Riyadh, Saudi Arabia
By Sumaya Almajdoub
Saudi Arabia’s 2030 vision to transition into a post-oil economy has turned one year old this April. Despite the royal family’s expressed commitment to the vision, the Kingdom continues to face obstacles in its economic diversification efforts due to problems that stem from deep-seated deficiencies within the Saudi state and economy. If political will remains restricted to procedural reforms that fine-tune rather than transform the social and political order, Saudi Arabia will not be able to realize the full potential of its economic reform plan.
Vision 2030 foresees reducing Saudi Arabia’s dependence on oil by diversifying the economy and expanding the private sector. Despite these bold aims, the Kingdom’s economy remains dependent on the petroleum sector, which is dominated by the state. Last year, the oil sector accounted for 42 percent of gross domestic product (GDP), 90 percent of export earnings, and 87 percent of budget revenues. The bulk of this income is generated by state-owned oil company Aramco, leaving the country tethered to the oil market as its tries to reorient elsewhere.
The most recent reorientation effort came last month when King Salman visited Indonesia, Malaysia, Brunei, Japan, and China. The Kingdom reportedly signed $65 billion worth of deals on energy, space, and infrastructure projects during this marathon of visits. In addition, the architect and leader of Vision 2030, Deputy Crown Prince Mohammad Bin Salman, met President Donald Trump in Washington where he announced the intention to boost Saudi-US ties and launch joint initiatives worth $200 billion in direct and indirect investments on energy, technology, and industry.
These visits are aligned with the Kingdom’s ambitious, and somewhat unrealistic, goal to increase the private sector’s contribution from 40 to 65 percent of GDP and increase foreign direct investment (FDI) from 3.8 to 5.7 percent of GDP by 2030. Expanding FDI in Saudi Arabia, however, will be difficult because the country lacks the necessary legal and policy frameworks to protect investor rights. The Kingdom still lacks bankruptcy laws and its judicial system needs to be upgraded to effectively deal with complex corporate structures and solve commercial disputes in a timely manner. While some Saudi ministries are seeking to facilitate the issuing of visas to investors, Saudis, let alone foreign investors, still find it difficult to purchase property or acquire credit to open commercial businesses. To realize the full-potential of new investments, the Kingdom must enact serious domestic reforms to improve the rule of law, transparency, and the ease of doing business. Fitch’s recent downgrading of the Kingdom’s credit rating only illustrates the urgency of such reforms.
While procedural and technocratic reforms can contribute to improved economic performance, the gravity of the Kingdom’s economic challenges renders such reforms insufficient. With a $79 billion budget deficit and an expected population increase of about 10 million by 2030, the Saudi government will no longer be able to provide the same level of economic security that its citizens are used to. Citizens who have already witnessed a scaling down of the welfare state and are expected to pay new taxes by 2018 will demand accountability if such reforms fail to yield results. The Kingdom’s delicate ruling bargain – in which citizens agree to political acquiescence in exchange for economic security – was easier to sustain during periods of high oil revenue. However, as oil becomes less dependable, the Kingdom will need to accelerate its investments in non-oil sectors and improve the efficiency of existing industries in order to transform the current social contract.
The Saudi government is planning to privatize five percent of Aramco and possibly other state-owned companies to pay off its budget deficit. Privatization of state assets and cutting government subsidies may help balance the budget in the short-term, but these measures will be insufficient to drive economic growth and create new jobs. To expand non-oil sectors, serious investments will be needed to foster new industries or expand existing ones. The Kingdom has the potential to increase its comparative advantage in certain manufacturing industries. However, this is a long-term effort, and may not yield immediate returns. In addition, creating new jobs in the private sector will also be difficult in an economy where the lines between the private and public sector are blurred. Members of the royal family often dominate major sectors in the economy, leaving little room for an independent private sector to grow. Further, encouraging Saudis to move away from cushy government jobs will mean trimming an overblown public sector significantly, a politically risky measure.
Necessary structural reforms, particularly those related to human capital development, will require the government and its citizens to seriously examine institutions that have served as pillars of Saudi society for most of its modern history: a royal family that dominates the economy, government jobs that trade economic stability for political acquiescence, and a conservative class of religious scholars who exert substantial influence on many facets of daily life. Economic diversification depends on such structural, rather than procedural, reforms. If the ruling monarchy and business elite continue to fine-tune rather than transform the social and political order, the Kingdom will not be able to meet its Vision 2030.
Sumaya Almajdoub is a Middle East Fellow at Young Professionals in Foreign Policy (YPFP). Sumaya expects to receive an MA in Middle East Studies from George Washington University in 2017.