Saudi Arabia's Ambiguous Economic Vision for 2030

BY PETER MILLS

On April 16, 2016, Deputy Crown Prince Muhammad Bin Salman announced Saudi Vision 2030: a plan to transform the kingdom economically and culturally. This is an ambitious plan, to the point where one of its key provisions includes losing Saudi Arabia’s dependence on oil by 2020. While this goal most likely will not be met given how vital oil is to the Saudi budget, at times making up around 90 percent of the Saudi Arabian budget, this goal shows the level of ambition Muhammad Bin Salman has to transform the kingdom and “end its addiction to oil.” In addition, these reforms include components such as lessening restrictions on the mixing of men and women at public events and within the workforce. Given these steps, it is quite possible that the government will eventually relax its infamous ban on women drivers; there have already been calls to do so.

One of the largest components of these reform efforts is the initial public offering (IPO) of Saudi Aramco, one of the largest oil producers on the planet. Although it is expected that only 5 percent of Aramco’s shares will be available for purchase, the estimated value of this offering runs from $2 trillion to “merely” hundreds of billions of dollars. While this will bring in much needed cash flows to replenish Saudi Arabia’s reserves that were hurt by the recent period of low oil prices, which saw Saudi Arabia’s budget deficit skyrocket to 14 percent of GDP. These low oil prices stem partly from the emergence of shale oil producers in the U.S. which has increased supply in the oil market. Oversupply in the market means that oil storage facilities are near capacity and producers are running out of places to store oil. This in turn has hurt Saudi efforts at cutting production to control oil prices as, whenever production is cut by OPEC, more oil supply is released from oil storage facilities and again pushes oil prices back down. As a result, it is unclear how much revenue this IPO will actually bring in; either way, Saudi Arabia’s debt-to-GDP ratio is expected to rise over the next few years, although it is still quite low and manageable for the moment. However, a lot of information surrounding Aramco remains secret and, given its close associations with the Saudi Kingdom, it is hard to say how much control or influence investors will have over the company.

There are other economic reforms that have been proposed by this initiative, including lowering the government's dependency on oil revenue and instead trying to grow its non-oil revenues. On this point there has been some success, and non-oil revenues are projected to grow by 6.5 percent this year. This is being achieved through cutting government subsidies for a wide range of services and attempting to reduce the unemployment rate from 11 percent to 7 percent. However, efforts to repeal subsidies are oftentimes politically unpopular, and some polls have indicated that as many as 86 percent of people in Saudi Arabia want subsidies to continue. When the government attempted to repeal subsidies on utilities, the price of water rapidly rose 500 percent over six months. As a result, the water minister was sacked, but this affair shows how difficult it will be for Muhammad bin Salman to stick to his reform plan. While so far Muhammad bin Salman has not backed away from his reform efforts, he will face increasing political difficulties as the economic pain of these changes bite at middle- and low-income Saudis.

In addition, the government is hoping to increase women’s participation in the workforce from 22 to 30 percent. While modest, this is significant change for a country where conservative religious clerics still hold sway. But this raises questions of its own. While these reforms nominally focus on economic measures, increasing the number of women in the workforce will inevitably carry with it cultural changes. At the same time, government efforts to build entertainment centers and attract a more international audience could provide a focal point for the Ulema, a council of top religious clerics who have wide control over social and religious policy, to organize a backlash against these reforms. On the upside, 85 percent of the Saudi populace prefers to follow the government over religious clerics on questions of policy, which indicates that the government may have some leeway in stretching the conservative boundaries that have often been imposed by the Ulema.

Still, one of the central pillars of Saudi Arabia is the alliance between the House of Saud, who governs the country as monarchs, and the Al ash-Sheikh family, who are descended from Sheikh Muhammad Ibn ‘Abd al-Wahhab and control the country’s religious institutions. The alliance between these powerful families dates back to the founding of the country when Abdul Aziz Ibn-Saud used Wahhab’s ultra-conservative followers to defeat his rivals and ultimately form the modern country of Saudi Arabia. Since then the Ulema have often directed the country’s social and religious policies. Yet, at the same time, they have often been subordinate to the king himself and rarely challenge his power directly.

For these reforms to attract the foreign direct investment (FDI) and foreign expertise necessary to transform the Saudi economy, Saudi Arabia will have to become a more attractive place to work. At the moment, because of its restrictive visa system and strict laws, Saudi Arabia is rarely a place of interest for foreign investors. In addition, with many Saudi workers guaranteed positions by the government, they often lack the necessary skills and discipline to succeed in a modern economy, which creates another potential problem. While these reforms will start out as economic, for them to be truly successful they will inevitably involve a cultural component. This is certain to provoke a conservative backlash as the Ulema will feel their power over social issues is being threatened. In addition, once these reforms start affecting Saudi culture, it is hard to say if the government will be able to stop people from demanding political reform as well. Presently, over 60 percent of the country’s population is under the age of 30, with those under age 25 accounting for half of the population. This massive youth population will require jobs and meaningful work if they are to become productive citizens and power an economy diversified away from oil. By some estimates, this will require annual GDP growth rates of 8 percent, far higher than Saudi Arabia’s typical growth rates of 2 to 3 percent. While Saudi Arabia has tried prioritizing Saudi workers to increase jobs, this often exacerbates the problems which make FDI reluctant to come to the country as Saudi workers oftentimes lack the necessary skills to succeed in a modern economy. The government has to both quickly carry out reforms to save the country from both low oil prices and losing its youthful populace to stagnancy; yet, at the same time, the pace of reform needs to be carefully controlled to prevent political unrest and a conservative backlash. These reforms will require a delicate balance.

If Saudi Arabia is able to pull off this plan, the country will be almost unrecognizable 20 years from now. It will avert the expected collapse of energy demand shifting away from oil, and it will potentially secure itself as a major Middle Eastern regional power for the foreseeable future. However, this is a big if: there are massive challenges facing Saudi Arabia and certain sectors of Saudi society will adamantly oppose these changes. In a worst case scenario, if these reform efforts fail to yield the expected results, then the subsequent changes could tear apart Saudi society as its ultra-conservative elements and its more liberal elements come to a head. This will be a disaster for the Middle East on an unimaginable scale. Given the importance of the Hijaz, the region comprising Mecca and Medina, in Islam, any severe intrastate conflict in Saudi Arabia will certainly draw in radical Islamist forces that will in turn draw in superpowers such as the United States. Therefore, it is of vital national interest for the United States and other powers in the region for these reform efforts to succeed. The difficulty remains in the political side of this equation, but it is incredibly difficult to analyze the tumultuous politics amongst Saudi Arabia’s many princes as so much of this is kept secret. Therefore, it is difficult to see how the kingdom will handle the youth’s drive for greater say in governance while controlling dissent against the expected economic and cultural changes as a result of this plan. This leads to the central question: if it comes down to this plan succeeding or the continuation of an absolute monarchy in Saudi Arabia, what will the king choose?