Saudi Vision 2030 Challenges & Opportunities

Despite the sweeping crackdown on royals and businessmen accused of corruption, the Saudi officials insist that the biggest economic transformation of the country’s economy since the discovery of oil in the 1930s – the Vision 2030 Strategy of Crown Prince Mohammed bin Salman – is still on track.

So too are plans for the biggest initial public offering in history- than of Saudi Aramco, potentially valued at $2 trillion. They also reiterate that a $200bn privatisation programme is going ahead as planned.

Saudi Vision 2030 is a plan to reduce Saudi Arabia’s dependence on oil, diversify economy, and develop public service sectors such as health, education, infrastructure, recreation, and tourism. Goals include reinforcing economic and investment activities, increasing non-oil industry trade between countries through goods and consumer products, and increasing government spending on the military, manufacturing equipment and ammunitions. Details were announced on 25 April 2016 by Crown Prince Mohammad bin Salman. Plans include 80 projects, each costing between $3.7 million and $20 million.

The Saudi Arabian economy is dominated by oil and has been for many decades. Oil accounts for about 35-45% of the GDP of Saudi Arabia. It is the source of 75-80% of its government revenues and 85-90% of its export revenues. Petrochemicals, based on oil and a much more recent component of the Kingdom’s economy than hydrocarbon fuels, are Saudi Arabia’s next largest export.

Conceptualized and approved by the country’s leaders, Saudi Arabia Vision 2030 reflects an extraordinary degree of extended research, analysis, and assessment. It was aided throughout by the input and comment of some of the world renowned and experienced advisors in forward planning, focus, messaging, and communication. The process was launched in 2015 soon after King Salman bin Abdulaziz Al Sa’ud appointed his son, Mohammed bin Salman, as Deputy Crown Prince and Minister of Defense.

The plan involves raising the kingdom’s share of non-oil exports from 16% to 50% of non-oil gross domestic product (GDP) as well as localizing the renewable energy and industrial equipment sectors, boosting tourism and developing the private sector.

As the oil price continues to fall, the implementation of the plan is becoming increasingly important. The Trading Economics website observed a significant drop in Saudi Arabia’s GDP, from $753.83 in 2014 to $646 in 2015. In 2014, according to the website statistics, the estimated average inflation rate amounted to 2.69% compared to the previous year. It is expected to rise to 4.7% in 2018, then remain steady at around 2% until 2020.

The program seeks to improve the working of the government and cities, to dramatically diversify the economy, to increase the importance of small to medium-sized businesses from 20% to 25% of the economy, and to vastly increase foreign direct investment. It wants women to grow from 22% of the workforce to 30% and to increase the capacity for Umrah and Hajj visitors as well as other religious and non-religious tourism.

Further, it aims to increase the savings of Saudi Arabians, to make the country less consumption-oriented and more investment- and production-oriented. The program seeks to raise life expectancy by 6 years and reduce unemployment by over 4%. The goal is also to increase the development of non-governmental organizations and promote volunteerism. Broadly, the objective is to better connect the economy to education and training.

“Saudi Arabia Vision 2030” seems to want to transform not only the economy but also the citizenry and in a short 15 years. The program plans to partly pay for this from a public offering of about 5% of Saudi Aramco, depositing the proceeds from the sale into the Kingdom’s Public Investment Fund.

It also intends to place Saudi Aramco and numerous other public assets into a holding company that would promote development and transformation. Selling additional and possibly quite substantial public assets could also be in the works. If so, the goal would be to create a massive investment fund that would help introduce to the Kingdom effectively the nature and extent of the changes that the program envisions.

From some conservative elements there is already considerable resistance. As is to be expected, and indeed occurs in any and every country whenever leaders seek to alter the status quo, naysayers in this instance can be found inside and outside of Saudi Arabia. Some, naturally fear change.

Changing too quickly could have one or more less than desirable if not also contradictory consequences. In one scenario, it could shatter the very things that “Vision 2030” hopes to strengthen and expand. Another, no less significant concern is that for one reason or another it could prevent curbing or rationalizing, let alone eliminating, the extensive and wasteful range of subsidies that preclude recovering anywhere near the actual costs of electricity, fuel, water, and a range of other public services.

The plan looks good on paper, but is costly to realize. As such, several measures have been taken to finance the vision, including higher taxes on imported goods, price increases for gas, water and electricity, and cuts in welfare spending as well as various financial supports such as study grants and interest-free home loans. The plan may not be successful if the ruling family does not change its lifestyle. The Saudi government has been able to stay in power by paying off its people and the international community through assistance and contracts, but now this extravagant lifestyle is squeezing people.

The plan has several major components, among which one relates to oil that is on the verge of collapse Another is to increase private sector employment, especially of Saudi nationals, but nothing has really been done to change the situations. They didn’t fire public workers and haven’t dramatically reduced migrant workers’ employment (9 million foreign and migrant workers are estimated to live in Saudi Arabia, almost a third of the population of 31 million).

Unless they do that, a shift towards private sector employment for Saudis will fail. The third issue is that the government wants to sell off a lot of its assets, the big one being Aramco (the national oil company). But here lies the problem: the value of Aramco is linked to the oil price and the amounts produced.

The government estimates this at around $2 trillion, but it’s very doubtful whether private investors will pay that much, and I don’t think that oil prices will rise anytime soon. Initial reactions to the announcement were positive, with the Saudi Tadawul All-Share Index (TASI) closing 2.5% higher on the day at 6,868.

Vision 2030 is the blueprint for Saudi Arabia’s ambitious economic transformation and rests on three pillars: A vibrant society, A thriving economy and An ambitious nation.  This bold plan includes strategic objectives, which cascade down to Saudi Arabia’s public sector entities and vision realisation programmes, twelve of which have been unveiled recently.

With all these ambitious programs and targets, which aim to overcome Saudi Arabia’s oil dependency with a well-diversified, dynamic and modern economy, the challenges ahead for Saudi Arabia are daunting. In addition, this road map also includes setting a general direction for policy goals, and objectives.

Accordingly, certain public sector entities underwent a restructuring process to align them with the requirements of Vision and the NTP. Prince Mohammad presented a vision that excites, based on a set of lucid facts and challenges that we in Saudi Arabia need to address and overcome. However, we need to temper our excitement with realism; this is just the beginning of a long and winding road.

The challenges are multi-dimensional, as the country’s political leaders need to contend with the short-term gargantuan challenges, such as the required structural adjustments that are needed to establish the country’s new socioeconomic paradigm, in addition to establishing a recognisable linkage with the long-term objectives that the people can relate to and have a vested interest in meeting.

One of the underpinnings of this far-reaching transformational program is the National Transformation Program (NTP) which sets out specific obligations that the government ministries and other public sector entities must achieve by 2020. On the other hand, the other NTP related commitments include strengthening financial governance, increasing non-oil revenues and improving spending on programs and projects.

During the NTP, participating government ministries and public sector entities were tasked with carrying out detailed studies and meeting targets, in addition to coordinating with other government entities.

Undoubtedly, Saudi Arabia always suffered from poor implementation, when it came to turning plans into tangible results. However, with the launch of Vision 2030 and its accompanying executive programs, government entities are slowly breaking their silo mentality.

The main contention or challenge with Saudi Arabia’s Vision 2030 is the uncertainty surrounding its launch and potential for success. This stems from its stated objectives, which can only be described as ambitious, given the scope and magnitude of the undertaking – not to mention the relatively short time horizon (fifteen years) that has been set to achieve the stated objectives.

Enacting and implementing wide-ranging policy reforms pose a serious dilemma, especially if the changes include monumental, structural and macroeconomic changes.  The Vision is calling upon the private sector to partake in this massive transformation.

Economic growth and diversification will no longer be state-led, and one of its intended outcomes is the dismantling of a social contract between the state and the people that is close to fifty years old; a social contract that became institutionalised with the passing and implementation of the country’s First Development Plan.

The above is not a simple economic adjustment or structural reform program that may be painful to certain sections of society. It is a gargantuan undertaking, which requires not only (public) institutional and organisational capacity, but also deftness and communication skills in order to manage expectations. The multiple stakeholders have overlapping needs, priorities, expectations and outlooks.

The questions stem from the uncertainty due to a lack of detail as to how the policy changes will affect people’s lives. Implementation will carry with it the seeds of accrued knowledge, accomplishment and laborious hardship. However, harvesting the fruits of our toil will, undoubtedly, transform the lives of the people of Saudi Arabia.

In the eyes of his fellow citizens and the Kingdom’s inhabitants, Prince Mohammed is unique. Not only because of his age, but also his interest. He has been entrusted to oversee, guide, and administer two of the country’s most strategically vital portfolios.

In one, in his position and role as Chairman of the Economic and Development Affairs Council, Prince Mohammed is tasked with protecting and advancing the material wellbeing of the Kingdom’s 30 million people. Not least among his challenges in this regard is how best to address the needs of the country’s burgeoning youthful citizenry.

The nature and degree of unemployment among this segment of Saudi Arabia’s population is a matter of mounting and daunting concern, combined as it is with the goal of increasing dramatically the share of private sector and foreign investment involvement in the Kingdom’s economic growth.

In a recent interview, Prince Mohammad vowed to return the country to moderate Islam and asked for global support to transform the hard-line kingdom into an open society that empowers citizens and lures investors. The ultra-conservative state had not been normal for the past 30 years, blaming rigid doctrines that have governed society in a reaction to the Iranian revolution.

Vision 2030 has begun to reduce a big state budget deficit with austerity measures but has not yet created major new sources of non-oil growth or jobs. The phased removal of subsidies on fuel, water and electricity has started but some austerity moves have been unpopular. Already, some have been reversed or delayed as the economy has slowed because of low oil prices.

The plan includes private investment and privatizations and building the world’s largest sovereign wealth fund. The aim is to create jobs and raise the participation of women in the workforce from 22% now to 30% by 2030.

It is pertinent to mention here that Prince Mohammed had already announced a $500-billion plan to create a business and industrial zone extending across its borders into Jordan and Egypt, part of his efforts to reduce dependence on oil. The 26,500 square-km (10,230 square-mile) zone, known as NEOM, will focus on industries including energy and water, biotechnology, food, advanced manufacturing and entertainment, and will power itself solely with wind power and solar energy.

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