Saudi Arabia aims to transform its economy. And, diversification is just the beginning
Welcome to Fast Company Middle East Pulse, our daily newsletter on LinkedIn, featuring an article selected each day by our editors on topics around innovation in technology, business, leadership, and design.
Sign up here to get Fast Company Middle East's newsletter in your inbox!
----------------------------------------------------------------------------
Saudi Arabia’s Vision 2030 has three primary objectives: fostering a vibrant society, building a thriving economy, and creating an ambitious nation.?
The kingdom is transitioning towards diversifying its economy and achieving Vision 2030, which depends heavily on its per capita GDP, which drives economic diversification, private sector growth, and a more equitable distribution of wealth, leading it into a sustainable and resilient economic landscape.?
So, how is it achieving this transition, and will the growth alter the future?
DIVERSIFYING THE ECONOMY
Saudi Arabia has successfully diversified its economy under Vision 2030. The non-oil sector has grown from 40% to 45% of the GDP, with notable developments in tourism, manufacturing, logistics, and renewable energy. Foreign investments have also increased from $7.4 billion to $29.7 billion, with a target of 12.4 trillion riyals by 2030.
“Initiatives like the Kafala program and SME Development Bank help small businesses access financing and resources while education and training programs equip the workforce with necessary skills. Megaprojects like NEOM , Qiddiya | ?????? , and Amaala also aim to attract talent and diversify the economy further,” says Fahad Alanazi , Senior Investor Feedback and Reporting Analyst at the Ministry of Investment of Saudi Arabia.?
Elaborating further on the kingdom’s economic diversification, Abbas Hijazi , Chief Strategist and Head of Research at AIMS Holding , says that while oil was the only significant revenue contributor for budget spending, the Saudi economy has changed since Vision 2030 was launched in 2016.?
In 2015, Saudi Arabia’s total revenue was $162.12 billion, with $118.39 billion coming from oil exports, making oil contribute three-quarters or 73% of total revenue that year. By 2023, Saudi Arabia’s total revenue had reached $408.6 billion, with only 52% coming from oil.
Between 2015 and 2023, the contribution of oil revenue to total revenue decreased from 73% to 52%, marking a reduction of 19 percentage points, while total revenue grew from $162.12 billion to $408.6 billion. In 2023, estimated non-oil GDP growth of 5.9% significantly outperformed the overall economy as oil GDP declined, resulting in almost flat overall growth of 0.03%, adds Hijazi.?
But, moving away from oil wealth, recent economic reforms also influence per capita GDP trends that are adding to sustaining economic growth and development.?
Abdullah AlSaeed , Economic Analyst and Investment Manager at the ?????? ?????? ???????? | General Authority for Competition , believes reforms marked since the start of Vision 2030 have contributed to non-oil GDP growth, showcasing the diversification efforts’ success. He believes increased investor confidence and rising foreign direct investment (FDI) have led to job creation and decreased unemployment to 4.8%.?
Moreover, investments in new technologies such as AI and blockchain have enhanced efficiency and competitiveness, contributing to the country’s development. He points out that what is crucial to continue is the efforts to assimilate more women into the workforce and implement gender equality for the entire Saudi population to experience higher incomes and improved living standards.
MAJOR SECTORS TRANSFORMING SAUDI ARABIA?
Roughly three major sectors are transforming the economy. Following oil and public services, the manufacturing sector is the second-largest contributor to the GDP.?
Between 2001 and 2021, the manufacturing sector witnessed a 100% growth in its contribution to the total GDP. In 2001, the non-oil manufacturing sector accounted for only 4.8% of the total GDP, which was $236.33 billion. By 2021, non-oil manufacturing constituted 9% of the kingdom’s total GDP, reaching $376.75 billion, notes Hijazi.?
The building material industry is a fast-growing sector.?
He adds that technology adoption, especially in manufacturing, will greatly enhance economic continuity and sustainability by creating value through technological innovation.?
The ramp-up in manufacturing has given rise to tourism and also, the gaming sector. Alanazi notes that Saudi Arabia’s high per capita GDP of around $24,000 (PPP) has facilitated significant development in these sectors. The increased spending power has led to greater disposable income, boosting domestic and international travel within the tourism industry.
The youth and high smartphone usage in Saudi Arabia have fueled the thriving gaming market, with esports gaining traction. The government is backing this trend by setting up the Saudi Esports Federation, organizing big tournaments, and investing in digital infrastructure, pushing the industry’s expansion.
THE ECONOMIC IMPACT??
With increased disposable income among the population, the country becomes appealing to foreign companies seeking expansion, says Alanazi. Moreover, the increased revenue facilitates the government’s improved infrastructure development, including transportation networks, ports, and telecommunications.
But it’s not only FDIs aiding the economy.?
Monetary policies also play a role in shaping future economic trajectory. Ahad Alsayari , an Economic Analyst at the Gulf Monetary Council ?????? ?????? ??????? , says regulating bank liquidity and managing the money supply is crucial for growth. He emphasizes the importance of currency stability and a favorable business environment. A stable currency and supportive monetary policies attract domestic and foreign investment, spurring economic expansion.
Stable currency values boost investor confidence, reduce exchange rate risks, and support economic diversification efforts. This stability fosters growth in non-oil sectors like finance, tourism, and renewable energy while preserving individuals’ purchasing power and promoting overall economic expansion and regional stability. A stable currency environment also enhances the region’s attractiveness to foreign investors, reducing risks and encouraging foreign direct investment, further fueling economic growth.
Lastly, controlling inflation is vital for protecting consumer purchasing power and supporting Saudi Arabia’s goal of boosting domestic consumption while reducing reliance on oil exports for economic prosperity, highlights Alsayari.?
As the country advances and diversifies its economy, setting interest rates by the Saudi Central Bank becomes increasingly significant. These adjustments influence borrowing costs and investment decisions, positively impacting per capita GDP.
On the other hand, Dr. Roman Zytek , a former International Monetary Fund economist and adviser in Saudi Arabia’s Ministry of Economy and Planning - MEPsaudi , advises that fiscal policy, revenue and expenditure policies should not discourage work, value creation, productivity growth, saving, and investment, including in human capital.?
领英推荐
He says, “Successful social welfare policies distinguish between routine life-cycle demands and unpredictable events. Successful policies encourage people to prepare for routine events by saving and insuring. The government remains the insurer of the last (not first) resort by building financial and other buffers to stand ready to help deal with major natural disasters, economic or financial crises, and ‘black swan’ events. Successful policies minimize moral hazard and demands for the taxpayer or religious charity-financed assistance.”
Overall, public policies should promote productive entrepreneurship.?
AlSaeed adds that data analytics and economic forecasting are powerful tools for informed decision-making and policy formulation.?
He says, “By utilizing these tools effectively and responsibly, the country can make informed choices that contribute to a more prosperous and equitable future for all its citizens.”?
THE HUMAN CAPITAL INVESTMENT?
Saudi Arabia’s per capita GDP is closely linked to job creation and human capital development, says Alanazi. The government revenue drives its growth. Industries’ expansion, led by diversification efforts, creates new job opportunities in various sectors. Strategic investments in human capital, economic diversification, and innovation can harness the per capita GDP growth to create abundant job opportunities and a well-developed workforce.
Also, to ensure that economic growth benefits all segments of society, AlSaeed suggests addressing factors and indices that combat inequality. This includes having transparent policymakers who address such issues and using the Human Development Index (HDI) to assess well-being and opportunities across various groups.
Measuring per capita income alone may be skewed and fail to address inequality issues. He adds that distribution, sustainability, and quality of life are equally important factors to consider.?
CHALLENGES AND SOLUTIONS
For Alanazi, achieving sustainable and improved per capita GDP growth will require persistent efforts, adaptability, and a collaborative approach from the government, private sector, and civil society.
“The economy of Saudi Arabia heavily depends on oil, with over 40% of GDP and 70% of export earnings originating from this sector. This dependence on oil makes the economy susceptible to volatile oil prices, potentially hindering growth and diversification endeavors.”
Despite economic growth, unemployment, especially among youth, remains a challenge. Addressing this requires aligning education and training programs with emerging sector needs. Progressive social reforms can attract international talent but may face challenges due to traditional norms, adds Alanazi.?
Balancing economic modernization with cultural preservation is crucial. Similarly, balancing economic growth with environmental protection is key for long-term sustainability, requiring environmentally friendly policies.
Offering a solution here, Alsayari suggests that financial market development and capital inflows could significantly drive economic growth and improve per capita GDP in Saudi Arabia.?
A well-developed financial market enables efficient capital allocation, increasing productivity and higher living standards. Capital inflows, including foreign direct investment, also stimulate economic expansion, resulting in enhanced economic activity and job creation.?
Moreover, financial market development promotes transparency, investor confidence, and access to financing, supporting the country’s economic reform and diversification goals outlined in Vision 2030.
SUSTAINING ECONOMIC GROWTH?
For Alanazi, achieving sustainable and improved per capita GDP growth in Saudi Arabia will require persistent efforts, adaptability, and a collaborative approach from the government, private sector, and civil society.
To tackle youth unemployment in the face of economic growth, it’s crucial to align education with evolving job opportunities. Yet, implementing progressive social reforms while potentially attracting global talent and promoting inclusivity faces obstacles due to entrenched traditional norms. Balancing economic modernization with cultural preservation becomes crucial. Also, ensuring long-term sustainability demands harmonizing economic growth with environmental protection, requiring implementing eco-friendly policies and regulations.
But Saudi Arabia’s sustainable development goals represent a new approach, potentially driving growth in non-oil sectors, which may eventually surpass the oil industry, if successful, says AlSaeed.?
Currently, there’s room for experimentation to identify successful sustainable growth efforts, as the oil sector serves as a fallback. However, this reliance on oil will diminish over time, emphasizing the urgency to promptly establish and implement sustainable development goals.
LONG-TERM ECONOMIC GOAL
Saudi Arabia’s per capita GDP trajectory hinges on its economic policy mix, says Zytek. International evidence suggests that only a handful of developing and lower-income nations have achieved rapid and sustained growth, eventually converging towards income levels seen in advanced economies. However, in numerous developing countries, the convergence rate has fallen short of optimistic projections often presented in government reports, national development visions, or blueprints.?
This disparity has led to widespread disappointment and, in some cases, even reversals of reform efforts, he adds.?
Although classified as an upper-middle-income country and making significant progress, Saudi Arabia still grapples with internal disparities, an over-reliance on oil, and limitations relative to high-income countries, adds Alanazi.?
Continuing to diversify the economy, promote social development, and implement economic reforms is vital to consolidate Saudi Arabia’s position and achieve prosperity in the future.
Check out some of the Fast Company Middle East 's best-read stories: