Low oil prices and high spending have drained Saudi Arabia’s cash reserves and as fossil fuels become relics of the past, the economies of oil-producing nations will diminish as well. To avert this catastrophe, the Saudi leadership promptly designed an unprecedented plan to diversify the kingdom’s economy beyond petroleum. Although the intention is welcomed by the global community, the Vision 2030 initiative is not without its geo-economic considerations.
Headed by Crown Prince Mohammad bin Salman, the Saudi Vision 2030 project came into effect at the backdrop of the 2011 Arab Uprisings. The speed at which the demonstrations spread throughout the Middle East caught the House of Saud by surprise, and when protests erupted in the country’s Eastern Province where much of the Shia community resides, the government in Riyadh cracked down on dissidents while it ramped up social spending.
However, the $93 billion that was poured into social spending could only be maintained if the price of crude oil remained at around $100 per barrel. Yet, at the time, oil prices were around $55 per barrel. As a result, the budget deficit grew swiftly while the Saudi foreign exchange reserve decreased steadily. It became evident that the situation was not sustainable due to the demographics. The fact of the matter is that since about 60% of the Saudi population is under the age of 25, the number of working adults in the country is set to surge over the next decade. Even if the price of oil increased, it would not be sufficient to secure the long-term economic prospects of the kingdom.
The Saudi Government recognizes that it needs to reduce its spending and increase domestic revenues from sources beyond oil production. In other words, it was time for a change. To that end in 2016, the government launched the Vision 2030 project. At heart, the initiative promised to step back from the present relationship the government has with the public where the state provides all the services and resources the citizens need at very little cost in exchange for complete control over the society.
The effort to move away from this social contract is neither easy nor appreciated by the public. For instance, the government’s recent increase of various taxes and prices for services raised living costs in the country. In addition, the Vision 2030 initiative stipulates the downsizing of the public sector and the empowerment of the private sector in the economy. Yet, considering the fact that nearly 70% of the kingdom’s labor pool is employed in the public sector, Saudi citizens are not thrilled with the proposed reforms of the Vision 2030 initiative.
At this stage, it is too early to judge the success of the Vision 2030. Since the start of 2018, the Saudi Government has fallen back on its old habits of spending thanks to improved oil prices. As such, the urgency for reform has slowed down. However, there is still progress in some areas and many more changes are likely to unfold in the coming years. Some of the acclaimed specifications of Vision 2030 are the promise to boost employment in the private sector and to triple non-oil revenues through taxes and fees.
To accomplish this, Vision 2030 proposes to reduce all kinds of social subsidies while implementing labor and social reforms that would increase the participation of women in the workforce.
Meanwhile to open the kingdom’s private sector to foreign investment, Riyadh plans to invest in retail, finance, construction, healthcare, tourism, defense, mining, and manufacturing.
A central component of the initiative is Saudi Aramco. More specifically, to acquire the necessary investment funds, the government wants to put up the state-owned Saudi Aramco for initial public offering. Only then will the Vision 2030 project truly start. Once the IPO reaches a valuation of around $2 trillion, the government plans to sell about 5% of Saudi Aramco on public stock markets. This would generate the Saudis roughly $100 billion. However, there is great skepticism over the valuation of Saudi Aramco with many estimating the value to be around $1.5 Trillion. To get the funds, Riyadh would end up selling additional shares of Saudi Aramco’s assets.
In addition, the government’s hope that 5% will fetch $100 billion is not sufficient for economic reforms. In fact, it’s just enough to balance the flow of money draining from the Saudi reserve, but there won’t be enough money left to invest in private industries. To address the financial shortcomings and still have enough funds to invest, the kingdom would have to sell additional shares of Saudi Aramco’s assets.
Beyond funding, the Vision 2030 project seeks to ramp up the share of the private sector in the overall economy which sits at a little over 20% of the total GDP. Some industries such as defense and tourism will likely surge in the coming years. Religious tourism is already at an all-time high with about $22 billion in annual revenues and tourism is the second largest source of income in the kingdom. Tourism is also expected to rise by another $10 billion in the next few years and this number could increase if the Saudi Government reformed its visa system for travelers.
As for its defense industry, Saudi Arabia is one of the biggest military spenders in the world, yet the country has no domestic defense industry. As such, for years, the Saudis have procured arms from western nations like the United States. To that end, the Vision 2030 initiative seeks to change this by bolstering the indigenous manufacturing of weapons thereby reducing military spending and creating jobs. These reforms are likely to succeed in the coming years.
However, in other industries, Saudi Arabia has its limits. Many of the specified industries are already adequately advanced in the country such as mining and petrochemicals. Meanwhile, Saudi Arabia is unlikely to grow into a regional medical hub as it aspires since more sophisticated facilities already exist in the nearby region. Altogether, it means that the roadmap to ramp up private industrial output will work in some areas, but fail in others.
Another complication for the Vision 2030 initiative is that the projections are based on western models and do not consider the work ethics in Saudi society where about 80% of the jobs in the private sector are filled by foreign workers from South Asia. Even though Vision 2030 could create more economic opportunities, most Saudi citizens will not be eager to take up labor intensive jobs since they have grown accustomed to high-paying jobs in the public sector. Therefore, to truly employ the Saudi youth in the private sector, the Saudi leadership in Riyadh will have to take the time to educate its people and cultivate better work ethics amongst the public. This adjustment will take far longer than the current schedule for 2030.
For the sake of argument, let’s assume that somehow the Saudi youth agreed to work in the labor-intensive sectors and as promised, Saudi Vision 2030 doubled the GDP, created 6 million jobs, and everything went as planned. On paper, the economic project would have improved the livelihood of all citizens including the minorities. In practice however, the Saudi leadership will not risk their relationship with the Wahhabi clerics who will try to restrain the role of Shia officials, businessmen, merchants, and clerics in Saudi society. Thus, no matter how far-reaching Saudi Vision 2030 goes, it will not resolve the country’s sectarian divisions.
In fact, the initiative is more likely to further sideline the Shia community of Saudi Arabia who account for 15% of the total population. Thus, Vision 2030 will not improve the lives of all Saudi citizens. The Wahhabi and Sunni communities are said to benefit from more opportunities and as the social and economic status of the Shia community will remain largely unaffected, they could resent the other religious segments even more.
Although the Vision 2030 has set up admirable goals, policymakers in Riyadh will need to find a balance between social spending, public outcry, budget deficits, as well as sectarian and foreign interests if the initiative has any hope of succeeding.