Saudi Arabia - Economy
In a country that has no elections and where political legitimacy rests partly on distribution of oil revenue, the ability of citizens to adapt to reforms aimed at reducing oil dependence and improving self-reliance is crucial for stability.
Crown Prince Mohammed bin Salman said on 12 November 2020 he was working hard on doubling the size of the Kingdom’s economy and diversifying it away from reliance on oil, and that the Kingdom made unprecedented achievements in less than four years. “Saudi Arabia is one of the biggest and most important economies in the world, and we are working hard on doubling the size of the economy and diversifying it… The government considers the non-oil Gross Domestic Product (GDP) as the main indicator for the success of our economic plans,” he said. “In 2016, Saudi Arabia’s non-oil GDP was worth 1.8 trillion riyals ($480 billion), and we started planning to double that at a rapid pace. The result was accelerated growth in the past three years, at 1.3 percent in 2017, 2.2 percent in 2018, 3.3 percent in 2019 and more than 4 percent in the fourth quarter of 2019, despite some economic challenges,” he added.
Saudi Arabia will triple its value added tax rate and suspend a cost-of-living allowance for state employees, the kingdom's finance minister said on 11 May 2020, seeking to shore up finances hit hard by low oil prices and a coronavirus-driven slowdown. In 2018, Saudi Arabia's King Salman ordered a monthly payment of 1,000 riyals ($267) to every state employee to compensate them for the rising cost of living after the government hiked domestic gas prices and introduced value-added tax. About 1.5 million Saudis are employed in the government sector.
On April 25, 2016 Saudi Arabia unveiled a long-term plan that could result in its most significant economic change in decades by proposing a shift away from oil, the country's most valuable asset. The economic reform plan is part of an effort to revive Saudi Arabia's economy, which has been hard hit by sharp drops in crude oil prices, forcing the world's largest exporter of crude to find new sources of income. The reforms are intended to eliminate housing and unemployment issues and ensure the most needy citizens get water and energy subsidies. The plan will focus on privatizations, subsidy cuts, the sale of five percent of oil giant Saudi Aramco and the creation of a $2 trillion fund to develop cities. The plan, named "Saudi Vision 2030," was approved by the Saudi Cabinet.
The Kingdom's 2030 reform program hopes to reduce its dependence on oil and create jobs for young Saudis. Saudi Arabia continued to work out how to sell around five percent of its state-run oil producer, Aramco - a deal that could raise more than $100bn. The plan was at the heart of an ambitious economic reform program, which included a new $500bn megacity near the Red Sea. It was hoped the extra money from the sale will make Saudi Arabia less reliant on the black gold in the long term.
Saudi Arabia's short-term challenges are very linked to oil prices. But, in the long term, the Kingdom needs to have an economy that is not oil or energy based in order to curb unemployment and deal with other structural issues.
Saudi Arabia may go bankrupt within the next five years if the government maintains its current spending habits, the International Monetary Fund said in a report 21 October 2015. Saudi authorities were already planning spending cuts as the world's biggest oil exporter seeks to cut its budget deficit created by the drop in crude prices.
Many Saudis take considerable comfort from the $600 billion in foreign currency reserves the Kingdom has accumulated during the oil boom and also from the country’s low debt and solid credit rating. Saudi officials have repeatedly said that the kingdom's economy is strong enough to weather the plunge in crude prices as it did in similar crises, when its finances were under more strain. But the IMF said measures being considered by oil exporters "are likely to be inadequate to achieve the needed medium-term fiscal consolidation. Under current policies, countries would run out of buffers in less than five years because of large fiscal deficits."
The new deputy crown prince Mohammad bin Salman, age 30, chairs the newly created Council of Economy and Development has laid out an ambitious plan to reform the Kingdom’s economy away from oil dependence setting a 2030 goal to raise non-oil revenue from 10 percent of the Kingdom’s revenues to 70 percent. The government pledged a similar transformation plan in 2000 after oil revenues crashed in the 1990’s. That plan was quickly abandoned when oil prices resumed their rise in 2003 unleashing a decade of unprecedented government spending.
The Saudi economy has long been split between higher paid Saudis mostly employed by the government and lower paid foreigners, mostly from South Asia, employed in the private sector. In the private sector, even after a decade of government pressure to hire Saudis, some 84 percent of the work force is non-Saudi. Most Saudis prefer the security and short hours of government employment.
Oil was discovered in Saudi Arabia by U.S. geologists in the 1930s, although large scale production did not begin until after World War II. Oil wealth has made possible rapid economic development, which began in earnest in the 1960s and accelerated spectacularly in the 1970s, transforming the kingdom.
Saudi Arabia continues to pursue rapid industrial expansion, led by the petrochemical sector. The Saudi Basic Industries Corporation (SABIC), a parastatal petrochemical company, is now one of the world's leading petrochemical producers, and the government promotes private sector involvement in petrochemicals. The government also plans new investments in the mining sector and in refining,
After Saudi Arabia announced its intention to join the World Trade Organization, negotiations focused on increasing market access to foreign goods and services and the timeframe for becoming fully compliant with WTO obligations. In April 2000, the government established the Saudi Arabian General Investment Authority to encourage foreign direct investment in the country. Saudi Arabia signed a Trade Investment Framework Agreement with the U.S. in July 2003, and joined the WTO in December 2005.
Through 5-year development plans, the government has sought to allocate its petroleum income to transform its relatively undeveloped, oil-based economy into that of a modern industrial state while maintaining the kingdom's traditional Islamic values and customs. Although economic planners have not achieved all their goals, the economy has progressed rapidly. Oil wealth has increased the standard of living of most Saudis. However, significant population growth has strained the government's ability to finance further improvements in the country's standard of living. Heavy dependence on petroleum revenue continues, but industry and agriculture now account for a larger share of economic activity. The mismatch between the job skills of Saudi graduates and the needs of the private job market at all levels remains the principal obstacle to economic diversification and development; about 4.6 million non-Saudis are employed in the economy.
Saudi Arabia's first two development plans, covering the 1970s, emphasized infrastructure. The results were impressive--the total length of paved highways tripled, power generation increased by a multiple of 28, and the capacity of the seaports grew tenfold. For the third plan (1980-85), the emphasis changed. Spending on infrastructure declined, but it rose markedly on education, health, and social services. The share for diversifying and expanding productive sectors of the economy (primarily industry) did not rise as planned, but the two industrial cities of Jubail and Yanbu--built around the use of the country's oil and gas to produce steel, petrochemicals, fertilizer, and refined oil products--were largely completed.
In the fourth plan (1985-90), the country's basic infrastructure was viewed as largely complete, but education and training remained areas of concern. Private enterprise was encouraged, and foreign investment in the form of joint ventures with Saudi public and private companies was welcomed. The private sector became more important, rising to 70% of non-oil GDP by 1987. While still concentrated in trade and commerce, private investment increased in industry, agriculture, banking, and construction companies. These private investments were supported by generous government financing and incentive programs. The objective was for the private sector to have 70% to 80% ownership in most joint venture enterprises.
The fifth plan (1990-95) emphasized consolidation of the country's defenses; improved and more efficient government social services; regional development; and, most importantly, creating greater private-sector employment opportunities for Saudis by reducing the number of foreign workers.
The sixth plan (1996-2000) focused on lowering the cost of government services without cutting them and sought to expand educational training programs. The plan called for reducing the kingdom's dependence on the petroleum sector by diversifying economic activity, particularly in the private sector, with special emphasis on industry and agriculture. It also continued the effort to "Saudiize" the labor force.
The seventh plan (2000-2004) focused more on economic diversification and a greater role of the private sector in the Saudi economy. For the period 2000-04, the Saudi Government has aimed at an average GDP growth rate of 3.16% each year, with projected growths of 5.04% for the private sector and 4.01% for the non-oil sector. The government also has set a target of creating 817,300 new jobs for Saudi nationals.
The eighth plan (2005-2010) again focuses on economic diversification in addition to education and inclusion of women in society. The plan calls for establishing new universities and new colleges with technical specializations. Privatization as well as emphases on a knowledge-based economy and tourism will help in the goal of economic diversification.
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