Amid the deluge of news about Saudi Arabia’s latest investments in the global sports market and the newest initiatives planned at Neom, it is hard to get a clear sense of how the Vision 2030 reforms are affecting the day-to-day workings of the economy. Such an assessment is further complicated because short-term movements in indicators such as growth, exports, and inflation are influenced by factors that are not directly related to the reforms, including oil prices and U.S. monetary policy.

The impact of the reforms can be easier to see in indicators that capture narrower aspects of the economy. Four such indicators are the labor force participation rate of Saudi women, tourist arrivals in Saudi Arabia, foreign direct investment inflows, and the educational attainment of Saudi students. Close monitoring of these indicators will provide important information on the progress with the broader Vision 2030 reforms. Indeed, positive answers to the following four questions will give confidence that the kingdom’s economic diversification plans are on track.

1. Will the labor force participation rate of Saudi women resume an upward trend?

The increase in the number of Saudi women participating in the labor market is one of the most significant successes to date of the Vision 2030 reforms. Between 2017 and 2021, the Saudi female labor force participation rate doubled from 17.4% to 35.6%, comfortably exceeding the Vision 2030 target of raising it to 30%. Since then, however, the female participation rate has stagnated in the 35%-36% range, although women’s employment has continued to increase during this period, and the female unemployment rate has declined.

It is important that the female labor force participation rate starts rising again this year. Estimates by the International Monetary Fund suggest that increasing the female labor force participation rate could add up to 1.6% per year to gross domestic product. Given the participation rate of Saudi women is still well below the global average, there is plenty of scope for further increases. Legal impediments that previously restricted female participation and employment have been eased, and costs of employment are being defrayed through subsidies for childcare services, travel costs, and training. Social norms and expectations, however, will take time to change. This process would be accelerated if companies ensure an attractive work environment for their female employees and more Saudi women are promoted into leadership positions, which would have a positive demonstration effect on those considering entering the workforce.

2. Will foreign and domestic tourist arrivals continue to surge?

Vision 2030 puts considerable emphasis on developing the tourism sector. These efforts are bearing fruit with both foreign and domestic tourism booming. Official data from the Ministry of Tourism shows that 14.6 million foreign visitors arrived in Saudi Arabia in the first half of 2023, compared to 16.6 million in all of 2022, while the World Tourism Barometer published by the United Nations World Tourism Organization estimates that international arrivals in the kingdom increased by 56% in 2023 relative to 2022. Since tourist visas were first introduced in 2019, leisure travel to the kingdom has surged. In the first half of 2023, 2.9 million foreign visitors arrived for leisure purposes, nearly four times the number in 2018. Domestic tourist trips have also increased substantially, and spending during these trips doubled in 2021-22 compared with 2018-19. It looks likely that 2023 will match or exceed the 2021-22 numbers.

The development of tourism has had a noticeable impact on the balance of payments. A decade ago, the travel account was in a $10 billion deficit – in other words, Saudi residents were spending $10 billion more overseas than nonresidents were spending in the kingdom. In 2022, it had swung into a surplus of $10 billion, and a similar or better outcome looks likely for 2023. The boom in tourism has also contributed to robust growth in private consumption. Of course, these numbers do not take account of the huge sums of money that are being spent to develop the tourism sector, and questions remain about whether the tourism investments will ultimately provide value for money for the kingdom.

Strong growth in the tourism sector should continue this year. The World Tourism Organization projects that international tourism will recover above its pre-pandemic level during 2024, while the further build out of tourist infrastructure, hosting of more global events in the kingdom, and substantial outreach the authorities are undertaking to highlight the attractions that Saudi Arabia has to offer should see the country increase its share of the growing global market. With Saudi Arabia receiving approved destination status from China in 2023, it is likely that Chinese visitors will rise substantially. The one potential headwind to this growth is the uncertainty caused by the conflict in Gaza, which could deter some travelers from visiting the region.

3. Will foreign direct investment in the nonhydrocarbon sector take off?

Vision 2030 aims to increase foreign direct investment into Saudi Arabia to 5.7% of gross domestic product per year, a level that would exceed the 4.5%-5% of GDP achieved in the United Arab Emirates. According to the revised FDI series published in the Saudi Central Bank’s “Monthly Statistics Bulletin,” FDI into Saudi Arabia increased in 2021 and 2022, reaching 87 billion riyals and 105 billion riyals (2.5% of GDP) in these years respectively (these numbers are somewhat lower than those published by the General Authority for Statistics). This pick-up, however, was driven mainly by the sale by Aramco, the national oil company, of stakes in an oil and a gas pipeline to two consortiums of largely foreign investors. While recorded in the data as investment in the “transportation and storage” sector, these were effectively investments in the hydrocarbon sector. FDI inflows have weakened in 2023, although data for the full year is not yet available.

While regional uncertainties could dampen investment flows to the Middle East, other factors suggest that FDI inflows should accelerate in 2024. Saudi Arabia has recently introduced important legal reforms through the new Civil Code (effective December 2023). Previously, civil and commercial transactions were governed by sharia law, and many rules were applied inconsistently by the courts. The new code seeks to integrate Islamic principles into modern legal concepts, and while it remains to be seen how courts and tribunals will interpret the new code, it should provide a more predictable legal environment for businesses in the kingdom and should unlock increased investment. Further, the Regional Headquarters Program is coming into effect during the first quarter of 2024, and this may also boost foreign investment into Saudi Arabia.

4. Will education reforms start to pay dividends?

Ensuring the education system is equipping young Saudis with the skills needed for jobs in the dynamic non-oil economy the kingdom is trying to develop is a crucial element of the reform process. While Saudi Arabia spends around 5% of GDP (17% of government spending) on education, outcomes have been less than stellar. Two studies – Progress in International Reading Literacy Study (PIRLS) and Trends in International Mathematics and Science Study (TIMSS) – have found Saudi students score at the lower end of standardized international tests in reading, math, and science. This underperformance is even starker given Saudi Arabia’s income level. The chart shows a positive relationship between a country’s income level and its educational outcomes as represented by the 2019 TIMSS score. Countries below the trendline, including Saudi Arabia (marked by the orange triangle), are underperforming relative to their income level.

Recognizing that improvements are needed, the authorities have implemented reforms to the education system in recent years to try and raise the quality of teachers, strengthen curricula, and improve student attainment. The results of the 2023 TIMSS study, which are scheduled to be released at the end of 2024, will provide an important indication of whether the reforms are beginning to have a positive impact on educational outcomes.

Structural Reforms, Not Public Investment, Key to Economic Diversification Success

While large-scale investment by the government and other public sector entities can play an important role in kick-starting new sectors of the economy, economic diversification will ultimately depend on the successful implementation of deep-seated structural reforms that improve productivity and the investment climate and thereby boost the competitiveness of the non-oil economy. The good news is that many of these reforms are happening. Careful monitoring of the four indicators discussed above will provide important information about the likely success of the Vision 2030 reforms.