Vision meets Saudi reality

If Saudi Arabia succeeds in its reforms by 2020, 2030 or even 2050, it will have accomplished a transformation that has proved almost impossible for its neighbours. In its discussion note “Economic Diversification in the GCC” , the IMF points out that “export product diversification has increased in the United Arab Emirates and Oman, but Saudi Arabia and Kuwait have witnessed greater export concentration, and Bahrain and Qatar have experienced little change” since 1990. In Saudi Arabia 73% of 2015 state revenues ($162 billion) came from oil.

Oil revenues have created rapid development in the region. Since it was discovered in 1938, oil has fuelled the engine of development. The government has built schools, universities, hospitals and a functioning state apparatus.

Saudi Arabia controls 18% of the world’s oil and gas reserves, and so in theory the government has an infinite source of income to continue this spending spree. But, thanks to low-cost production techniques elsewhere in the world, it no longer controls the price of oil, and so even while flooding the market, its budget deficit is expected to be 13.5% of GDP in 2016.

Economic reform means redirecting oil revenues to changing the composition of the economy. Investment capital to realise Vision 2030 will not be a problem. It will be financed in part by plans to sell less than 5% of state-owned Saudi Arabian Oil Co. for between $100bn and $150bn. The ownership of Saudi Aramco will transfer to Saudi Arabia’s sovereign-wealth fund, the Public Investment Fund. This will become the world’s largest sovereign wealth fund, and control $2tr of investment capital for public-private partnerships and infrastructure, targeted at non-oil investments.

But many Saudi workers like things as they are. Saudis do not pay either income or sales tax, get a state pension, unemployment benefits (a response to unrest during the Arab Spring), subsidised fuel, water and electricity, and free education and healthcare. Short-run government reforms are trying to bring the budget back into surplus by cutting back on this spending. At the beginning of January, fuel, water and electricity subsidies were cut. Petrol prices jumped by about 50% overnight – although only to 24 cents a litre. Long-run international commitments to reduce carbon dependency mean that, in future, government spending cuts may need to bite much deeper. There are plans to introduce some sales tax on luxury items, and a tax on vacant land, though an income tax isn’t on the agenda.

Saudi Arabia cannot just cut its way to faster growth. Vision 2030 is really about diversification: in common with other GCC states (Vision 2020 in Oman, Vision 2021 in the United Arab Emirates, Vision 2030 in Bahrain, and Qatar National Vision 2030), it wants to boost the private sector and generate tradable exports.

This can only happen if there are more private sector companies and a supply of qualified Saudi workers willing to take the jobs they offer. The Saudi state employs 90% of non-foreign workers in secure employment. Competition among immigrant workers depresses pay and job security in the private sector, and so wages are also higher in government jobs. Almost 50% of Saudis are less than 30 years old, but there is so far little incentive for a young Saudi to start a business, or even work in the private sector – even though the supply of new government jobs cannot go on for ever.

So while unemployment is officially 11.7%, the headline figure masks low female labour force participation and damaging inequalities. As the IMF’s 2015 report into Saudi Arabia’s economy explains:

“Youth unemployment was over 40%, and has been increasing. With rising labour force participation for women, and over 35% of the population still under the age of 19, these segments of the labour force will increase rapidly, underscoring the urgency of creating private sector jobs for nationals.”

Privatisation will not end with Saudi Aramco. For example, Saudi Arabian Airlines privatised cargo and ground services, and plans to sell off the rest of its businesses in stages. Foreign investors are being courted. In 2015, The Tadawul, Saudi Arabia’s overwhelmingly non-oil stock exchange, opened to non-Saudi investors – though so far only those who have funds of more than $5bn under management.

Long-run changes will use the benefits of the Public Investment Fund to encourage further Foreign Direct Investment and establish non-oil domestic companies, especially SMEs, on the model of countries such as Indonesia and Chile that have successfully diversified away from commodity exports. For example, Saudi Arabia wants to build a successful domestic market for its defence spending: currently 98% goes overseas, and Vision 2030 wants this cut to half.