SEATTLE — Between 2003 and 2013, soaring oil prices enhanced Saudi wealth, making it the 14th largest economy in the world. However, as the price of oil has dropped dramatically in the last year, the Kingdom has had to rethink and shift its focus; it is currently taking steps that will ensure the country’s future economic stability. “Saudi Vision 2030” announced in April by Deputy Crown Prince Mohammed bin Salman promotes an economic reform plan that will reduce Saudi oil dependence.
Saudi Arabia is an oil-based economy with tight government control over the majority of the country’s economic activities. The CIA World Fact Book approximates that 87 percent of budget revenues, 42 percent of GDP and 90 percent of export earnings are derived solely from the petroleum sector.
A report published by McKinsey & Company, a worldwide management consulting firm, said the country could no longer rely on oil revenue and public spending for growth as the global energy market changes.
It should be noted, however, that the plan did not discuss measures to raise revenue from taxes nor had it considered the notion of modifying the existing political arrangement.
Saudi Arabia, an absolute monarchy, employs a rather large public sector and collects no taxes from a society that relies heavily on governmental assistance.
The Deputy Crown Prince, often referred to as MbS and son of King Salman, who approved the 84-page document outlining the economic reform plan, promises to cultivate the country’s private sector. In a recent interview with Al Arabiya, MbS said, “By 2020, we’ll be able to live without oil.”
According to the Wall Street Journal, MbS’s Vision 2030 pledges to increase the private share of gross domestic product to 65 percent by 2030, up from 40 percent. In addition, he plans to increase the participation of women in the work-force, cut the current 11.6 percent unemployment rate, privatize state industries and remove utility subsidies for citizens who do not need them.
In order to implement reform, the government will have to encourage investment, creation of new businesses, and simplify the hiring and firing process. Currently, the Wall Street Journal reports, to start a company or any business in Saudi Arabia is a difficult process as numerous ministries must give their approval. There are all-encompassing licensing requirements and there is virtually no foreign investment in entire industries, as they are prohibited by the government.
There is little doubt that it will be a challenge for the government to implement a reform plan that will reduce Saudi oil dependence. Suspension of utility subsidies will not likely garner support for the kingdom.
The plan also does not mention any reform that would lift the driving ban on women. This will increase the difficulties for a growing workforce that increasingly will be relying on women. However, any changes made to lift the driving ban would need to be negotiated with the country’s Wahhabi religious authorities who possess immeasurable power within the country.
As the McKinsey report made very clear in terms of economic transformation, all players will have to be engaged, including the private sector, foreign investors and individual households. And individual Saudi’s will have to assume more personal accountability as the state will be required to adopt a way of thinking based on a more competitive market economy.
– Heidi Grossman