The implications of Saudi Arabia’s unprecedented economic boom
Saudi Arabia announced over the weekend a positive assessment of the economy during 2022, expecting a significant fiscal surplus for the first time in eight years. The International Monetary Fund also expects the Saudi economy to grow by 7.6 percent during 2022, making it the fastest-growing economy worldwide, with gross domestic product exceeding $1 trillion for the first time.
This vastly improved economic performance will have positive strategic implications for the country, domestically, regionally and globally. To sustain and strengthen those benefits over the long run, prudence suggests drawing lessons from previous economic booms.
By the end of 2022, it is projected that the public treasury will register a revenue of $326 billion, an increase of about 17 percent over projections made at the beginning of the year. Actual spending has also increased by about 18 percent, from $255 billion of spending planned at the start of the fiscal year to $302 billion expected now by the end of the year — a significant increase of 18 percent.
Despite increases in spending in 2022, the budget is expected to register a surplus of about $24 billion by year’s end. The last year with a fiscal surplus was 2013. That year’s surplus of more than $40 billion was followed by eight straight years of large deficits, peaking in 2015 at more than $103 billion.
The Ministry of Finance’s statement lauded the progress made in economic diversification projects, the delivery of social safety net programs, and ease of doing business indicators. It highlighted the success of the government’s Fiscal Balance Program to control high budget deficits. It also cited the current Fiscal Sustainability Program balancing the “strategic spending” of Vision 2030 with the need to maintain stable fiscal indicators, including the level of government debt and financial reserves.
It has not been easy to maintain this balance during the tough economic times of the past eight years, in which Saudi Arabia has had to run fiscal deficits due to a combination of lower oil prices, COVID-19 and a global slowdown reducing demand for oil.
The future assessment is quite positive for government finances. Fiscal surplus is expected to continue in 2023 and for the near future, at least until 2025, according to the ministry’s statement, which expected that the new outlook is going to make it easier to improve performance through spending efficiency, revenue growth and risk management.
Despite the expected good fortunes, the government will continue to borrow from local and international markets to pay back the public debt. Recent improvements in the country’s credit ratings should make it easier and cheaper to borrow.
The good news for the Saudi economy as a whole is even brighter. It started in 2021, when the GDP registered a positive growth of 3.2 percent in real terms (adjusted for inflation) after shrinking during the years of COVID-19 and the collapse of oil prices. However, 2022 is turning out to be Saudi Arabia’s bumper year: GDP is expected to grow by about 7.6 percent, the fastest growth rate in 10 years. This jump will make it the fastest-growing economy worldwide.
Recent assessments by the IMF have confirmed this optimistic outlook. In a recent report, it said that the near and medium-term outlook for Saudi Arabia is positive, as growth is picking up, inflation remains contained and the external position will strengthen further. It added that, with oil production increasing in line with the OPEC+ schedule and momentum from the continuation of the ambitious reform agenda under Vision 2030 underway, overall GDP is projected to grow by 7.6 percent in 2022 despite monetary policy tightening and central government fiscal consolidation going forward.
The IMF expects non-oil growth to increase to 4.2 percent in 2022 and headline inflation to accelerate in the second half of 2022, but it will remain contained at 2.8 percent on average for the year. Inflation remains low, helped by the appreciating dollar, to which the Saudi riyal is anchored, caps on gasoline prices, and wheat price support to contain pressure from supply-side shocks.
Saudi Arabia’s external trade balance has also improved substantially: The current account surplus will increase to 17.4 percent of GDP in 2022 — a level not seen since 2013 — while reserve buffers are expected to stabilize at about 28 months of imports over the medium term, according to IMF estimates.
The improvement in government finances and the economy as a whole have led to improved credit ratings and the country’s ability to attract foreign investment, which are critically needed to fund megaprojects and increase efficiency and labor skills.
This positive outlook is expected to hasten the pace of economic diversification and project implementation to prepare the country for the post-oil-dependency era. Critical to achieving that objective is empowering the private sector to lead economic growth, instead of it being government-dependent.
At the social level, the improving economy is already providing more jobs for Saudi nationals and expatriates alike. Earlier this month, the government announced a significant drop in the unemployment rate for nationals, to less than 10 percent. While it remains high, especially for Saudi women, getting it to single digits is quite an achievement, which has not been seen in more than a decade. Improvements in the social safety net are also likely to continue, including policies to shield vulnerable communities from international inflation and weakened supply chains.
The IMF puts the size of the Saudi economy in 2022 at more than $1 trillion, confirming its position as the 18th-largest economy worldwide. This is the first time that Saudi GDP has exceeded the trillion mark. Joining the trillion-dollar club will add to the country’s influence and role regionally and globally, but also to its responsibilities.
Saudi Arabia’s role in addressing global challenges is likely to grow through the G20, the UN, World Bank and IMF, among others. Its leadership in providing humanitarian and development aid to countries in need will continue to neighboring states and beyond.
Joining the trillion-dollar club will add to the country’s influence and role regionally and globally, but also to its responsibilities.
Dr. Abdel Aziz Aluwaisheg
To reap these real benefits over the long run, it is important to resist the temptation to follow past patterns of overspending during the good times. IMF warnings are timely and apt: Policy priorities will need to manage higher oil revenues while sustaining strong private sector-led growth and advancing reforms for a greener economy. In particular, Vision 2030 reforms should continue to open and diversify the economy, including by implementing the National Investment Strategy.
Continued commitment to fiscal discipline, the IMF suggested, should help avoid pro-cyclical policies associated with past oil-driven boom-and-bust cycles and ensure continued reform momentum toward a diversified economy and a greater strategic role worldwide.
- Dr. Abdel Aziz Aluwaisheg is the GCC assistant secretary-general for political affairs and negotiation, and a columnist for Arab News. The views expressed in this piece are personal and do not necessarily represent GCC views. Twitter: @abuhamad1