Saudi Arabia's princes enjoyed their gold-plated profligacy, but now comes the day of reckoning

Which Middle Eastern country has run a budget deficit for 17 years, has seen national income per head halve since the early 1980s and now faces a choice between fundamental economic reform complete with painful spending cuts, and deep fiscal crisis and possible devaluation? Impecunious Egypt, ravaged Lebanon, struggling Syria or Jordan ?

Which Middle Eastern country has run a budget deficit for 17 years, has seen national income per head halve since the early 1980s and now faces a choice between fundamental economic reform complete with painful spending cuts, and deep fiscal crisis and possible devaluation? Impecunious Egypt, ravaged Lebanon, struggling Syria or Jordan ?

No, the answer is Saudi Arabia, the land that oil seemed to have turned into a modern-day El Dorado, but now facing its most serious economic problems in decades. The problems are so severe that the country, which recently announced it was going to start issuing tourist visas to bring in foreign currency, said yesterday that it wants to introduce road tolls to offset the billions of riyals it spends maintaining its highways.

Say Saudi Arabia and you think of vast desert, Islam's most holy places, the gold-plated profligacy of its ruling princes and a human rights record featuring beheadings, amputations and closed-door justice. Economic failings do not come to mind.

But failings there are; so much so that if nothing is done, some analysts believe the consequence could be the geostrategic nightmare that haunts planners in Washington and London - political instability in the country that is America's biggest foreign oil supplier and a key Western ally in an eternally unstable region.

Not that the kingdom is quite a basket case yet. Saudi Arabia is Opec's largest and most influential producer, with 25 per cent of the world's oil reserves, good for another century at present extraction rates. The wealthier among its citizens have sent abroad an estimated £300bn to £500bn, enough to pay off Britain's entire national debt. The return of even a quarter of it would put Riyadh's accounts to rights at a stroke. But the Saudi myth no longer holds. A timeless law of nations has been proved once again - that no country is so rich it cannot spend itself into trouble.

That didn't seem to be the case in the 1970s, after the first Opec oil bonanza, when Saudi Arabia became the organisation's pivotal producer, and its oil minister, Sheikh Ahmed Zaki Yamani, a global celebrity. Nor did anyone bat an eyelid a decade later, when the kingdom poured £16bn into Iraq's war against Iran, or when it chipped in £35bn to finance the US-led operation to drive Saddam Hussein from Kuwait (largesse thanks to which America actually showed a profit on the war). And, as British Aerospace among other arms manufacturers would gratefully attest, no weapons system was too expensive for Riyadh's armed forces - usually paid on the nail, in cash.

But all the while, the price of oil was in decline, and by the 1990s Saudi Arabia, metaphor for boundless wealth, joined the well-stocked ranks of governments living beyond their means. And, even though oil prices are back to about $25 (£16) a barrel, so the country remains today.

For two decades, Saudi Arabia has been trapped between a mostly falling oil price and an inexorably rising population. The lavish system of subsidies and welfare set up on the back of the 1970s boom might have been politically untouchable; not so the price of the commodity that has kept the economy afloat and which even today generates 75 per cent of budget revenue.

As the cost of a barrel of crude dipped from almost $40 to beneath $10 at one point, the economy stagnated at best. But population, anywhere from 15 million to 20 million, continued to grow at an annual 3 per cent. Thus, GDP per head declined from more than £10,000 in 1981 to barely £4,500 now.

Today, even the congenitally cautious House of Saud has got the message. "The age of abundance is over," Crown Prince Adbullah, who in effect runs the country in the place of his ailing brother, King Fahd, warned his fellow Gulf rulers at a summit.

The aim now is to diversify the economy by reducing dependence on oil. Links with the global economy will be helped by an overhaul of the stock market, modernisation of the tax system and membership of the World Trade Organisation. Curbs on direct foreign investment are being eased, and soon foreign oil firms could be back in Saudi Arabia for exploration and production, 19 years after the Saudi industry was nationalised.

Other economies include the staggering of arms payments, and cuts in longstanding subsidies on energy and other services. Most telling of all perhaps, a reluctant door is being opened for ordinary tourists. Under new legislation, Saudi Arabia will issue its first tourist visas. No longer can a country regarded as the closed heart of Islam afford to spurn the income-generating package holidaymaker.

But whether even this will suffice is debatable. Much of the country's infrastructure was installed in the 1970s and is showing its age; the expansion required to cope with the growing population could cost £60bn or more. With dearer oil, talk of a devaluation of the riyal has receded but even native Saudis can now face unemployment - a prospect hitherto confined to largely unprotected immigrant workers, accounting for a fifth of the population. With half its citizens aged under 25, the state can simply no longer guarantee jobs in the old way.

If the ruling dynasty is to bring in reform, now is surely the moment. The economy is picking up and the oil price should stay high for a while. Saddam Hussein, whose invasion of Kuwait in 1990 brutally exposed Saudi Arabia's vulnerability, is safely in his box. Relations with Iran, the Gulf's biggest power and Riyadh's other historic regional rival, are on the mend, while the ArabIsraeli peace front still shows faint glimmers of progress. At home, the undeclared opposition that surfaced after the Gulf War has been bribed or browbeaten into line.

But at the best of times decision-making in Saudi Arabia is a meandering process. And Prince Abdullah's role as regent, one of a group of powerful brothers rather than king in his own right, makes hisability to push through needed reforms even more questionable. His family continues to spend the state's money as if there were no tomorrow. Disagreement in the ruling clan, however, could force suppressed strains in society to come to the surface. If things went wrong and Saudi Arabia imploded, the shock would be felt around the world.