An economic transformation in Saudi Arabia... Has Vision 2030 begun to bear fruit?

Introduction to translation

Karen Yang, a senior fellow at the Middle East Institute in Washington, DC and director of the Economics and Energy Program at the same institute, prepared an analysis published by the American magazine "Foreign Affairs" in which she deals with the features of the new Saudi economic policy, and explains where the Kingdom stands now in the goals of "Vision 2030", and how It adapts to fluctuating global oil prices.

translation text

In 2016, Saudi Arabia embarked on a revolutionary political and economic experiment.

In April of that year, Deputy Crown Prince at the time, Mohammed bin Salman, announced the economic reform initiative "Vision 2030", and bin Salman's announcement was accompanied by sharp criticism of his country's dependence on oil, and according to the prince's vision, the kingdom needs to face the challenges of the century. In the twenty-first century, and get rid of its position as a rentier state dependent on revenues from oil exports.Instead, the kingdom will integrate its economy into the global financial market as both a destination for its money and a source of investment.Bin Salman also announced that the Saudi sovereign wealth fund will take over “more than 10% of the investment capacity of the world.

Saudi Arabia has already undergone massive social changes in these recent years, but it has stumbled on its way toward some of these ambitious financial goals.

The kingdom is still waiting for a lot of promised foreign direct investment, while its foreign reserves have been depleted due to the growth plan.

Most of Mohammed bin Salman's shining promises, including future mega urban projects, are still incomplete.

However, the Saudi experience recently began a process of reorienting the economy, as the country's leadership realized that the kingdom's old model, based primarily on a welfare state based on oil money and strict gender segregation, was no longer viable.

This realization resulted in an economic approach that relied not on charismatic futurism, but on a more traditional and technocratic set of policies.

Rather than modernization seeking to garner propaganda, the new Riyadh model relies heavily on strengthening the domestic market, the goal being to encourage debt-fueled consumption and lowering the ceiling of what citizens expect from the state.

Saudi leaders are seeking to establish an economy driven by the service sector, and create a consumerism in the American way, and the radical trend of the state towards reducing public expenditures, selling assets and withstanding the wave of declining global demand for oil are manifestations of this transformation.

Despite the “Covid-19” pandemic, and two years of fluctuating oil prices, the government was able to adhere to this highly disciplined fiscal policy, a policy that prepares the Kingdom to face future economic challenges.

New government policy

It is sometimes difficult for us to recognize the features of the new Saudi economic policies, as the kingdom remains highly dependent on oil, with net oil and gas exports accounting for nearly 70% of the country’s total exports in 2020. At the same time, total exports made up only 26% of GDP , which indicates the potential of Saudi Arabia, which has the largest domestic consumer market in the Gulf.

The proportion of oil and gas revenues in the total government budget shrank from 64% in 2016 to 53% in 2020.

Moreover, the COVID-19 pandemic has prompted the government to find innovative ways to generate revenue and reduce expenditure.

In response to the collapse in oil prices in the spring of 2020 and the long-term global shift away from fossil fuels, Saudi policymakers recognized their need to steer the economy in a new direction, and Riyadh raised its value-added tax from 5% to 15% in the summer of 2020 as part of this efforts, which boosted non-oil revenues by more than 30% in the first nine months of 2021. Currently, goods and services taxes generate approximately 70 billion Saudi riyals, which is equivalent to half of oil revenues.

In comparison, government spending on major infrastructure projects has shrunk sharply.

The Saudi private sector is also expanding, even if its foundations are weak.

After contracting for seven consecutive quarters, the economy finally started to grow again in the second quarter of 2021, as the gross domestic product rose by 1.5 percent, and the growth of the private sector outside the oil sector rose by 7.5 percent in the first half of the same year.

This expansion is partly due to the government's attempts to shift social services such as health care and education towards the private sector.

Saudis currently spend more on healthcare out of their own pocket than most of their neighbors in the Gulf states. According to 2018 World Bank data, the Saudi government covers about 60% of healthcare expenditures, which is low by Gulf standards.

The government's belt-tightening policy extended to the public sector and military spending.

Despite the pandemic, spending on public sector wages decreased from a high level of 510 billion riyals at the end of 2019 to about 490 billion riyals by the end of 2021. With regard to military spending, it decreased from 540 billion riyals in 2019 to 440 billion riyals by the end of 2021. This is because the gradual de-escalation of the war in Yemen that occurred recently has a financial rationale, not just a political and military one.

Separately, women are taking on new roles in the labor market, with improved access to economic mobility across the country.

Now 25% of Saudi women work in the labor market, compared to only 15% in 2018, and there are similar trends among other segments of the population, where the participation rate of men in the labor market between 20-24 years is 55%, compared to 40% in 2018. Despite persistent unemployment among job seekers - about 11 percent - more Saudis are looking for work now than they were before the "Vision 2030" reforms.

These numbers come as a partial result of the government's efforts to replace Saudi citizens with expatriate workers, while dedicating certain jobs to be the preserve of citizens only.

Despite its association with the pandemic, such programs have succeeded in developing the workforce, as about 600,000 foreign workers have left the Kingdom since early 2020.

Finally, as a result of government encouragement, Saudis are now borrowing money to maintain their lifestyle rather than relying on state subsidies. Ultimately, some of the goals of the Kingdom's Vision 2030 include facilitating access to real estate loans and developing an affordable financial services sector that encourages citizens to invest local, and increasing the number of companies listed on the local stock exchange.

The Saudis seized the opportunity, as Saudi banks sold new real estate loans with a record number of 46.7 billion riyals in the first quarter of 2021, which is a higher number than it recorded in the previous year, which amounted to 31.2 billion riyals.

The US credit rating agency, Standard & Poor's, expects the Saudi mortgage market to increase by 30% annually over the next two years.

The government's long-awaited next step may be the privatization of the Saudi Electricity Company, in addition to attempts to generate at least 30% of the country's domestic energy needs using solar and renewable energy sources.

If such a shift occurs, the Kingdom will likely see a rise in the number of independent energy producers, with a more competitive market for various types of renewable energy.

Although such developments are difficult for Saudis who are accustomed to low energy prices, they will help the country achieve its goal of zero carbon emissions by 2060. Indeed, citizens and residents alike are preparing for this transformation, due to the government's recent reduction of subsidies on utilities and fuel.

Reducing the role of the state

Taking all of the above into account, these disparate policies represent a major shift in the Saudi political economy.

By developing new sources of income and decoupling spending from fluctuations in oil prices, Riyadh is laying the groundwork for conservative fiscal policy in the Gulf.

However, a transformation of this magnitude will not go unopposed, and I mentioned in 2016 that there are two challenges that could stand in the way of Vision 2030.

The first is the possibility that reforms will falter due to the intransigence of the Saudi bureaucracy and the vested interests of the ruling family and associated elites.

The second is the possibility that the Gulf model of real estate and property development, which focuses on housing and tourism, is ineffective in the kingdom, as Riyadh is not Dubai.

Mohammed bin Salman's anti-corruption campaign in 2017, and his ongoing crackdown on political dissent, managed to silence any domestic opposition to economic reforms.

Although the second challenge remains, it has become less important. Saudi Arabia does not need to follow in the footsteps of its smaller neighbors in the Gulf, because it has the advantage of scale and a growing domestic market.

However, a number of emerging challenges lie on the horizon today.

While the kingdom today has a young population eager for social reforms, willing to borrow and actively work to meet its lifestyle expectations, ten years from now this group will begin to recalculate in light of the economic burdens of middle age, including care costs. High health, children's education expenses, and debt obligations.

Although elderly residents are less likely to take to the streets, they are also less likely to innovate and take risks to start new private businesses.

Therefore, there is little chance for Saudi Arabia to bring about the desired transformation in its economy.

Despite those risks, the Saudi regime has learned and adapted in amazing ways over the past five years.

Mohammed bin Salman has passed his period of stability in power and is now so tightly held over the state that he is so comfortable that he has delegated some of the power in terms of the economy and energy to others.

The country has maintained a disciplined and traditional fiscal policy in the face of enormous pressure to expand social spending, and these are simply glimpses of the new Saudi economic model.

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Translation: Hadeer Abdul Azim

This report has been translated from Foreign Affairs and does not necessarily reflect the website of Meydan.