The Future of Saudi Economy

20160109_LDD001_0
Cited from //cdn.static-economist.com

The economy of Middle East and North Africa region (MENA) is considered among the weakest economies in the world. It represent only about 4% of the total world economy and most of it is oil-based returns. Moreover, the MENA region share in world exports of goods and services is only 5% and 80% of it is oil exporting [1]. In fact, oil-based economies, such as Saudi Arabia, are not stable since oil is not sustainable good. The prices of oil can go up and down any time affecting the social and political status of these countries. Moreover, oil is a good that can be run out or be replaced with any other type of alternative energy. Therefore, MEAN countries have to diversify their economies and form intra-regional trade agreements to strengthen their economies [1].

The weak transportation infrastructure in MENA region is one of the most important facts that discourage intra-regional trades among the MENA countries. Transporting goods and services between MENA countries is very costly and difficult since there are no effective land lines that link these countries [1]. However, in the last few years, many MENA counties realized this issue and start building railroads for the purpose of smooth the economic interactions between their countries. One of the best examples of these projects is the Gulf Railway project that is going to link the Gulf cooperation states [2].

Gulf Railway:

In 2009, Gulf Cooperation states (Saudi Arabia, Kuwait, Qatar, Bahrain, United Arab Emirates, and Oman) successfully could reach an agreement to build an international rail network that links the six states. The length of this railway will be about 2,117 km starting from Kuwait in the north going down to Saudi Arabia, Bahrain, Qatar, UAE, and ending in Oman. The cost of this project is about $16 billion and expected to be operational by the year 2018 [2]. The first step of this project started in the year 2011. Each country is responsible for building a complete internal rail network that links the major cities of the country. By the beginning of the 2016 and after the completion of the internal major railways, the internal networks are going to be linked [3].

Such project is going to relieve many trade barriers between these states. The amount of investments and goods exchange between GCC states will increase. Moreover, the Gulf Railway will include not only freight transport, but also passenger. Therefore, the tourism actors of the Gulf states will be flourished.

middle_east_map
 http://www.globalrailnews.com/

However, the oil the low oil price may affect the working process of the project negatively [4]. At the time of starting the project in 2011, the oil price was nearly $100 per barrel [5]. The Gulf states, as oil-based countries, they were able to finance their projects [4]. The high oil rent helped them to start such huge project.

However, in the last few months, the price of oil faced a dramatic decrease to be less than $40 per barrel [5]. With such low price of oil, the Gulf states will not be able to meet the operational deadline due to lack of funding availability [4].

King Salman Bridge:

A dream became a true. In April 8, 2016, the King of Saudi Arabia, Salman Al-Saud, and the President of Egypt, Abdel Fattah El-Sisi, agreed to build a bridge that will link Asia and Africa continents. According to King Salman “I agreed with my brother his Excellency President Abdul Fattah Al-Sisi to build a bridge connecting the two countries” [6]. The bridge will increase the bilateral trade between these two states. In fact, the bridge will be the first connecting land way between Middle East and North African [7].

32FA267300000578-3530177-image-a-39_1460127383029
http://i.dailymail.co.uk/

Historically, the plan of building a bridge between Saudi Arabia and Egypt had discussed and agreed many times. However, the previous president of Egypt, Hussein Mubarak, always canceled the plan when it was about to start. The bridge will cross the Red Sea to link Saudi Arabia with Egypt. The length of this bridge will be 25 kilometer with approximate cost of $6 billion [7].

The bridge will increase the trade between the two countries by more than $200 billion. It will be the access of the African goods and services to the Gulf states. Moreover, this project will support the tourism sectors of both countries. The Saudi tourists will easily reach Egypt and the African pilgrims will find a cheaper way to reach Saudi Arabia [7].

 A Future Without Dependent on Oil:

In January 2015, a new Saudi King, King Salman Al-Saud, took the power. The king placed his son, Mohammed ibn Salman Al-Saud, in the government to be the second deputy crown prince. Prince Mohammed was given “unprecedented control” over the government. He became the controller of the “national investment fund, economic policy, and the Ministry of Defense”[8].

14545662221
Cited from //cdn.static-economist.com

The 31 year old prince decided to end the oil-based economic era by releasing a massive economic reform that will reshape the economic direction of the country. The target of Prince Mohammed is to turn the oil sector of Saudi Arabia from primary factor to a secondary factor in the Saudi economy. According to the Price “[the Saudi government] will technically make investments the source of Saudi government revenue, not oil. . .So within 20 years, we will be an economy or state that doesn’t depend mainly on oil”[8]. The economic reform includes cutting the unnecessary government spending and social subsidization, and selling a share (less than 5%) from the Saudi national oil company (ARAMCO) in the stock market for the purpose of raising money to establish the largest sovereign wealth fund in the world, which will worth $2 trillion [8].

The reform also includes the truing of ARAMCO from only oil producing company to “the world’s biggest industrial conglomerate.” Moreover, in the last few months, the government opened the country for foreign direct investment to encourage the international companies to inter the Saudi market [8].

A Summary of the Political Economy of Saudi Arabia:

Saudi Arabia is one of the countries that are ruled by an absolute monarchy. Islam is the official religion of the county and ruled under the Sharia law. Saudi Arabia is an oil rich country, which is has the second largest oil reserve in the world. It is the world’s largest oil producer. The economy of this country is heavily based on oil. Oil represents more than 90% of the country’s total income and about 45% of its total GDP. Therefore, the economic status of the country changes as oil price change.

High oil rent helped Saudi Arabia during the Arab Spring. The government controls the social stability by providing a very large benefit to its citizens. However, oil is less likely to continue helping the government. The country has a large unemployment rate, and slightly high population growth, which may cause social unrest in the future. Inside the territory of Saudi Arabia, there are a huge number of immigrant workers, which make up 33% of the total population. The country can easily solve the unemployment issue by reducing the number of the foreign workers in the country.

Health and education in Saudi Arabia have significantly improved in the last few decades. The high oil rent helped the country to invest in these important sectors. The country is providing free healthcare and education to its whole citizens. Healthcare and education represent about 35% of the total Saudi budget.

One of the most challenging issues in Saudi Arabia is water scarcity. Saudi Arabia was one of the largest wheat producers in the world, but the water scarcity was a barrier of this project. The government realized that the water that was used in the wheat irrigation is more valuable to the country than the income that was generated from producing wheat.

Finally, Saudi government started taking many positive steps in terms of solving the social and economic issues in the country. The government started many effective economic and social reforms that will improve the country’s social, political, and economic condensations in the future.

Sources:

[1] Cammett, Melani; Diwan, Ishac; Richards, Alan; Waterbury, John (2015-02-24). A Political Economy of the Middle East (Kindle Location 8759). Westview Press. Kindle Edition.

[2]http://gulfnews.com/business/sectors/general/gcc-railway-project-estimated-to-cost-15-4b-1.1292154

[3]http://www.globalrailnews.com/2015/02/09/the-return-of-the-railway-eastern-promise/

[4]http://www.arabnews.com/news/887551

[5]http://www.macrotrends.net/1369/crude-oil-price-history-chart

[6]http://www.bbc.com/news/world-middle-east-35999557

[7]https://www.youtube.com/watch?v=g9PqtXiXLBY

[8]http://www.bloomberg.com/news/features/2016-04-21/the-2-trillion-project-to-get-saudi-arabia-s-economy-off-oil


3 thoughts on “The Future of Saudi Economy

  1. Great post. I think Saudi Arabia is going through some similar issues regarding economic integration as Kuwait. Doing my own research on Kuwait, I have been able to see that due to the lack of economic diversity, the country is falling behind. Additionally, similarly to Saudi Arabia, infrastructure is definitely holding the country back. Kuwait has been talking about starting a building plan of railways and it is set to begin this year. This may be in accordance with the railway plans that you discussed going throughout the Gulf region. I do agree with you that this would make transportation of goods more effective taking some of the burden off of the roads. It would also be interesting to see if the building of new railway infrastructure would somehow influence countries in the region to export different types of goods, since most Saudi counter parts the GCC already have so much oil. Maybe this will even push Kuwait to change economic tactics.

    Like

  2. I am glad to read this blog. Your discussion on the bridge plan for Saudi Arabia and Egypt can bring lots of benefits. Both countries will contribute from this project such as tourism, transportation of goods, and pilgrimage. There many opportunities that can happen, but Saudi Arabia may delay their plans due to the conflict in Yemen and the oil prices. However, the country is capable of experiencing unexpected changes in the region, so it’s a possible chance that Saudi Arabia will complete the bridge.

    Like

  3. As always, fantastic blog! I always worry when countries in the MENA region with “limitless” oil reserves rely solely on this as an economic gain, so I absolutely agree when you wrote that MENA has to diversify its economies. The benefits of having a railroad system is completely understated in talking about this region. Creating railroads and trains can not only make jobs, but can improve inter-regional trading like you said.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s