How do you diversify an economy from over-reliance on one sector? It is a challenge faced, more than anywhere else, by Russia and Saudi Arabia. Both are massively dependent on petroleum exports to sustain their entire economies, but whereas Russia has no coherent plan to do so, this aim is at the forefront of policy in Saudi Arabia – which from an economic perspective makes the country one of the most interesting on earth.
As most people know, Saudi Arabia is both the world’s largest oil exporter and has the largest proven reserves. Fewer people are aware that it is the 19th largest economy in the world, about the same size as Switzerland, a bit smaller than the Netherlands and a bit bigger than Poland. Fewer still will be aware that it has had nine successive five-year development plans since 1970, all of which have sought to work towards it becoming a diversified economy, less reliant on oil. But they have had only modest success. Oil, gas and associated industries generated 42 per cent of the country’s GDP last year, 87 per cent of its tax revenues and some 90 per cent of its export earnings. The fall in the oil price over the past four years has naturally hit public finances severely.
Now there is a new and more radical plan. It was launched in 2016 by Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud and is called Vision 2030. It is a fascinating exercise, and the best place to start for anyone seeking to understand the country’s dilemma.
All resources are finite. That dilemma is whether it should use its wealth to invest around the world through its sovereign wealth fund to provide a flow of income for the day when oil and gas revenues decline, or whether to press on trying to develop new sectors at home in areas where it does not have an obvious natural advantage. Of course this is a both/and rather than an either/or, but the balance between the two strategies is important.
Vision 2030 is not a detailed plan, rather a statement of intent. There are several planks. One is to cut bureaucracy, including a reduction of civil service staff by 20 per cent, and closer monitoring of its performance. Another is to remove obstacles faced by the private sector. There is an authority to support small and medium-sized businesses, and regulatory and legal reforms. And since there was a fiscal deficit of nearly 8 per cent last year, there is a commitment to balance the budget by 2019 and generate a surplus by 2020.
In the short term, achieving these financial aims will be made much easier by the recovery in the oil price, but that will not help the country to achieve the objective of rebalancing the economy. The aim here is to try and make Saudi Arabia a hub for tourism and other service industries. There is a huge infrastructural project, essentially building a new city, Neom, in the process.
How do you fund all this? Well, stronger oil prices are a big help, but the country does plan to float off 5 per cent of the shares in Saudi Aramco, the world’s largest oil company, currently owned by the state. It is not clear when or even whether this will happen. The Saudi authorities maintain that it will go ahead but there have been rumours that the sale will be postponed.
This story has become complicated and I don’t think it helps to speculate on what will happen. If the company were to float, it would have to comply with global disclosure and accounting standards. That would have both plusses and minuses from the point of view of the Saudi government. Disclosure forces discipline but it would also be an invasion of privacy. There is also the question of price. There has been talk of the stake being worth $2 trillion, but also of it being only a quarter of that amount. It is very hard to value the company for a host of reasons – you only really know what it is worth when you bring it to market.
If the sale does not go ahead, the plans can be financed but they will have to be done more slowly. That may not matter at all. Indeed, there is a strong argument that the country would make fewer investment mistakes if it spins out the process. The question really is whether it can become more of a regional service hub.
Dubai has shown one way of doing that, but there are many reasons why the more restrictive Saudi society would not want to head down that path. In any case there probably is not much room for another service centre, given what has already been achieved by Dubai, Abu Dhabi and, in a rather different way, Qatar. Take the plan to create this new city, Neom. Six “new economic cities” were announced in 2005. Even the most advanced of those, King Abdullah Economic City, seems to be lagging behind planned growth.
This is, I think, a cultural issue here, which is whether Saudi citizens want to work in the private sector, with all its insecurities and disciplines, rather than have solid jobs in government. Behind that are questions about education and training of the local workforce. You can always get expats to come in and do jobs, as the Gulf states have shown. But building a sustainable private sector has to be a bottom-up exercise, not one imposed by government. What Crown Prince Mohammad is seeking to do is impressive and important. But there is the danger of disappointment arising from the way he is doing it.
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