Governance of public spending avenues by oil prices, oil revenues, and GDP in Saudi Arabia: proportionate sensitivity and trend analysis

ARTICLE INFO Anis Ali (2020). Governance of public spending avenues by oil prices, oil revenues, and GDP in Saudi Arabia: proportionate sensitivity and trend analysis. Investment Management and Financial Innovations, 17(4), 152-164. doi:10.21511/imfi.17(4).2020.15 DOI http://dx.doi.org/10.21511/imfi.17(4).2020.15 RELEASED ON Monday, 30 November 2020 RECEIVED ON Monday, 02 November 2020 ACCEPTED ON Monday, 30 November 2020


INTRODUCTION
In Saudi Arabia, OSR constitutes more than 50% of the GDP (Saudi Arabia, facts and figures, 2020), and the export of the oil products and their prices governs the economy (Dreger et al., 2016;Nyangarika, 2018) and indirectly governs the PSA. The negative variations of OP lower the economy and obstacles in developing the oil-exporting economies (Ebrahim et al., 2014). In Saudi Arabia, it was found that the OP of the oil products lowering since 2014 and affects the OSR, and lowers the expected growth of the Saudi economy (Al Rasasi et al., 2019;Alharbi, 2020). The OSR and PSA govern employment in Saudi Arabia (Alkhteeb et al., 2017) that assures the balanced development and optimum utilization of human resources. For sustainable development in any nation, dependency or reliance on a specific resource is not appropriate for the economy in the long run. Saudi Arabia is opening its wings to attain the goals of Vision 2030 to make itself more self-reliant and opportunity to all the sectors of the economy. In achieving the goals of Vision 2030, the vitality of the OSR cannot be Haque and Khan (2019) found that government expenditure and exports of oil products significantly affects the Human Development Index (HDI). Al-Qudair (2005) studied the relationship between government expenditures and revenues in the KSA and found a long-term equilibrium relationship. Akoum et al. (2012) examined the relationship between the Organization of the Petroleum Exporting Countries (OPEC) basket oil price and the stock market returns of Gulf Cooperation Council (GCC) countries from 2002 to 2011. They found that the OP and stock returns of GCC countries are not strongly correlated. Nusair (2016) found a positive relationship between the OP changes and the GDP in GCC countries and explained the efficacy of positive prices than the negative OP on GDP. Hemrit and Benlagha (2018) preferred non-oil GDP to oil GDP and explained the positive relationship between the government expenditure and growth of the non-oil GDP of Saudi Arabia. Sultan and Haque (2018) found a positive relationship between economic growth and exports and government expenditures and a negative relationship between the economic growth and imports of Saudi Arabia. Alsamara et al. (2017) analyzed and compared the effect of asymmetric OP on the GDP of Saudi Arabia and Turkey. They have seen the effects of OP shocks on economic growth positively and negatively. The positive OP shocks govern the economy more than the negative shocks in Saudi Arabia, while a reverse situation exists in Turkey. Al-Sasi et al. (2017) studied the impact of the demand for petroleum volatility on the economic growth of Saudi Arabia and found that the petroleum demand growth is doubled the economic growth rate and explored that crude oil accounts for 40.6% of global-ly produced energy. OP change governs the unemployment status and is influenced by the economic growth rate and explains government measures' efforts. Sarrakh et al. (2020) found that removing the subsidies from the energy sector would negatively affect the Saudi GDP. The suggested compensatory measures to cover the low-income households applying the social security network to face the oil price volatility. Mahalik et al. (2017) explored the relationship between energy consumption and financial development and found that financial development helps in energy demand in Saudi Arabia. Baumeister and Kilian (2016) studied lowering the OP and its impact on the US economy and found a very slow response of OP changes on the economy and that there is no negative impact of oil-related investment on non-oil related investment. Nyangarika et al. (2019) explored the impact of the OP shocks on the Russian economy. They found the world oil price is the main consideration while found the positive relationship between the OP and the Russian GDP. They suggested the low dependence on the energy resources and diversification of the economy by attracting foreign investments. Mohaddes and Pesaran (2017) stated that the recent lowering prices of the oil are good for the US and global economy. They found a stable negative relationship between OP and real dividends. The low price negatively affects the oil-producing economies and forces them to enhance oil production to compensate for the loss of low OP. Aregbeyen and Kolawole (2015) found no relationship between public spending and economic growth in Nigeria and suggested that the government should invest more in capital projects to enhance oil production to enhance the economy. Gazder (2017) explained that the oil sector of Saudi Arabia affects the other pillars of the economy as the traditional fossil-based energy sources are depleting fast. He studied energy con-sumption and the factors affecting the energy consumption in Saudi Arabia and Pakistan and found that economic development, population, industries, and transportation factors affect energy consumption. He explained that energy consumption is driven by economic development in Saudi Arabia, while the population governs energy consumption in Pakistan. Jawad (2013) analyzed the OP volatility on the economic development of Pakistan and suggested that government should make a proper plan to maintain a balance between demand and supply to lower the impact of OP volatility on the economy. Jung  found the unidirectional relationship between energy consumption, population, and GDP and suggested Vietnam promotes the population and energy for economic growth. Majidli and Guliyev (2020) studied the relationship between real OP real non-oil GDP growth of Azerbaijan and found that the increase in OP also enhances the real GDP and exchange rates. Giri and Joshi (2017) found that the crude OP influenced the stock prices negatively and suggested the government to take some corrective steps to control the crude OP in India, and investors' trust can be boost by the appropriate policy formation. Nonejad (2020) found that short volatility in the crude OP in predictive regression and suggested considering the volatility of OP for the policymakers. Sarwar et al. (2017) studied the relationship between OP, economic growth, electricity consumption, gross fixed capital formation, and population. They obtained the bidirectional relationship between electricity consumption, OP, fixed capital formation, population, and GDP. The countries applying non-renewable energy sources negatively affect their economic growth. Van et al. (2019) investigated the results of the OP changes in the GDP of 17 OECD countries. The study of volatility is divided between two, i.e., pre and post-World War II, to measure the volatility of the world OP and found that the real oil volatility is negatively correlated with the aggregate economic activity. They supported and suggested that the improved monetary policy is the shield to face the OP volatility's negative impact. Balke and Brown (2018) found the less elastic impact of the OP changes on the economy. Based on all the above studies, the governance process of PSA by the OP, OSR, and GDP can be depicted as follows: Figure 1 explains that the higher prices of the oil products directly and positively affect the GDP, while the lower prices negatively and indirectly affect the public spending as OSR is the major ingredient of the GDP of Saudi Arabia. The previous studies explored the relationship between OP and PSA, OP and GDP, OP, GDP, public spending, and other dependent variables. There is no study available to explain the proportionate contribution sensitivity and trend of OSR and GDP to PSA in Saudi Arabia. There is a need to consider the impact of OP shocks on OSR and GDP of Saudi Arabia and

AIMS
The objective of the study is to get the comparative sensitivity and trend of the OP, OSR, GDP, and PSA and proportionate governance of PSA by the OSR and GDP in Saudi Arabia. The study also tries to find out the over-and under-allocation of PSA based on the proportional governance and explores the optional resources to reduce the dependency on OSR and hedge the economy from the shocks of the OP.

RESEARCH METHODOLOGY
where K -number of samples, and N -number of all variables.

DATA ANALYSIS AND RESULTS
As per the objective of the study, the analysis of the OP, OSR, GDP, and PSA of Saudi Arabia can be divided into three categories, i.e., normality of variables, cause and effect relationship, and proportionate governance of OP on dependent variables and governance of GDP on the PSA in Saudi Arabia.

Normality of variables
The normality of variables facilitates comparison between the data and assures that the variables are unaffected by the abnormal factors, or the deviations of the variables are insignificant. Cause and effect relationship between OP, OSR, GDP, and PSA.
The cause and effect relationship explains the effect of changes in the dependent variables on the other independent variables. The high degree correlation between the OP, OSR, GDP, and PSA explains the high impact of changes of OP on the GDP and public spending in Saudi Arabia, while low degree or no correlation reflects the negligible or no impact of price volatility on the GDP and public spending. The trend of variables reflects the long-term co-movement, and sensitivity indicates the variables' short-term variation. The similarity of trend and sensitivity of OP, OSR, GDP, and PSA of Saudi Arabia reveals the long term and short term variability. Table 3 reveals that OP, OSR, GDP, and PSA movement in the long term are significantly different (Table 3, H 0 1) and no significant differences in the sensitivity of all variables (Table 3, H 0 2). This implies that the OP, OSR, and GDP do not affect the movement trend of PSA, and shocks of OP, and OSR, GDP yearly affect the PSA of Saudi Arabia.

Contribution of the oil sector to GDP of Saudi Arabia
It is evident that OSR is a major ingredient of GDP and plays a vital role in the Saudi economy. Low OP affects the OSR and finally decreases the contribution to GDP. There was a downfall in the absolute amount of oil sector contribution due to a heavy downfall in the OP in Saudi Arabia. As per the law of supply, the prices of the products govern the sales revenue positively and proportionately. Table 4 explains the governance of the OSR by the OP positively and proportionately (rx1, x2 = 0.99). The OSR of Saudi Arabia governs the GDP positively and up to a great extent (rx2, x3 = 69.78). Hence, H 0 3 is rejected. Due to low oil prices, the OSR lowers its contribution to the GDP of Saudi Arabia year by year. Recently, it was seen that the contribution of the oil sector to GDP was enhanced last year. There is weak symmetry found in the sensitivity and movement trend of the oil sector and GDP of Saudi Arabia.      The comparative movement reveals the variability impact of the independent variable on the dependent variables. The high degree of comparative movement reveals the high dependency of dependent variables on independent variables and governance of the dependent variables by the independent variables in the long run. Table 6 explains the trend and governance of public spending avenues proportionate to the oil sector and GDP of Saudi Arabia. The movement of education spending of Saudi Arabia proportionate to the oil sector and GDI is positive and highly correlated, or the variations of oil sector contribution and GDP highly govern the education (r = 0.93) in the short run. The sensitivity of health (0.77), housing and community amenities services (r = 0.69), social security and welfare (r =0.69), and other community and social services (r = 0.77) is positive and moderately correlated or governed by the oil sector or GDP of Saudi Arabia in the long run. The proportionate governance of OSR and GDP to health and other community and social services is similar in the long run. Hence, H05 is rejected. Overall, all the public spending positively correlated, but the degree of relationship education with the OSR and GDP is higher than the other PSA, while housing and community amenities services are the lowest in the long run.
4.6. Summary of comparative sensitivity and trend of PSA proportionate to OSR and GDP The comparative sensitivity and movement of public spending proportionate to OSR and GDP explain the short and long-term governance of the public spending by the OSR and GDP.
From Table 7, it can be summarized that the correlation between the CBI of PSA to OSR and PSA to GDP explains that the short-term variations in OSR and GDP govern the PSA positively. There is a high degree of symmetry between the governance of education by the OSR and GDP. It implies that the Saudi government is much concerned (r = 0.87) about the education comparatively other PSA while less (r = 0.60) concerned about the other community and social services in the short run. In the long run, OS and GDP also govern public spending positively. OS and GDP govern the education highly (r = 0.93), while the housing and community amenities services and social security and welfare services moderately r = 0.69). Hence, H 0 6 is accepted, and there is no significant difference among the comparative governance of sensitivity and trend of PSA proportionate to OSR and GDP.

DISCUSSION
The

CONCLUSION
Based on all analyses, results, and discussion, it can be concluded that OP governs the OSR and GDP positively and perfectly as the oil sector contributes approximately half of the GDP of Saudi Arabia. However, there is a negative correlation between the OP variations and the PSA in Saudi Arabia. The impact of low OP can be seen on the OSR and GDP since 2014. Saudi Arabian government enhances its spending on public avenues and especially on education while there was a lowering of the OP. The volatility of OP does not affect the OSR, GDP, and ultimately public spending in the long run. However, there is governance of volatility of OP that can be seen on OSR, GDP, and ultimately on PSA in the short run. So, there is a need to change the oil-based economy pattern to a knowledge-based economy in Saudi Arabia. Education, employment, innovation, information and communication technology (ICT), human capital are the areas where the Saudi government can put additional efforts to change the pattern of the economy. The conventional source cannot be considered suitable for economic growth in the long run. In Saudi Arabia, opportunities can be explored in the field of renewable energy and innovative technologies by the research initiatives of the experts and scientists from the advanced countries. There is a need to diversify the income resources to minimize oil prices' reliability and the budget deficit. Solar, wind sources, nuclear power, and hydrogen fuel cell sources can be the alternatives to oil resources in the near future. The spending on unproductive education can be minimized to balance other spending and save the budget from negativity. There is a need to consider the sensitivity of OP on the economy by the policymakers to formulate the policies to minimize the impact of volatility of OP on the economy. The improved and appropriate monetary policy saves the economy from the negative impact of the OP. The study considers only quantitative data, and there should be consideration of other qualitative factors to get the variations in GDP and public spending in the short and long run. There is scope for further studies by considering the impact of OP and other qualitative factors on OSR, GDP, and PSA. There should be consideration of the number of oil products along with OP and OSR.