The Non-Oil Economy in Saudi Arabia: Vision 2030 and Beyond

January 03 2024 Ayten Ismail.

Economics

Rising Non-Oil Economy in Saudi Arabia

Saudi Arabia, traditionally known for its vast oil reserves, is undergoing a significant economic transformation. As the country shifts its focus towards the Non-Oil Economy, the Vision 2030 plan emerges as a pivotal strategy for diversifying the Economy in Saudi Arabia. This shift is driven by global trends towards sustainable energy and the need for economic stability amid fluctuating oil prices. In this article, we delve into the historical advancements, current progress, and future prospects of the non-oil economy in Saudi Arabia, exploring how the Vision 2030 initiative is reshaping the nation’s economic landscape.

Table of Contents

Historical Advancements in Saudi Arabia’s Non-Oil Economic Growth

Between 2003 and 2014, there was a notable increase in the non-oil private sector’s contribution to the Saudi Arabian economy due to higher oil prices, which the government used to stimulate private sector activity through increased spending. As other sectors such as industrial and services have developed, the proportion of the oil sector in the economy has decreased since 2003.

In 2021, the Non-Oil Economy in Saudi Arabia grew by 4.9% for the full year, recovering lost output in 2020. This can be attributed to several initiatives:

Regional Headquarters Directive by MISA and RCRC

In February 2021, MISA and the Royal Commission for Riyadh City (RCRC) announced a new directive that companies that want to contract with the Saudi Arabian Government (SAG) must establish their regional headquarters in Saudi Arabia, preferably in Riyadh, by 2024. Companies that relocate their regional headquarters to Riyadh will receive tax breaks and other incentives.

Legal Reforms Announced by the Crown Prince

In a February 8, 2021 statement, the Crown Prince announced draft legal reforms impacting personal status law, civil transactions law, evidence law, and discretionary sentencing that aim to increase predictability and transparency in the legal system, facilitate commerce, and expand protections for women.

Launch of the Shareek Program for Domestic Investment

3)On March 30, 2021, the SAG announced the new Shareek program, an initiative designed to generate $3.2 trillion of domestic investment from the SAG, the sovereign wealth Public Investment Fund, and the private sector into Saudi Arabia’s economic development.

Approval of the Private Sector Participation Law

In March 2021, Saudi Arabia approved the Private Sector Participation (PSP) Law. The PSP law aims to increase private sector participation in infrastructure projects and in providing public services by supporting Public-Private-Partnerships (PPP) and the privatization of public sector assets.

Transformation of the Public Investment Fund

The SAG has been transforming its Public Investment Fund (PIF), traditionally a holding company for government shares in state-controlled enterprises, into a major international investor and sovereign wealth fund. In 2020 and early 2021, the PIF made a number of new investments, including in Facebook, Starbucks, Disney, Boeing, Citigroup, Live Nation, Marriott, several European energy firms, Carnival Cruise Lines, Reliance Retail Ventures Limited (RRVL), and Hambro Perks Ltd’s Oryx Fund.

In 2022, Saudi Arabia experienced the highest rate of economic growth among the G20 countries. The country’s overall growth amounted to 8.7%, which was mainly due to the 4.8% growth of its non-oil GDP. During Q4 2022, the non-oil sector grew by 6.2%, the highest level since Q3 2021.

The Saudi non-oil sector is predicted to grow by 4.7% in 2023. The non-oil sector is experiencing growth mainly because of strong private consumption and investments from the private sector, including large projects. The main drivers of this non-oil growth were the wholesale, retail trade, construction, and transport industries.

Overall, the changing composition of the Saudi economy highlights the private sector’s contribution and the country’s transformation.

Current Progress & Challenges in Saudi Arabia’s Economic Landscape

Sector-Specific Growth: Analyzing Saudi’s Non-Oil Economic Sectors

Rapid growth in some sectors, including transportation, storage, communications, trade, restaurants, and hotels, has occurred, whereas others, such as finance, insurance, and real estate, have slowed down.

In Q1 2023, the transport, storage, and communications sector experienced a 9.3% y-o-y growth, while trade, restaurants, and hotels saw an increase in real output growth to 7.5% y-o-y. The construction sector also experienced stronger growth at 5.5% y-o-y. However, key sectors such as finance, insurance, and real estate saw a slowdown in growth from 3.9% in Q4 2022 to 2.8% y-o-y in the last quarter. The government service sector grew at the fastest pace since 2018 with a 4.9% y-o-y growth, accounting for around 14% of total GDP.

Demographic Dynamics and Saudisation in the Evolving Saudi Economy

The Saudi population is relatively young, with 63% of citizens under the age of 30. The Saudi government is aware of this potential demographic pressure on the labor force, and this partly explains the economic shift undergone in recent years, where a host of new, more labor-intensive industries such as hospitality and tourism have been encouraged to flourish and Saudis have been encouraged, through the “Saudisation” strategy, into jobs previously occupied by immigrant workers.

In December 2022, the “Tawteen programme” launched the second phase of creating 170,000 jobs, with 30,000 allocated to the tourism sector.

Despite efforts to diversify the economy, oil still accounted for about 40% of real GDP in the last few years, down from about 45% a decade ago. The share of the oil economy in nominal GDP varies significantly with oil prices and was about 30% in 2021 but is projected to have increased to about 40% in 2022.

Saudi Arabia’s diversification efforts and development of the non-oil sector are essential to realizing the Vision 2030 plan and reducing the country’s reliance on oil for economic growth. While it seems to be challenging, several initiatives are paving the way for a more diversified economy.

Vision 2030: Steering Saudi Arabia Towards an Economic Diversification Era

Vision 2030 encourages the diversification of non-oil exports and an increase in non-oil GDP share to 50% in 2030. Key sectors to achieve this goal include finance, insurance, transport, communication, non-oil manufacturing, and agriculture.

Saudi Arabia’s income in 2023 improved considerably because of higher non-oil revenues, which rose by 9%, while oil revenues declined by 3% due to lower crude prices.

The Saudi authorities have carried out extensive fiscal reforms in recent years as part of Vision 2030 to reduce oil dependence. These include revenue mobilization, energy price reforms, expenditure rationalization, Treasury Single Account implementation, fiscal risk assessment, budget disclosure improvement, and strengthened debt management.

The non-oil sector is less volatile, more sustainable, and generates more jobs than the oil sector, which will help to accommodate the rapidly growing number of Saudi nationals entering the labor market each year. Saudi Vision 2030’s initiatives, including the National Transformation Program and Fiscal Balance Program, aim to realize this vision by establishing targets and initiatives for non-oil sector development.

Conclusion

Saudi Arabia’s reliance on oil has been a cornerstone of the country’s economy for decades, but this approach is no longer adequate in light of the growing demand for environmentally sustainable energy. As a result, the Saudi Vision 2030 initiative aims to diversify non-oil exports and increase non-oil GDP share. Creating a non-oil economy is essential for generating long-term and sustainable economic growth.