While economic debate in 2015 centred on low oil prices and the challenge they posed to the economy, by 2016 the focus of public discourse had shifted to how these hurdles might be overcome. In January the government set the tone for the discussion: after years of only modest reform it would radically reconfigure the Saudi economy to cope with the prevailing low oil price environment. Combined with the recent ascension to the throne of King Salman bin Abdulaziz Al Saud and the creation of the Council of Economic and Development Affairs chaired by Deputy Crown Prince Mohammed bin Salman Al Saud, the announcement brought a sense of momentum to the government. However, parties had to wait until April 2016 to be granted access to the nation’s long-term development strategy, Vision 2030.
The document outlines in broad terms the regulatory, budgetary and policy changes to be implemented over the next 15 years in an effort to reduce the nation’s reliance on crude oil, which accounted for 44.2% of GDP on average and the majority of revenues between 2010 and 2015, according to the research firm Haver Analytics.
The 84-page plan offers a number of glimpses into the Kingdom’s future, including a privatisation programme that will see the listing of state-owned giants – such as the partial listing of Saudi Aramco – the creation of the world’s largest sovereign wealth fund and the increased participation of women in the workforce. Its goals are ambitious and include a rise in non-oil state revenue from SR163bn ($43.5bn) to SR1trn ($266.6bn) by 2030; boosting the contribution of small and medium-sized enterprises to economic output from 20% to 35% in a bid to diversify the Kingdom’s exports; establishing Saudi Arabia as one of the 15 largest economies in the world; localising 50% of military spending; establishing special zones, such as a separately regulated entity in the King Abdullah Financial District and other zones in logistics, tourism, industry and finance with special commercial regulations to boost investment; reducing unemployment from 11.6% to 7%; improving the education system; and raising levels of home ownership.
The Next Step
The goals of Vision 2030 have brought global interest to an economy that has gradually opened its doors to foreign investment since its accession to the World Trade Organisation in 2005. Although nearly every one of its key performance indicators is headline-generating in its own right, the general thrust of the new strategy came as little surprise to observers of the Kingdom’s economy.
While in early 2016 many of the details of Vision 2030 had yet to be filled in, there was no shortage of clues as to what sort of steps the government might take in the reorganisation of the nation’s economy. Labour market reform, curtailment of public expenditure, enhancement of the business environment, and strengthening of the regulatory and legal framework had all been proposed in recent years as essential to sustainable, long-term economic growth.
These strategic concepts were brought together in a 2015 report by management consultancy McKinsey, titled “Saudi Arabia Beyond Oil: The Investment and Productivity Transformation”. The document was seen by many as an informal blueprint from which the government would formulate its own long-term strategy. McKinsey’s report acknowledged that the government invested heavily in education, health care and infrastructure during the decade-long oil boom from 2003 to 2014, and that it had built up its reserves to almost 100% of GDP by 2014. However, it also stated that rapid growth in the number of working-age Saudis and a changing global energy market meant the old model of growth, centred on oil revenue and public spending, could no longer be relied on. Furthermore, the report asserted that the usual defensive mechanisms deployed in times of stress, such as budget freezes and immigration curbs, would be ineffective against the risks posed by rising unemployment, falling household income and a deteriorating fiscal position. McKinsey highlighted that Saudi Arabia could overcome its economic challenges by boosting its modest productivity growth rate of 0.8% between 2003 and 2013, and by instigating a productivity-led economic transformation that would double its GDP and create up to 6m new jobs by 2030.
According to the report, the 4.5% compound annual growth rate needed in order to double economic output would require around $4trn in investment, the overhaul of business regulations and the adoption of a more open stance to trade and investment. The report identifies eight sectors that could form the basis for the nation’s economic transformation: mining and metals; petrochemicals; manufacturing; retail and wholesale trade; tourism and hospitality; health care; finance; and construction.
These ideas are apparent in the National Transformation Programme (NTP), a detailed policy document unveiled in June 2016. The plan complements Vision 2030 and sets out a roadmap via which the objectives of the nation’s overarching development strategy might be realised. The NTP’s interim targets are set for 2020, with the first phase of implementation already under way.
The most significant of the NTP’s near-term goals are to cut public wage spending from 45% of the budget to 40%; triple non-oil revenue to SR530bn ($141.3bn); add 450,000 private sector jobs; and widen the debt-to-GDP ratio from 7% to 30%. The NTP also states that these objectives will be achieved on a modular basis, ministry by ministry, with successive action plans implemented to reach the NTP’s targets. These plans have been formulated via a lengthy consultation process in which stakeholders from the public and private sector were asked for their input.
The result is an array of initiatives for implementation: the Ministry of Justice is to improve contract enforcement and slash resolution times for commercial cases from 575 days to 395 days; public sector wages will be frozen, and bonuses and allowances will be cut, while pay for ministers and Consultative Council members has already been reduced by 20% and 15%, respectively; the Ministry of Finance will implement an income tax on residents and apply new real estate fees; the Ministry of Economy will implement cuts to subsidies and reduce the percentage of delayed projects from 70% to 40% ; the Ministry of Energy, Industry and Mineral Resources will boost non-oil exports, increase dry gas production and work with strategic partners to boost power plant generation; primary health care will be reformed through a SR4.7bn ($1.3bn) spending programme administered by the Ministry of Health; the Saudi Postal Corporation will be privatised by the Ministry of Communications; the Ministry of Housing will spend SR2.8bn ($746.5m) on a loan guarantee programme to promote home ownership; the Commission for Tourism and National Heritage is to raise the number of employees in the sector from 830,000 to 1.2m; and the Saudi Arabian General Investment Authority will boost foreign direct investment from $8.1bn to $18.7bn. Riyadh-based Jadwa Investment expects the NTP to cost SR447bn ($119.2bn), with the private sector contributing around 40% of that figure.
Theory & Practice
As with all schemes of this kind, the first question that arises is how effectively the NTP can be implemented. The foreword of the programme document pre-empts this challenge, stating that the Council of Economic and Development Affairs has established a governance model aimed at translating the numerous implementation programmes that will be launched successively in order to accomplish the NTP’s objectives.
In practical terms, this has involved the creation of a number of bodies charged with the launching, monitoring and evaluation of these programmes, the most prominent of which are the National Centre for Performance Measurement, the Delivery Unit and the Project Management Office of the Council of Economic and Development Affairs. The document also outlines a framework of periodic audits, ongoing monitoring and follow-up. Audits will be conducted on two levels, the first will examine the progress to wards targets related to each entity’s strategic objectives, while the second will track the progress of initiatives relative to the scheduled plans.
This framework also goes some way to answering one of the chief criticisms of the NTP – that establishing a wide-ranging, detailed plan at the start of the transformation process would result in an unwieldy strategy. Under the envisioned implementation plan, entities can, by coordinating with the Strategic Management Office, continually redefine their goals and targets, launch new initiatives every year and engage with other state bodies. The depth of reform set out by Vision 2030 and the NTP is unparalleled in Saudi Arabia’s history, and implementing them successfully is the biggest challenge the new government faces.