RIYADH -- Oil-rich Saudi Arabia, dealing a heavy blow to the concept of a welfare state, decided Monday to impose mandatory health insurance on millions of nationals employed in the private sector and their families, DPA reported . The decision, adopted at a cabinet meeting chaired by King Fahd, spares government employees and takes effect in phases two years after "applying the insurance on foreigners."

This implies that the decision will take effect in 2006.

Saudi Arabia began in September a gradual implementation of Islamic-style cooperative medical insurance on some seven million foreigners living and working in the kingdom.

It started with private companies employing more than 500 workers. Next year, the scheme will cover firms with more than 100 employees and it will be applied to all foreigners in September 2004.

Under the scheme, Saudi employers are required to pay the full premiums for their foreign employees and their families, but the amount has to be agreed between employers and insurance companies.

Every foreigner living in the kingdom must be covered under the scheme except government employees. The medical insurance is a precondition to obtaining a legal residence permit.

Saudi Arabia, the world's top oil exporter, has been offering cradle-to-grave welfare to its 16.5 million citizens, with essential services provided either free of charge or at a heavily-subsidized cost.

But in recent years, the kingdom began liberalizing its economy by lifting subsidies on some services, notably electricity, and imposing charges on others to overcome a chronic budget deficit and a staggering public debt.

In the past two decades, the Saudi budget was in the black only in the year 2000 and the public debt climbed to 168 billion dollars at the end of 2001, representing 90 percent of gross domestic product (GDP).

Two years ago, the government lifted subsidies on the power generation sector which is currently operating on a commercial basis. It plans similar measures in the water sector.