By: Tomas Penfold Perez
Saudi Arabia and the rest of the OPEC members have found themselves trying to alleviate the economic pain that low oil prices have caused in the last several years, most notably 2014-2015. As the world’s largest oil exporter that is responsible for roughly 20 percent the global conventional oil reserves, Saudi Arabia faces an imminent challenge to stabilize its economy and maintain growth despite declining oil prices.
While it may prove to be difficult, Saudi Arabia has entrusted thirty-one year old millennial and crown prince Mohammed bin Salman with the daunting task of regulating their oil dependency. Prince Mohammed’s father, King Salman, gave his son unprecedented control over the national investment fund, ministry of defense, economic policy, but most importantly, inconceivable control over the state oil monopoly, Saudi Aramco.
Prince Mohammed has responded to this challenge by attempting to implement economic and social policies away from the oil sector, allowing them to focus on other aspects of the economy in the private sector. Straying away from oil production, which contributes to 90 percent to its earnings and 42 percent to GDP, will be a challenge but necessary nonetheless. Prince Mohammad plans to transform Saudi Arabia from an oil-dependent kingdom to a better-rounded, less volatile economy.
Prince Mohammed and his surrogates have outlined a policy report that was approved by King Salman called ‘Vision 2030’. It aims to prepare the Saudi’s for life after oil, or without such dependence in order to diversify the economy. The proposal includes greater foreign direct investment (FDI), a 2 trillion USD sovereign wealth fund, drastic policy changes with regards to the economy and lastly, social reform.
Prince Mohammed believes that, “Saudi Arabia needs an advanced financial and capital market open to the world; to this end, we will continue facilitating access to investing and trading in the stock markets, we will smooth the process of listing private Saudi companies and state-owned enterprise”. FDI can transfer savings, technology and managerial expertise to host countries. In doing so, FDI can allow local producers to link into global marketing networks.
At the moment, foreign investors currently own less than 1.3 percent of all listed companies in Saudi Arabia and therefore, can be improved dramatically. Increasing investment will allow Saudi Arabia to increase competition within the economy, which will drive growth in the long-term, as the investments from the private sector will take time to develop. Saudi Arabia aims to more than double the amount of FDI over the next five years, with a focus on mining, education, vocational training, tourism, housing and health.
Sovereign Wealth Fund
The Saudi government plans to create the world’s largest sovereign wealth fund, which will hold more than $2 trillion in assets, making it big enough to purchase the world’s four largest publicly traded companies (Bank of China, China Construction Bank, Agricultural Bank of China and Warren Buffett's Berkshire Hathaway).
In order to reach the goal of $2-3 trillion, Saudi Arabia will sell shares of Aramco, which is valued at nearly $10 trillion. Revenues from the wealth fund will allow the government to diversify their revenue base and act as in insurance against low oil prices.
Change in Export Economy
With such an over dependence on oil, Saudi Arabia runs the risk of unconsciously disregarding other sectors of the economy (infrastructure, private sector), that could drive growth in the long-term. It is vital now to restructure their economy because the impact of low oil prices continues to affect the global economic market, particularly the members of OPEC.
Although economic growth might remain slow, or stagnant, due to low oil prices, Prince Mohammed is confident that “within 20 years, we will be an economy or state that doesn't depend mainly on oil – we will make investments the source of Saudi government revenue, not oil”. Understanding of the dangers of economic stagnation, Saudi government will find alternative ways to generate capital.
Although Saudi citizens have enjoyed low tariffs on public goods, in addition to subsidized electricity, water and fuel, it may be time to scale back on the subsidy payment programs in order to increase government capital. Subsidy restructuring can generate a large amount of money which should be issued to low-and middle-income citizens.
While 'Vision 2030' largely focuses on a drastic economic change; Prince Mohammed has not shied away from a social transformation by allowing women and young people a more inclusive role in the economy. Saudi Arabia has a youth unemployment rate of 30.4 percent, more importantly, 57.9 percent among females. Inclusive social reform policies, most notably those that increase the labor force participation rate, will undoubtedly stimulate the economy.
In order to be able to actively include women and the younger generation in the labor force, education reform will be the most vital policy to implement. Prince Mohammed has promised to create “an education system aligned with market needs”. However, it will take time for there to be a shift in Saudi culture to overcome its roots of religious conservatism.
Although Prince Mohammed’s 'Vision 2030' has drawn sharp criticism from policymakers and journalists alike, it is undeniably an outline for a more progressive future for Saudi Arabia. Whether his vision is feasible is up for debate. While some might consider some of his policies too extreme, he has given hope for progressive Saudis, and the younger generation in knowing that social and economic reform may come sooner rather than later.
Tomas Penfold Perez is a communications intern for the EastWest Institute. He is a Fordham University senior majoring in International Political Economy and Communications & Media Industries.