift in early 1980s when private sectors banks were allowed in the country. The sector embarked upon a Financial Sector Reform Programme in the 1990s which primarily aimed at entrusting additional powers to the central bank by strengthening efficacy of its instruments. Interest rates were liberalised; introducing new bills activated open market operation. Attempts were made to improve governance in the financial sector.

The second phase that begun at the beginning of the present decade was a multifaceted one. Reform initiatives attempted to improve legal aspects, corporate governance, loan recovery, exchange and interest rates management, NCB's functions, risk management and efficiency of the Bangladesh Bank. With a strong legal foothold, we could focus our attention on establishing good governance. Better disclosure and transparency standards have been introduced; fit and proper tests prescribed for bank directors, chief executives and advisors; restriction imposed on the composition of the membership of the board of directors; the roles and functions of the board and management were clarified and redefined. Audit Committees were mandated for all banks with clear guidelines and TORs and Early Warning System (EWS) was introduced. To strengthen the banking operation, minimum capital requirement was raised from Tk. 400 million to Tk. 1000 million and the requirement on risk-weighted basis was also increased. Most recently the capital requirement has been raised from Tk. 1000 million to Tk. 2000 million.

Stringent loan rescheduling conditions were introduced to stop ever greening of loans. An upper limit on a bank's exposure to a particular customer or group was introduced. Strict measures have been laid and enforced on loan loss provisioning. Loan write off guidelines were issued by the Bangladesh Bank, allowing the banks for the first time, to write off 'bad' debts against full provisioning. Large loan limit has been linked to bank's NPL ratio. BB is encouraging syndication of several banks for large loans and has issued guidelines for restructuring such loans.

In The Core Risk Management Guidelines on five major risks has been introduced by BB (credit, foreign exchange, and assets-liabilities risk management, internal control and. compliance and anti-money laundering) laying down policies, processes, procedures and structures that will lead to better governance and improved services.

In the monetary and foreign exchange front we have an exchange rate regime, which is now, market determined. Floating of taka since June 2003 was achieved without encountering undue volatility. Further reform in simplifying and streamlining forex operations and payment system is underway. New financial instruments of varying tenure such as repo and reverse repo and government investment bonds of longer tenor have been introduced. Efforts are underway to develop the government and corporate bond market. BB and the Securities and Exchange Commission (SEC) agreed to allow the government bonds to be traded in the stock exchange. Securitization of receivables of private financial institutions has started.

We have initiated a capacity building programme in the Bangladesh Bank. Service standards have been introduced for work in different departments. Workflow analysis has been initiated to bring in greater speed and ensure quality. The Central Bank Strengthening Project (CBSP) includes (a) computerization of the relations of the Bangladesh Bank, (b) human resource development through reforms of recruitment, promotion and compensation policies, (c) restructuring of the different departments, (d) reengineering the business processes, (e) automation of the Clearing House, (f) capacity building in the core activities i.e. monetary policy, regulation of the financial sector, and research and policy analysis. The goal is to transform the decades-old traditional and manual system to a modern, automated system.

BB has got a Policy Analysis Unit (PAU), which produces various analytical policy briefs and publishes Monetary Policy Review, Financial Sector Review and Bangladesh Bank Quarterly.

Nationalised Commercial Banks (NCBs): Sonali Bank, Janata Bank and Agrani Bank have been corporatised and in corporatised as public limited company. Sale of Rupali Bank to a foreign private entrepreneur is underway. These banks will be more accountable to the central bank.

(b) Specialized Banks (SBs): Public sector banks in charge of agricultural and industrial term lending suffer from poor decision making and low efficiency. In order to make them efficient and financially viable, restructuring of these institutions is necessary otherwise it will hinder the overall financial sector stability and soundness.

Non-Bank Financial Institutions (NBFIs) play a significant role in meeting the diverse financial needs of various sectors of an economy as well as to the deepening of the country's financial system. The activities of NBFIs witnessed an impressive growth during the last five years.

Both banks and NBFls to function as complementary institutions should follow some ethical and technical norms. Banks can go for joint financing under syndication arrangements with leasing companies on any project proposal. Capital market, comprising of debt and equity instruments, can play a key role in economic development by channeling surplus resources to the most productive uses. A notable characteristics of the capital market of Bangladesh is its limited role in funding long term investment as compared to banks and non-bank financial institutions. The capital market is still thin having low level of capitalisation, liquidity and depth; it lacks active trading in fixed income securities (bond and debentures). A number of steps have already been adopted to develop the capital market of Bangladesh. However, there are some urgent issues which include the following.

Insufficiency of disclosure of financial statements, weakness of corporate governance, limited fixed-income securities are among the major factors holding back the development of a vibrant equity market in the country. Successful conversion of NCBs into corporate entities hold the prospect of major new entrants into the stock exchanges in the near future, and even foreign banks may seek listing if encouraged. Other ideas to render the equity market more attractive would include the SOE's and the telecommunication companies to issue equity in an orderly fashion. These initiatives will definitely raise the market capitalisation to a significant extent, which will foster the overall economic growth.

Investment in Bangladesh is highly dependent on bank credit. A major fallout of the excessive dependence on bank credit is the mismatch between the asset and liability sides of bank portfolios. The dependence of business on bank credit for investment increases the systematic risk faced by the banking system. There is also the info rmational asymmetry between the borrower and the lender, which adds to the risks faced by the lender. Indeed the latter asymmetry would be alleviated to an extent were the borrower to seek listing in the stock exchange, which could ordinarily require a greater extent of disclosure than otherwise and this may also allow better decision-making on the part of the banks in dealing with applications for credit.

In Bangladesh, fixed-income securities are still limited in variety and bond market is dominated by short and long term government securities. Corporate bond market is in nascent stage having a shallow debenture market. Invincible, efficient bond markets must encompass a mobile primary market, a fluid secondary market, transparent rules and regulations, a conducive tax system, market rules and awareness, well-functioning settlement and custody systems and a trustworthy rating system. Fixed-income securities market in Bangladesh has experienced a number of changes in recent years. To activate secondary market, Bangladesh Bank started repo and reverse-repo auctions and issued licenses to primary dealers in government securities. On the other hand preferential tax treatment for zero-coupon bonds has been introduced, Central Depository System has been created, and stamp duty on transfer of assets has been eliminated for securitisation. The weekly revaluation based on marking to market for the portion of securities held for trading by the banks has been made compulsory. However, further steps are needed such as developing benchmark yield curve in order to ensure the proper development of the bond market. A recent decision of the government to introduced pre-announced volume based auctions will definitely bring more transparency in the country's money market and avoid mismatch between cash and debt management.

The banking system in Bangladesh is continuously adopting modern and innovative products and services, to make smooth payments and transactions. Foreign Commercial Banks (PCBs) in Bangladesh are playing a pioneer role in introducing modern. financial products and services.

The existing innovative products and services consist of Debit and Credit Card, Automated Teller Machine (ATM), Point of Sales (POS), on-line banking (e-banking), Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), and Reuter. These technologies would upgrade the banking services.

Bangladesh Bank has been implementing the Central Bank Strengthening Project (CBSP) with a view to develop Bangladesh Bank into an effective and modern central bank through strengthening its capacity to play due role as the country's monetary authority as well as regulatory and supervisory authority of the banking sector. The project is working and is expected to be completed by June 2008.

Workers' remittances that played an important role in the economic development of the country over the last few decade, is now more closely linked to financial sector development. The role of formal remittance service system is not limited to boosting foreign exchange reserves and matching current account deficit in the short term. Channeling remittances through banks help deepening the financial system and integrates rural people with the formal system. BB is implementing a project 'Remittance and Payments Partnership (RPP)' with fund from DFID, through which Automated Clearing House (ACH) will be installed and migrants' remittance fund will be speedily handed over to the recipients.

A fair representation of financial position of a bank is required by its stakeholders for making their economic decisions. This is significantly influenced by the accounting standard. In line with international norms, Bangladesh Bank introduced international accounting standards (lAS-30) in the banking sector of Bangladesh in 2000. This requirement has brought transparency in the affairs of bank balance sheet by disclosing many sensitive issues such as volume of bad debts, amount of bad debt provisions, shortfall in provision, earning per share, cash flow position, banking risks including contingencies and future losses, maturity mismatch of asset and liabilities, credit facilities allowed to the bank directors. In order to bring more disclosure in the financial statements of banking companies, BB is continuously updating this requirement from time to time in line with International Accounting and Reporting Standards.

Bangladesh is a major compliant of international agreement on fmancial vigilance. Bangladesh enacted the Prevention of Money Laundering Act 2002, a major legislative development to combat financial terrorism. In order to closely monitor money laundering activities and update legal requirements as per international standard, Bangladesh Bank has set up a separate department namely Anti-Money Laundering Department (AMLD).

A Financial Intelligent Unit (FlU) has been established in the Anti-Money Laundering Department of the Bangladesh Bank. The unit is responsible for receiving, recording, maintaining and analysing Suspicious Transactions Reports (STR) and Cash Transactions Reports (CTR) received from banks and other financial institutions. FlU is mandated with responsibility of maintaining liaison with the concerned international bodies and FlUs of other countries. Bangladesh is a signatory of the UN Convention Against Corruption under which international collaboration is envisaged to combat corruption and money laundering activities.

As in many other developing countries, implementation of Basel II is a challenging issue for banking sector of Bangladesh. Compliance of Basel Core Principles (BCPs) requires providing a solid foundation for the eventual implementation of the New Accord. Recently BB has also carried out a self-assessment of the extent of Compliance of BCPs. The findings show that it is now a largely compliant of Basel principles.

Since the New Accord requires substantial prior risk management practices in the banking sector, BB issued 5(five) separate guidelines on 5(five) core risk areas in banking in 2003. It provides a basic foundation for smooth implementation of the New Accord. The risk areas include credit risk, asset and liability/balance sheet risk, foreign exchange risk, internal control and compliance risk and money laundering risk. Since the Accord is complex and may affect different banks in varying degrees, careful and compatible strategies need to be developed. This deserves inclusion of market participants in the decision making process.

In order to establish good corporate governance in banking, Bangladesh Bank issued several prudential regulations specifying qualification of a Bank Director and a Chief Executive Officer. It also issued directives clarifying authorities and responsibilities of Chairman, Board of Directors, Chief Executive Officer (CEO) and adviser to the bank in respect of overall financial, operational, policy making, and administrative affairs. As a part of good governance in banking, BB requires each bank to form an Audit Committee of their Board. The Committee is responsible for review of the financial reporting process, the system of internal control and management of financial risks, the audit process, monitoring of compliance with banking laws and regulations.

Faster GDP growth consistent with the poverty reduction goals cannot be met unless the extent and quality of financial intermediation in Bangladesh advances significantly. In particular, this would require a more competitive banking and non-bank financial sectors capable of reaching out to all sections of the community, rural and urban, catering to all types of marketable financial services. From the point view of a healthy and egalitarian pattern of economic development which is possible by bringing the poor and asset less (so-called unbanked) people within the fmancial system, the whole approach should be based on calibrated balancing of prudential norms and more genuinely inclusive financial services. The policy strategy that has been initiated and the reform programmes undertaken by Bangladesh would not only help the economy to grow at a faster rate but also pave the way for Bangladesh to become a member of the "middle income group country" by the end of the next decade.

(The views expressional in this article are the author's own and do not reflect there of the Bangladesh Bank)

Dr.Abdul Ruff

Custodian of the Two Holy Mosques, Saudi King Abdullah, accompanied by a high-level delegation including foreign, finance, labor and culture and information ministers, was greeted by Britain's Prince Charles and other senior British officials as well as Foreign Minister Prince Saud Al-Faisal and Saudi Ambassador to the UK Prince Muhammad ibn Nawaf on arrival at Heathrow Airport on a state visit to the UK on 30 October and received a red carpet welcome from Queen Elizabeth II on 31 October as he began a state visit to the UK, the first by a Saudi king in 20 years. The queen, alongside her husband Prince Philip and Prime Minister Gordon Brown, formally welcomed King Abdullah at Horse Guards Parade in central London, where he inspected a guard of honor. King Abdullah has paid previous official visits to Britain in 1973, 1984, 1988 and 1998. This is Abdullah's first official visit to Britain after he became king. The king stayed at Buckingham Palace, Queen Elizabeth-II's official residence in the capital. In the late next morning, he was formally greeted by the queen, followed by a state carriage procession, before a state banquet at Buckingham Palace.

He also met with Prime Minister Gordon Brown later on Wednesday, where they focused on counter-terrorism, Iran, the Middle East peace process, Iraq and Lebanon, said an official, who played down King Abdullah's remarks in a BBC interview that Saudi Arabia had conveyed intelligence to Britain that could have prevented the 2005 London bombings which killed 52 commuters when four young British Muslims blew themselves up on London's public transport system. He also said the Kingdom would not deviate from its Islamic faith and solid principles while making progress in worldly affairs. The king left London for Riyadh the on Nov 01. The queen and the Duke of Edinburgh bid farewell to their royal guest.

King Abdullah began his tour by lambasting UK for its failure in London bombing of July 07, 2005. In the BBC interview, King Abdullah said it would take 20 to 30 years to defeat terrorism. "My advice to all countries including Britain is that they should not show any leniency in fighting terrorism," he said. The king also revealed the recent arrest of some terror financiers in the Kingdom and said Al-Qaeda continued to be a big problem for Saudi Arabia.

After a day of ceremony, King Abdullah met Prime Minister Brown today to discuss the Middle East peace process, Iraq and Lebanon, counterterrorism and Iran. The BBC reported that King Abdullah is annoyed that the rest of the world has largely failed to act on his proposal to establish an international counter-terrorism center. The king also told the broadcaster, through an interpreter: "I believe most countries are not taking the threat of international terrorism too seriously including, unfortunately, Great Britain. "Everybody has accepted the proposal but then did nothing to implement it," the king said." This center, under the umbrella of the United Nations, will collect information related to terrorism. We have learned from our experience that the speedy dispatch of information is the main factor in combating terrorism," he explained. In the interview, King Abdullah also spoke about the political, social and economic reforms taking place in the Kingdom and the growing role of Saudi women in society. "Islam has given the most rights to women in the world and they are strong and important participants in our society," he said when asked about the condition of women in Saudi Arabia

Speaking about the US-sponsored Middle East peace conference, the king said he believed that the conference would fail unless the Palestinians' needs were taken more seriously. He emphasized the return of Palestinian refugees to their country. "This is a humanitarian condition for peace." We Want Rights Not Concessions, said King Abdullah, adding that Arabs want their legitimate rights, rather than concessions from Israel. "We don't want concessions. We are people with rights and we demand our rights," the king told the BBC when asked whether he expected any Israeli concessions in order to reach a Middle East peace settlement. The BBC aired the interview hours before the king arrived in London on a state visit.

The Two Kingdoms Dialogue, which began here on 29 October, ended its deliberations that focused on ways of strengthening political, economic and educational cooperation between the two countries. He noted Riyadh's efforts to promote peace in the Middle East and narrow the differences of parties involved in the Arab-Israeli conflict. The participants discussed the challenges facing young men and women in both countries and emphasized the need for inculcating moderate ideas and tolerant concepts in their minds. British diplomats in the Saudi capital, Riyadh, have discussed the issue with their counterparts. The dialog also focused on expanding cooperation between Saudi and British universities and prospects for setting up Saudi-British technical training institutes in the Kingdom. The UK Foreign Office said the conference focused on youth, education and cultural dialog.

He made no specific reference to King Abdullah's remarks about Britain's role in tackling terrorism, but insisted that both countries understood the threat that groups like Al Qaeda pose. UK Foreign Office Minister Kim Howells underscored Saudi Arabia's efforts in fighting terrorism and said the two countries were cooperating in this venture.

Gordon Brown and King Abdullah discussed their expectations for the peace conference in Maryland but the monarch did not give a clear indication whether his country would be represented. The prime minister emphasized the importance the UK attaches to Saudi leadership in the Middle East. They both agreed that a viable Palestinian state was key to a solution in the region. Counter-terrorism was discussed and the prime minister thanked the king for Saudi efforts on the issue. However, there did not appear to be any specific discussion of the king's claim in a BBC interview earlier this week that the UK had not tackled terrorism with sufficient seriousness.

King Abdullah had also said the UK failed to act on intelligence passed by the Saudis ahead of the 7 July suicide bombings in London - a claim denied by the Foreign Office. Education was high on the agenda, including its use as a tool to counter radicalization in Saudi Arabia. Officials said human rights in Saudi Arabia have been raised at other meetings during the king's time in the UK.

Brown did not raise the issue of human rights abuses in Saudi Arabia during his one-hour lunch with the king or during the 25-minutes they spoke afterward, his spokesman said. He added that

Both leaders expressed optimism that a Middle East peace conference, expected to take place soon in Annapolis, Maryland, could advance the peace process, the spokesman said. After meeting with Brown, Abdullah had separate meetings with opposition Conservative leader David Cameron and Prince Charles.

Abdullah praised Britain's commitment to a viable Palestinian state. Abdullah's 2002 Arab Peace Initiative, which called on Arab countries to make peace if Israel withdraws from the Palestinian territories, is an important framework going into a U.S.-sponsored peace conference, Brown said. In an interview published on 31 October in the London-based Saudi-owned newspaper Asharq Al-Awsat, Brown said Saudi support was needed to prevent Iran from obtaining a nuclear weapon - a development that could start a regional arms race. "Saudi engagement on the Iranian nuclear issue is critically important," Brown was quoted as saying. Brown's office said the two leaders also focused their discussion on counter-terrorism issues, but offered no details

Saudi and UK are determined to support the cause of peace between the Israelis and the Palestinians. Quite apart from the human tragedy of this conflict, stagnation in the Middle East peace process has weakened people's faith in politics and in the power of solutions achieved by dialogue. In that way, the conflict is too often acted as a source of radicalization and as a block on positive change in the Middle East as a whole. Today there is a hope that both sides can make progress towards peace. Prince Saud and Mr. Straw met last year in London to initiate the dialog with the aim of bolstering their bilateral ties. Saudi Arabian and British delegations headed by Foreign Minister Saud al Faisal and Foreign Secretary Jack Straw met in April 2006 for iteration of the "Two Kingdom's Dialogue" at the Royal Conference Palace in Riyadh.

As the home of Islam's two holiest sites, Saudi Arabia has enormous significance for the world's Muslims, including the two million of our people whom are Muslims living in Britain. Some 20,000 British citizens live in Saudi Arabia. Saudi Arabia is the UK's largest export market in the region. His visit augmented the urge for greater cooperation between them. The visit is the product of years of patient diplomacy and is an indication of how Saudi Arabia has become one of the UK's closest allies in the Middle East. Saudi Arabia and the UK clearly matter to each other, with the relationship going well beyond trade. In August, 2006 Saudi Arabia signed a deal with the UK to buy 72 Euroefighter Typhoon aircraft in a deal that analysts say could be worth more than $11 billion.

The UK is a driving force behind the EU's growing relationship with Saudi Arabia and its neighbors through the negotiations for a free trade agreement with the Gulf countries and the EU's work for a strategic partnership with the Middle East and North Africa. The UK and Saudi Arabia are also working together with the Organization for Economic Cooperation and Development's (OECD) new initiative designed to improve the conditions for investment in the Middle East and North Africa. The visit has consolidated the efforts further in this regard.

Both agreed that bilateral relations were healthy on the economic and educational fronts. The British foreign secretary said he strongly agreed with the statement of Custodian of the Two Holy Mosques King Abdullah who rejected the idea of a "clash of civilizations." He also mentioned the initiative of King Abdullah who, as crown prince, floated the idea of setting up an international center for combating terrorism.

The press conference in this connection covered a range of issues including election of Hamas and its aftermath, the situation in Iraq, the fight against terrorism and the difficulties over Iran's nuclear program. In his remarks, Prince Saud made a proposal for setting up a joint investment holding company with participation from the private sector in both countries. He said such an initiative would go a long way toward boosting bilateral investment. British investment in the Kingdom stood at SR4 billion and was set for further growth in the climate of economic and political stability that Saudi Arabia enjoys. The prince's proposal was welcomed by Straw, who commended it to the attention of the business communities in both states.

The crucial issue on Palestine was discussed briefly. On Hamas' victory in recent elections and the suspension of financial aid to the Palestinian government, Saudi said this amounted to collective punishment of the Palestinian people. Prince Saud said, European resistance to Nazi occupation during World War II and implied that Palestinians were similarly resisting Israeli occupation of their territory. Straw, while acknowledging that Hamas came to power in a democratic election, reiterated Britain's view that it should recognize Israel and renounce the use of force before the international community could continue its financial aid.

Meanwhile, international pressure is growing on both Israel and the Palestinians to agree on a common vision of a final peace deal before a Middle East peace conference. The meeting is expected to take place in Annapolis, Maryland, in November or December. "We hear that our Palestinian brethren are not very optimistic about the progress that has been achieved thus far," the king said. "I believe that unless a serious effort is put into this in order to reach agreements that satisfy the Palestinians, the Arab world and the Islamic world, the conference may not be successful." Asked whether Saudi Arabia would participate in the conference assuming that it would be successful, he replied: "This question is premature." He said if there were serious desire from all parties, the conference would prove successful irrespective of the fact that it takes place at the end of George W. Bush's presidency.

King Abdullah as the Crown Prince under King Fahd initiated a lot of reforms. He departed from the traditional policy making of the kingdom and went ahead with good economic and cultural relations with countries with different systems, including Russia. Saudi Arabia has recognized, if properly managed, reform and modernization will preserve what Saudis and others most cherish in their society; the values of respect for the family, others and religion, of social responsibility and good order; of a powerful morality based on the great and noble faith of Islam. Saudi Arabia is a monarchy with a political system rooted in Islamic Sharia law. Arabia was formed in 1932 when Abdul Aziz bin Abdul Rahman Al Saud united different regions of the kingdom. Between 1992 and 1993, King Fahd introduced a number of political reforms, including the establishment in 1993 of a Consultative Council, the Majlis Al-Shura.

Oil was discovered in Saudi Arabia in 1938, and production began under the then US-controlled and now nationalized Saudi Aramco (Arabian American Oil Company). Saudi Aramco is one of the largest oil companies in the world. Saudi Arabia was one of the five founding members of the Organization of Petroleum Exporting Countries (OPEC). Over the last two years OPEC has played a significant role in maintaining oil market stability. With 25% of the world's reserves of oil, Saudi Arabia has a pivotal role in the world energy market, which is of such obvious and crucial importance for global growth and prosperity. Indeed, without Saudi Arabia's stabilizing influence over the last quarter of the century and more, the world economy would have had a far rougher ride.

In January 2003, Crown Prince Abdullah set out proposals for "self-reform and the promotion of political participation" in the Arab world. A few days later he received a petition signed by 120 people which called for reform including: election of members to the Shura council and regional assemblies; an independent judiciary; freedom of speech and association; the development of civil society and increased human rights; a greater public role for women; and a national forum for open discussion. As part of this reform process, Crown Prince Abdullah announced in October 2003 the plan to hold municipal elections for half of the members of municipal councils. These will be the first elections to a government body in Saudi Arabia. Human rights violations in Saudi Arabia are widespread and cloaked in secrecy. Political and religious opponents routinely face arbitrary detention and brutal treatment. Over the past two decades, more than 1,000 people have been put to death or have suffered judicial corporal punishments such as amputation of limbs. Just as the repression is hidden, so too are the arms deals and shipments of security equipment which help the torturers and human rights violators. As usual the UK rakes up the issue of Human rights violations in Saudi Arabia just for formality and that does not faulter the strong ties between

Crown Prince Abdullah has encouraged economic reform by opening some sectors of the economy, such as the gas industry, to investment by foreign companies. Saudi Arabia has applied to join the World Trade Organization and is in the process of negotiating the terms of its entrance. Saudi Arabia's transformation over the last 100 years has been simply astounding. A country once considered a relative backwater has become a cornerstone of the global economy.

Economic growth and development has transformed life for millions of its citizens. However, as Saudi Arabia's own rulers have recognized, no nation can stand still. The challenge for Saudi Arabia, as for Britain and other nations, is to adapt to this changing world reality, whilst preserving all that is good and admirable in its society.

Saudi Arabia is economically self-reliant and does not expect any aid from any international agencies. Saudi Arabia is opening its economy to the outside world and is eyeing new export opportunities in Asia. After the kingdom joined the World Trade Organization, its trade volume with countries across the globe has steadily increased. An important addition to its trade community is China. King Abdullah headed a large delegation to China to help develop Saudi trade links with Asian economies.

The combination of relatively high oil prices and exports led to a revenues windfall for Saudi Arabia during 2004 and early 2005. For 2004 as a whole, Saudi Arabia earned about $116 billion in net oil export revenues, up 35 percent from 2003 revenue levels. Saudi net oil export revenues are forecast to increase in 2005 and 2006, to $150 billion and $154 billion, respectively, mainly due to higher oil prices. Increased oil prices and consequent revenues since the price collapse of 1998 have significantly improved Saudi Arabia's economic situation, with real GDP growth of 5.2 percent in 2004, and forecasts of 5.7% and 4.8% growth for 2005 and 2006, respectively.

Saudi Arabia, the world's leading oil producer, has by far the largest of the Arab economies. It has the largest proven oil reserves in the world (more than 25%). Its economy is vulnerable to fluctuations in the oil price and remains very dependent on oil income. Per capita GDP has remained constant over the last decade with a large increase in the last two years.

The rapidly increasing population highlights the need for the labour market to create more jobs for young Saudis. To support this, the government has implemented a policy called 'Saudiisation' whereby an increasing percentage of jobs in private sector companies (with over 20 employees) in Saudi Arabia must be filled by Saudi nationals.

Saudi Arabia has a history of buying arms from Britain dating back to the 1960s, and usually pays in oil. The United Kingdom has significant political and commercial interests in Saudi Arabia. About 30,000 UK nationals live there. Saudi Arabia is our largest export market in the region. UK exports to Saudi Arabia were about £1.4 billion in 2002. The UK is Saudi Arabia's joint 4th largest investor.

Saudi Arabia has long been a close ally of the UK. There are many high level visits between the two countries including at Prime Ministerial and Minister level. The British and Saudi royal families also maintain close contact.UK, like the USA, insists on change, modernization and reform in Saudi Arabia, on a particular focus on education, assistance for democracy and improving the environment for investment so as to ensure a strong partnership for both, and both have resolved to develop the historical ties even further. This could mean an expectation from the West from Saudi Arabia to follow and imbibe the Western culture step by step, to which Riyadh has a natural aversion for religious reason.