Economy and Trade
Saudi Arabia was established in 1932 by King Abdul Aziz. Since his death in 1953, he has been succeeded by various sons. Covering much of the Arabian Peninsula, Saudi Arabia has transformed itself from an underdeveloped desert kingdom into the world’s dominant oil producer, and owner of the world’s largest hydrocarbon reserves. Proven reserves are estimated to be 263 billion barrels, more than a quarter of the world’s known oil reserves. Despite efforts to diversify the economy, oil accounts for around one-third of GDP, more than 90% of the country’s export earnings, and nearly 75% of government revenues.
Saudi Arabia continues to pursue rapid industrial expansion, focusing on the petrochemical sector. Saudi Aramco, a parastatal petrochemical company, is one of the world’s leading petrochemical producers. Other industries, including construction, transport, finance, and communications, are also being developed. The government is seeking to encourage privatization, liberalize foreign trade, and reform the investment regime. Saudi Arabia is a member of the Gulf Cooperation Council (GCC), which also includes Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates.
Economic Policy over 12 Months
Saudi Arabia has largely avoided the political unrest seen in other Arab countries in 2011. This may partly reflect the fact that King Abdullah has gone on an unprecedented spending spree. More than US$100 billion is going to be spent on various social programs—raising public-sector wages; more state aid to help people buy houses; and benefits, for the first time, for the country’s rapidly increasing number of unemployed people.
The public sector will remain the major force of the Saudi economy in 2011 and the medium term, while a long-term effort to diversify the economy away from its dependence on crude oil exports is expected to be undertaken to enable a greater role for the private sector.
Substantial savings that were accumulated during the 2003–08 boom period allowed the government to play a significant role in financing new industrial and infrastructure projects, including the creation of value-added, energy-intensive industries that capitalize on the kingdom’s vast energy resources, and create jobs in manufacturing, tourism, and other services sectors.
The Kingdom’s ninth development plan, which runs from 2010 until 2014, is aimed at “combating poverty and spreading education and making housing, work and medical treatment available for everyone,” according to the authorities. The Kingdom faces severe social and economic challenges, with the largest population in the Arab Gulf, high unemployment, and a growing lower-income population. The government hopes to almost halve unemployment by the end of 2014 through the plan.
Two-thirds of Saudi nationals are under 30 years of age, and the Kingdom has struggled to create jobs for them, partly because of a state education system focused more on religion than job skills, and partly because local firms often decide to hire non-Saudis at lower wages. The Saudi government pledged to remain engaged in supporting economic activity, including US$400 billion via a five-year investment program intended to support the domestic economy.
In response to the global slowdown, the monetary authorities sought to stimulate the economy through lower interest rates. The Saudi Arabian Monetary Agency cut the repurchase rate to 2% in 2009, the lowest level in five years, also cutting the reverse repurchase rate to 0.25%. Rates remained at these levels through August 2011.
Economic Performance over 12 Months
In its May 2011 annual report on the economy, the IMF said that the Saudi economy has continued to strengthen in 2010 and early 2011, driven by a strong increase in non-oil GDP reflecting a rebound in the private sector supported by increased government spending, and a recovery in global demand and higher oil prices as the world economy emerges from the global financial crisis. Overall real GDP growth rose from 0.1% in 2009 to 4.1% in 2010. Profitability of corporates listed on the stock exchange also improved significantly in 2010—net profits were 56% higher than in 2009. The banking sector continues to hold capital above statutory requirements and credit growth is rising. With government spending and oil production now also increasing, available leading indicators point to a further strengthening of activity in the first quarter of 2011.
Looking ahead, the IMF says that the economy is poised for continued robust growth. Oil production is increasing further to compensate for lower output elsewhere in the region. As a result, both fiscal and external balances are likely to register strong surpluses. Reflecting the positive momentum, overall real GDP growth is projected by the IMF to reach 6.5% in 2011, with inflation likely to rise to about 6% as a result of both domestic and imported factors.
In August 2011, the Samba Financial Group, one of the largest banks in the region, said that strong oil prices allied with a sharp rise in foreign assets would allow Saudi Arabia to maintain its budget surplus through the next three fiscal years but the non-oil balance has largely deteriorated given its heavy reliance on crude sales.
Samba added that the country current account would continue to record large surpluses in the next few years but added that structural issues mirror those on the fiscal side.“To a large extent, the current-account outlook mirrors that of the fiscal account. Robust oil export earnings will allow substantial current-account surpluses in the region of 14% of GDP over the next three years, allowing a further build-up of net foreign assets, which we expect to reach about US$700 billion by end-2013, accounting for nearly 120% of GDP,” it said.
Inflation inched up to 4.7% in June 2011 from 4.6% in May. The increases in prices was largely driven by domestic consumer demand, not international factors such as commodity prices. The rate stood at 5.1% in 2009 and was at 9.9% in 2008. Despite the oil boom of the past few years, unemployment remains worryingly high. Official figures show that the unemployment rate was 10.8% at the end of 2010. However, the true rate may be closer to 20%, according to a BBC report. The jobless rate is thought to be even higher among those aged under 30, who make up two-thirds of the population, and it is staggeringly high among women. Saudi women comprise 55% of graduates but only 5% of the workforce in the sexually segregated society. The education system, which is heavily influenced by the conservative religious establishment, may be partly to blame for the high unemployment rate, according to the BBC. Around 80% of graduates study subjects such as history, geography, Arabic literature, and Islamic studies, while the country does not have enough graduates in science, engineering, or medicine.
Support for Inward Investment and Imports
The government is keen to improve the investment climate as part of a broader program to liberalize the country’s trade and investment regime, to diversify an economy overly dependent on oil and petrochemicals, and to boost employment levels. The government encourages investment in transport, education, health, information and communication technologies, life sciences, and energy, and in six “Economic Cities” that are in various states of development. There is a list of sectors that are off-limits to foreign investors. There are also considerable barriers to investing in the country, including a formidable bureaucracy, a government insistence that companies hire Saudi workers, a conservative cultural environment, slow payment of government contracts, and a very restrictive visa policy. The Saudi Arabian General Investment Authority (SAGIA) was established in 2000 to provide information and assistance to foreign investors.
Almost all Saudi imports are covered by a general import tariff rate of 5%. Saudi infant industries, including furniture, cooking salt, mineral water, and plastic pipes will continue to enjoy 20% tariff protection. Imported cigarettes and tobacco products are charged 200%, wheat and flour 25%, and dates and long-life milk 40%. Despite Saudi Arabia’s membership of the World Trade Organization, the US Department of Commerce says that Saudi businesses and laws still favor Saudi citizens, and Saudi Arabia still has trade barriers (mainly regulatory and bureaucratic practices) that restrict the level of trade and investment. For more information on importing goods into Saudi Arabia, see the website of the Saudi Customs Department.
Saudi Arabia no longer offers tax holidays to foreign investors. For more information on the incentives that are available see the SAGIA website.
GDP growth: 3.7% (official, 2010 est.)
GDP per capita: US$24,200 (2010 est.)
CPI: 5.7% (2010 est.)
Key interest rate: 2% (central bank, August 2011)
Exchange rate versus US dollar: SR3.75 (fixed)*
Unemployment: 10.8% (2010 est.)
FDI: US$204.3 billion (December 31, 2010 est.)
Current account deficit/surplus: US$52.03 billion (2010 est.)
Population: 26,131,703 (July 2011 est.)
* Saudi riyal
Source: CIA World Factbook except where stated