The Saudi Cabinet recently approved the government’s “Vision 2030” and Deputy Crown Prince Mohammed bin Salman gave his first television interview in order to outline the plans. The 31-one-year old architect of Saudi Arabia’s economic reform program won plaudits for his directness and his bold vision for a post-oil era.
Low oil prices are turning out to be almost a blessing for the oil-dependent kingdom as economic reforms start to gain traction among policy makers. “We will not allow our country ever to be at the mercy of commodity price volatility or external markets,” Prince Mohammed said. “We have developed a case of oil addiction in Saudi Arabia,” he added, naming a truth rarely spoken by Saudi policy makers.
For a long time, energy subsidies was an issue that few would openly discuss or dare bring into the political arena.
But energy price reforms are now underway. Close to two-thirds of the subsidies went to the affluent, as is often the case across many countries.
The economy will have to adjust over time to become a more efficient user of energy and technology but the days of gas-guzzlers roaming endlessly has passed its zenith.
The “Vision 2030” forms part of a number of strategic documents to be released over the coming weeks through which the government will outline its plans for adjusting the Saudi economy to a post-oil era. There are several key points worth making.
These plans include a broad privatization program, including that of Saudi Aramco, as well as a drive to improve the efficiency of government spending. An IPO for Aramco, which is likely to involve the sale of a 5 percent stake next year, may value the company at more than $2 trillion, analysts say.
In addition, the government aims to build up and sell the Kingdom’s military equipment industry. Saudi Arabia has one of the biggest military budgets in the world. It announced an allocation of $57 billion in its 2016 budget for defense, marking the first time it publicly stated its annual spending.
The main impetus for privatization is not to raise just an estimated $130 billion from asset sales which, which might not be enough to plug twin deficits, but to deleverage the state from the economy and reduce the burden of the state on current expenditures and deepen private sector participation.
The state still holds large assets in petrochemicals, telecom, utilities, health care, aviation, ports and airports, education, banking and others which will increase on the efficiency scale if managed privately.
Increasing transparency and helping to limit corruption has also been mentioned on several occasions as a driving force for privatization and for taking Saudi Aramco public. Analysts will be looking at whether Saudi Aramco would be disclosing its upstream business especially its reserves. It would be interesting to see how transparency unfolds in the corporate world but also in the public sector.
At the core of the investment plan is the restructuring of its Public Investment Fund (PIF), which would become a hub for Saudi Arabia’s investments abroad, partly by raising money through selling shares in Saudi Aramco.
The size of the Saudi Aramco sell-off and other assets will determine the size of the asset management pool. The government’s dependence on oil will be determined by the total assets under management and the fund’s ability to generate consistent real returns over time.
Can this plan work? The success of any vision requires the support of a host of participants. Society as a whole appears to have embraced the vision and its architect.
The vision is lofty in the ability of the economy to rid itself of its dependence from oil by 2020 yet in the past for lacking a clear vision. Even if the economy diversifies halfway its sources of revenue away from oil, it will be a huge success even if done by 2025.
What the government needs to be vigilant of is not to ask for too much too quickly without employment inclusiveness. Reducing unemployment among Saudis from 11.6 percent to 7 percent by 2030 is possible by addressing the gender gap: By halving female unemployment. In order for that to happen, gender mobility would have to be seriously considered. Economic necessity may dictate change of mindsets.
A new Saudi Arabia is being built. Public officials are no longer occupying comfortable jobs for life. Accountability of public officials is increasing as the government is willing to take responsibility of policy blunders and dismiss officials like the recently dismissed Minister of Water.
The bureaucracy would be a challenge to reform into an enabler for the economy rather than an inhibitor. Tough work has started.
The success of the vision will also be determined by the level of commitment of the private sector and its inclusiveness. Clarity from the government is helping the business community comprehend and plan for the future. Companies would have to adapt to a gradual reality that subsidies and cheap expatriate labor would be replaced by productivity improvements by a greater number of Saudis, automation and better usage of labor and capital.
Painless reform doesn’t exist. The reform effort undertaken by Prince Mohamed is Saudi Arabia’s last chance to bring in much-needed changes.
— John Sfakianakis is the director of Economics Research at the Gulf Research Center in Riyadh.
Low oil prices are turning out to be almost a blessing for the oil-dependent kingdom as economic reforms start to gain traction among policy makers. “We will not allow our country ever to be at the mercy of commodity price volatility or external markets,” Prince Mohammed said. “We have developed a case of oil addiction in Saudi Arabia,” he added, naming a truth rarely spoken by Saudi policy makers.
For a long time, energy subsidies was an issue that few would openly discuss or dare bring into the political arena.
But energy price reforms are now underway. Close to two-thirds of the subsidies went to the affluent, as is often the case across many countries.
The economy will have to adjust over time to become a more efficient user of energy and technology but the days of gas-guzzlers roaming endlessly has passed its zenith.
The “Vision 2030” forms part of a number of strategic documents to be released over the coming weeks through which the government will outline its plans for adjusting the Saudi economy to a post-oil era. There are several key points worth making.
These plans include a broad privatization program, including that of Saudi Aramco, as well as a drive to improve the efficiency of government spending. An IPO for Aramco, which is likely to involve the sale of a 5 percent stake next year, may value the company at more than $2 trillion, analysts say.
In addition, the government aims to build up and sell the Kingdom’s military equipment industry. Saudi Arabia has one of the biggest military budgets in the world. It announced an allocation of $57 billion in its 2016 budget for defense, marking the first time it publicly stated its annual spending.
The main impetus for privatization is not to raise just an estimated $130 billion from asset sales which, which might not be enough to plug twin deficits, but to deleverage the state from the economy and reduce the burden of the state on current expenditures and deepen private sector participation.
The state still holds large assets in petrochemicals, telecom, utilities, health care, aviation, ports and airports, education, banking and others which will increase on the efficiency scale if managed privately.
Increasing transparency and helping to limit corruption has also been mentioned on several occasions as a driving force for privatization and for taking Saudi Aramco public. Analysts will be looking at whether Saudi Aramco would be disclosing its upstream business especially its reserves. It would be interesting to see how transparency unfolds in the corporate world but also in the public sector.
At the core of the investment plan is the restructuring of its Public Investment Fund (PIF), which would become a hub for Saudi Arabia’s investments abroad, partly by raising money through selling shares in Saudi Aramco.
The size of the Saudi Aramco sell-off and other assets will determine the size of the asset management pool. The government’s dependence on oil will be determined by the total assets under management and the fund’s ability to generate consistent real returns over time.
Can this plan work? The success of any vision requires the support of a host of participants. Society as a whole appears to have embraced the vision and its architect.
The vision is lofty in the ability of the economy to rid itself of its dependence from oil by 2020 yet in the past for lacking a clear vision. Even if the economy diversifies halfway its sources of revenue away from oil, it will be a huge success even if done by 2025.
What the government needs to be vigilant of is not to ask for too much too quickly without employment inclusiveness. Reducing unemployment among Saudis from 11.6 percent to 7 percent by 2030 is possible by addressing the gender gap: By halving female unemployment. In order for that to happen, gender mobility would have to be seriously considered. Economic necessity may dictate change of mindsets.
A new Saudi Arabia is being built. Public officials are no longer occupying comfortable jobs for life. Accountability of public officials is increasing as the government is willing to take responsibility of policy blunders and dismiss officials like the recently dismissed Minister of Water.
The bureaucracy would be a challenge to reform into an enabler for the economy rather than an inhibitor. Tough work has started.
The success of the vision will also be determined by the level of commitment of the private sector and its inclusiveness. Clarity from the government is helping the business community comprehend and plan for the future. Companies would have to adapt to a gradual reality that subsidies and cheap expatriate labor would be replaced by productivity improvements by a greater number of Saudis, automation and better usage of labor and capital.
Painless reform doesn’t exist. The reform effort undertaken by Prince Mohamed is Saudi Arabia’s last chance to bring in much-needed changes.
— John Sfakianakis is the director of Economics Research at the Gulf Research Center in Riyadh.
