How Saudi Arabia is diversifying from oil revenue

By Stefano Virgilli — Vision 2030, is Saudi Arabia’s agenda for restructuring the current economy by using the potential of other resources to ensure economic progress. The main goal of the agenda is for the Kingdom to successfully diversify from oil. One of the main points of the plan is the privatisation of  the energy giant Aramco along with tax increases. The agenda was supported by King Salman bin Abdulaziz, who sends a message to all his subjects to collaborate together and make the project successful. The strategy includes the creation of a $2tn wealth fund and a National Transformation Programme that incorporates well-planned economic reforms. The king’s son and deputy crown prince, Mohammed bin Salman, said that “The vision doesn’t need high oil prices.”
“We can live without oil in 2020,” the prince added. The agenda includes a plan for selling about 5 per cent of Aramco while raising investments and transferring the power from oil to investments. The oil giant is investing in pioneering new technologies putting innovation as the key component of its future business strategy. “The vision is a road map of our development and economic goals,” the prince stated. “Without a doubt, Aramco is one of the main keys of this vision and the Kingdom’s economic renaissance.”
The goal is to bring the economy to rely less on oil revenues — which formed 90 per cent of the Kingdom’s budget and increase non-oil revenue by attracting foreign investments. After the record deficit of almost $100 bn in 2015, Saudi Arabia took its first loan of $10bn from global banks — which is the first loan since 1991. The strategy focuses on transforming the way the Kingdom generates income since the government has been worried about the Kingdom’s oil-centred economy and where it will lead them in the future.
The importance and urge of the Kingdom to establish the agenda can be explained with the major change in the overall functioning of the oil market. Oil prices experienced a drop, especially after the growth of non-traditional energy sources. Opec, led by Saudi Arabia decreased its influence on the market prices, which inspired the creation of the 2030 agenda. To summarise the ambitious plan to diversify the economy, focuses on three main areas:
1. The first one is to increase the generation of non-oil revenues, expand the tax base, raise fees on public services, and attract visitors to the Kingdom to bring more income.
2. The second area is to reduce spending, lower subsidies, and wisely allocate the public investment programme.
3. The third one is the area of investments. The Kingdom plans to raise funds and invest to increase the country’s income.
The 2030 agenda comes with risks, given the importance and size of the transition. The start of the project has already been initiated, following the implementation of some important steps. The progress has been closely watched by the members of the Gulf Cooperation Council and many other countries in the world. The agenda is promising and it will make substantial economic reforms, inspiring other countries in the region to include similar changes in their economies as well.
The Director of Economics at the Gulf Research Centre in Riyadh, John Sfakianakis told The Guardian “The vision and ambition is out there and the proof now will be on the execution and the ability to continue to amass support from society in general and the business community specifically.”
“Due to Mohammed bin Salman’s age, pace and sense of accountability, society is embracing these plans. Now is the time for big economic changes that the country hasn’t embarked on since 1932. The dynamism and determination to deliver has not been seen before and Bin Salman and his team know they have to deliver. Economic necessity dictates that Saudi Arabia reforms now,” he said.
The Kingdom of Saudi Arabia has a great potential to transform its economy and move beyond oil. McKinsey Global Institute reports, among the other, finds that the country became the world’s 19th largest economy because of the boom of oil prices from 2003 to 2013. The number of jobs for Saudi women increased, as well as GDP and household income — that experienced an increase of 75 per cent.
Major investment projects were successfully implemented, mostly in education, health, and infrastructure. According to the report, a “productivity-led economic transformation could enable Saudi Arabia to double its GDP again and create as many as six million new jobs by 2030.”
To do that the Kingdom would need an estimated $4 trillion investment. They see the potential in eight sectors, including mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance, and construction. These sectors have the potential to generate more than 60 per cent growth. The report suggests that the only way to achieve these numbers are to approach a market-based economic model that will include the participation of Saudi man and women, ensuring improved efficiency and higher household income.
Without a doubt, the Kingdom is facing a challenging transformation that will ensure future prosperity and economic growth that will not only be based on sustainable sources but will set an example for many other countries with similar plans.
Oman has been taking major steps in this field as well. In fact, recently, His Majesty Sultan Qaboos gave his blessings to the second phase of the Tanfeedh project, a part of the 9th Five-Year Development Plan (2016-2020). The country began with the implementation of the next phase of The National Programme for Enhancing Economic Diversification, which focuses on a diversification strategy that includes several sectors, such as tourism, manufacturing, logistics, finance and employment.