Saudi Arabia’s Economic Changes: Are They Feasible?

7 December 2016 Lindsay Hughes, Research Analyst, Indian Ocean Research Programme

Background

Between 1998 and 2013, the price of oil soared by around 1,050 per cent, which led to Saudi Arabia’s economy rapid growth and made it the nineteenth-largest in the world. The government accumulated an estimated US$730 billion in foreign exchange reserves, household income grew by an estimated 75 per cent and around 1.7 million jobs were created. On the other hand, only 5.5 million Saudi citizens, of a total population of 31 million, work and of those three million are employed by the national government.

Since then, however, oil prices have plummeted and are currently at around US$56 a barrel, down from over US$120 per barrel during its heyday. Saudi Arabia, whose economy is, to all intents and purposes, completely dependent upon oil revenues, has seen a rapid slowing down of its economy with the attendant problems that situation brings. This makes it imperative that its Vision 2030 plan work as planned. The alternative is too grim to contemplate.

Comment

Recognising the economic and other dangers posed by its almost total dependence on oil revenues, Saudi Arabia developed its “Saudi Arabia’s Vision 2030” as a plan to bring about economic reform in the kingdom and remove its dependence on oil by identifying its policies and goals. The Council of Ministers placed the onus of implementing and monitoring the various measures to bring about the implementation of Vision 2030 on the Council of Economic and Development Affairs which, in turn, created several institutions such as the Project Management Office of the Council of Economic and Development Affairs, National Centre for Performance Measurement and the Delivery Unit to meet the objectives of Vision 2030.

Importantly, in order to meet the Vision 2030 goals, the National Transformation Programme 2020 (NTP) was implemented as a preliminary step in order to build institutional capacity. This programme is tasked with identifying the challenges each Saudi agency faces in meeting the NTP’s goals, developing initiatives to meet those goals and developing detailed implementation plans for those initiatives. The NTP, additionally, seeks to promote transparency in the course of achieving its outcomes and to implement a system of continual monitoring and improvement. Twenty-four government agencies were selected to be part of the NTP, including the Ministries of Health, Finance, Justice, Economy and Planning, Environment, Water and Agriculture, Transport, Education and Housing. The twenty-four agencies proposed 543 initiatives, 178 strategic objectives and 376 key performance indicators. The NTP will, it is estimated, create 450,000 jobs in the private sector and keep around 270 billion Saudi riyals ($96.9 billion) in the economy.

One report suggests that ‘a productivity-led economic transformation could enable Saudi Arabia to double its GDP again and create as many as six million new jobs by 2030. We estimate this would require about $4 trillion in investment.’ The obvious issue is that of finance. The report also suggests that ‘[e]ight sectors—mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance, and construction—have the potential to generate more than 60 per cent of this growth opportunity.’

There is, however, a fundamental shortcoming in these plans. The finance required to implement them is to be derived from the sale of five per cent of Aramco, the giant oil company that is wholly owned by the Saudi Government. This sale is expected to give Riyadh around US$100 billion, according to a different report. It is very unlikely that the remainder (US$2.3 trillion) of the estimated US$2.4 trillion can be derived from the other seven sectors. The Saudis will, therefore, need to sell a larger proportion of shares in Aramco to make up the deficit. Saudi Arabia is, additionally, expected to implement a value-added tax of up to 20 per cent by January 2018 and to levy an income tax on the foreign workers, estimated at around 10 million, who send home about $36 billion per year in remittances.

Saudi Arabia needs to carry out these reforms. Its 2014 budget spending was $294.3 billion, with a $14.4 billion deficit. The 2015 Saudi expenditure was reduced to $229.3 billion but maintained an expected $38.6 billion deficit. With the oil price plunging by 60 per cent, the kingdom’s foreign exchange reserves could be wiped out in four years. Even if oil prices were to rise, however, it is more than likely that a Trump Administration would export its oil and gas surpluses, which would force Russia, another non-OPEC member to lower its prices in order to retain its market share, leading to a price reduction, and a subsequent fall in Saudi revenues all over again. It is unlikely that Riyadh will be able to meet the full costs of initiating these reforms if and when that happens.

The situation is not helped by the perception of intemperate extravagance on the part of the Saudi royal family. A Saudi prince recently paid US$500 million to purchase a yacht from a Russian oligarch on a whim and completed the deal in the space of hours. At a time when Saudi Arabia is struggling to bring about the reforms it needs, such extravagance goes against the grain and does little to instil confidence in the citizenry.

While it is to be hoped that the reforms will be implemented, it is difficult to see how they could be in full.

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