Author(s): Mohammed A. Aljebrin
Economists agree that persistent trade deficits indicate poor economic health. However, opinions vary widely regarding the factors that influence trade deficits, and studies that focus specifically on non-oil trade deficits are limited. This study was an investigation of relationships between Saudi Arabia’s non-oil trade deficit and specific economic measures that were shown in previous research to be related to trade deficits in other countries. The researcher used Stock and Watson’s Dynamic Ordinary Least Squares (DOLS) approach (1993) as an empirical method to estimate the critical parameters of the non-oil trade deficit in Saudi Arabia over a 25- year period (1998-2015). To meet the requirements of the DOLS application, a time series was used to analyze the data. This allowed the designation of the order of integration for each series, generating the data for review. The results of our assessment suggest that a unique theoretical sign can be expected for the individual variables. This confirms that statistically significant positive relationships exist between the non-oil trade deficit and (a) real income, (b) relative national prices to foreign prices, and (c) international reserves. In contrast, a negative and considerable correlation was found between the Real Effective Exchange Rate (REER) and the non-oil trade deficit. Policymakers are currently challenged with controlling the domestic inflation rate, and the results of this study substantiate the positive relationship between Saudi Arabia’s non-oil trade deficit and relative domestic to foreign prices. Therefore, the findings indicate that controlling domestic prices is an important element of managing the non-oil trade deficit. The negative relationship between the non-oil trade deficit and real effective exchange rate strongly suggests that policymakers should also support the real effective exchange rate. Saudi Arabia needs strategic plans and policies that promote the development of innovative and dynamic trade sectors that potentially accelerate economic diversification. Economic diversification is dependent on inventive processes that improve productivity, products that promote sustainable growth, new markets, and institutions that allow for more efficient production. Strategies should strive to encourage both vertical and horizontal diversification beyond oil production, which would further integrate non-oil trade into the global value chain and attract foreign direct investment to the non-oil sector.