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Saudi Arabia
Economic Overview
Overview
Saudi Arabia enjoys an eminent position as the largest economy in the MENA region and
19th largest in the world. Strategically positioned at the heart of the Arabian Peninsula,
it not only holds the largest proven oil reserves, but is also home to two of Islam’s holiest
sites and a thriving economy.
Facts
GDP: $665.5 billion (2015 est.)
GDP per capita: $54,600 (2015)
Inflation: 2.3% (2015)
GDP growth rate: 3.4% (2015 est.)
Total population: 27.75 million (July 2015)
Saudi population: 20.7 million
Unemployment rate: 11.4% (2015 est.)
Member of the World Trade Organization and G20
Source:
https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
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Building a Modern Economy
The Kingdom has undergone a remarkable
transformation since its unification in
1932. It has evolved from a subsistence
agricultural and commercial society into a
global economic power, made possible by
the discovery of oil in 1938.
Oil was discovered in the Eastern Province
city of Dhahran, after King Abdul-Aziz
signed an oil concession with Standard Oil
of California. This U.S.-Saudi partnership
developed into Saudi Aramco- the largest
oil company in the world, and laid the
foundation for a longstanding U.S.-Saudi
relationship.
The oil industry began to take off in
the 1960s. Steady oil exports provided
the funds needed to build a modern
infrastructure of roads, hospitals, modern
schools, airports and seaports. However, it
was not until the 1970s- when the Arab
oil embargo and regional instability raised
the price of oil dramatically, that Saudi
emerged as a political and economic power.
The Kingdom experienced fast-paced
economic growth, a massive accumulation
of wealth and rapid urbanization. Over
the course of the decade, GDP grew by
10 percent per year. The massive inflow of
revenues allowed the Kingdom to increase
its import level, spending heavily on
defense and infrastructure, and supplying
large amounts of foreign aid.
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Oil
An oil-based economy, Saudi Arabia possesses roughly 18% of the world’s proven crude
oil reserves (266.7 million barrels). It ranks as the world’s largest producer and exporter
of petroleum (11.6 million barrels per day) and plays a leading role as a member of the
Organization of Petroleum Exporting Countries (OPEC). While the private, non-oil
sector’s contribution to GDP has increased over the past decade, the oil and gas sector
accounts for a majority of government revenues (50% of GDP; 85% of export earnings
in 2015). While this has contributed significantly to the Kingdom’s growth, such heavy
dependence leaves the country vulnerable to supply and demand disruptions and price
fluctuations (Graph 1).
Figure 1: Saudi Arabia Composition of Nominal GDP. Source:
Saudi Arabian Monetary Authority (SAMA)
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Trade
Saudi Arabia ranks as the 19th largest exporter and the 20th largest import market in
the world, ending 2015 with a recorded trade surplus of $21 billion dollars (Trading
Economics). Top exports include crude petroleum, petrochemicals and plastics but
represent all economic sectors. Exports of non-oil products continue to grow (averaging
around $6 billion dollars per year).
A strong and growing consumer market has opened the doors for increased imports of
foreign goods and services. In 2014, imports amounted to $152 billion, up 43% since
2010 and range from imports range from aircraft equipment to pharmaceuticals.
Trade has expanded tremendously in the Kingdom following bilateral trade agreements
and the formation of free-trade zones with neighboring GCC countries. China, India,
Germany, South Korea and the United Arab Emirates are among Saudi Arabia’s
leading trading partners however the U.S. tops the list with trade totaling $71 billion
in 2013 (Office of US Trade Representative). The Kingdom acceded to the World Trade
Organization in 2005 and has since enjoyed increased commercial activity on the global
market.
The government and chambers of commerce encourage the private sector to undertake
commercial ventures by offering long-term interest free loans and other incentives.
Today there are over 580,000 licensed commercial enterprises with an estimated joint
value of $54 billion.
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National Development Plans
The government recognized the importance of
diversifying the economy as early as 1970, when the
Ministry of Economy and Planning embarked on
the first of a series of five-year development plans.
The plans were aimed at expanding the country’s
physical and social infrastructure as well as its
non-oil sectors. This included the construction of
bridges, dams, an extensive pipeline network and
communications systems. Substantial funds were
spent on the building of more hospitals, schools and
universities as well as vocational training programs.
As the infrastructure took shape, the government
launched a major effort to expand the agricultural
and industrial base, in addition to other sectors. The
major industrial towns of Yanbu and Jubail were
designed by the government in partnership with
the private sector and international corporations
to accommodate heavy industries such as
petrochemical projects, iron and steel plants and
oil refineries.
The government introduced structural reforms by
the 1990s, encouraging privatization, joint ventures
and the liberalization of trade. Commercial laws
were revised, but the agenda continues with an
increased focus on diversification and privatization.
“In a matter of decades, Saudi Arabia transformed
itself from a desert kingdom populated by nomadic
tribes to a modern economic entity which controls
over a quarter of the world’s oil.” – John Mazor,
Worldmark Encyclopedia of National Economies
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Economic Diversification and Investment
In 2015, Saudi entered its tenth development plan. Efforts to privatize, diversify and
transform into a knowledge-based economy have opened up a wealth of opportunities
for foreign direct investment.
According to the United Nations Conference on Trade and Development (UNCTAD),
diversification efforts have attracted over $147 billion dollars over the past two decades.
The introduction of the Foreign Investment Law in 2000 also increased incentives for
FDI, including the right to own property and real estate. Many investments have gone
towards large-scale solar projects in a serious effort to support the country’s transition
to renewable energy. Other investments have gone towards the construction of projects
such as the King Abdullah Economic City, a new financial district in Riyadh and new
metro transit lines, which are expected to contribute over $150 billion to the country’s
GDP and create 1.3 million jobs by 2020.
Recognizing Saudi youth as its number one asset, the Kingdom has prioritized education
and research and development initiatives, launching the King Abdullah University of
Science and Technology in 2005 while also sponsoring over 200,000 students worldwide
through the King Abdullah Scholarship Program. Investing in education is vital for
the Kingdom, whose youth (aged 25 and below) make up over 60% of the population.
According to the Saudi Arabian General Investment Authority (SAGIA), Saudi dedicated
$57 billion to education and training in 2015, up 3% from the previous year.
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GDP Growth
As a result of the Kingdom’s long-term investment
and diversification plans, the share of non-oil output
in GDP has steadily increased and will continue to
post a healthy growth at around 3.5%. According
to Jadwa Investments, the non-oil private sector
will remain the driving force behind the country’s
economic growth, which continues to dampen
in response to the severe drops in oil prices. The
World Bank expects economic growth to average
2.4% in 2016, down from 3.5% in 2014 (Graph
2). Construction, transportation and consumerdriven sectors are leading economic growth in
the private sector, which now accounts for 40%
of GDP (Saudi Central Department of Statistics
and Information). This is expected to continue
growing as Saudi opens the doors to more foreign
investments.
Figure 2: Saudi Arabia GDP Growth (2016 forecast)
based on World Bank Data.
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Challenges and Prospects
Excess supply of oil on the market combined
with slowing demand (think China’s economic
slowdown) caused oil prices to drop by over 70%
in the last 18 months (Graph 3). While this 12year low resulted in Saudi Arabia entering a $98
billion budget deficit in 2015, the government
has committed to policy reforms and budget
cuts. The Kingdom started 2016 by cutting
energy subsidies, which, according to the IMF,
accounted for 10% of GDP- roughly $60 billion.
While the cuts will ease pressure on public debt,
they also aim to reduce inefficient domestic
energy consumption, which at the current rate,
jeopardize Saudi’s role as a market leader. Energy
efficiency is a national responsibility, and unlike
the Kingdom’s long-term plans to diversify its
energy mix, it provides an immediate impact
that is both vital for a growing population and
sustainable.
In addition to the abovementioned subsidy cuts, the government has taken prudent steps
to encourage foreign investment. The Tadawul Saudi Stock Exchange- the largest and most
liquid market in the region (valued at around $500 billion) opened up to qualifying foreign
investors in June 2015. Furthermore, SAGIA announced its plans to ease restrictions on
foreign direct investors, allowing full foreign ownership of businesses for the first time.
Opening up to foreign investment will not only promote growth and competitiveness in the
private sector, but will also create jobs for a young population. Such a large youth brings
with it enormous talent and innovative potential which the Kingdom has nurtured through
it’s education reforms and “Saudization” efforts of the workforce. But if the Kingdom is
to raise output and productivity, it must ensure its investments and policies translate into
employment for the young.
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Figure 3: West Texas Intermediate (WTI) prices dropped from $103 per barrel in Feb 2014 to $32 per
barrel in Jan 2016. Source: Energy Information Administration (EIA)
Summary
Despite its continued dependence on oil revenues, Saudi Arabia has taken a cautious
approach to reduce the impact of lower revenues on the local economy while also
creating significant investment opportunities through diversification and privatization
reforms. While it continues spending on vital development projects, the Saudi economy
remains robust and strong and is poised to sustain steady growth as it enters a new
economic climate.
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Written by: Nourah Aleidi
Edited by: Nabaa Hashmi
Work Cited
"Crude Oil Price History Chart.» Energy Information Administration, Web. <http://www.
macrotrends.net/1369/crude-oil-price-history-chart>
"GDP Growth (annual %). Saudi Arabia» World Bank, Web. <http://data.worldbank.org/
indicator/NY.GDP.MKTP.KD.ZG>
"Saudi Arabian Monetary Agency (SAMA)." The Saudi Arabian Economy page 58. 2015. Web.
<http://www.sama.gov.sa/en-US/EconomicReports/AnnualReport/5600_R_Annual_En_51_
Apx.pdf>
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