If the pace and scope of economic development initiatives and policies announced during the first five years of Saudi Vision 2030 were not dizzying enough, Saudi policymakers show few signs of slowing down. Government officials aim to create a virtuous cycle of economic growth through more centralized policymaking and greater collaboration with private sector partners. The sheer scale of new initiatives, programs, and targets present many commercial opportunities. However, the kitchen-sink approach to economic policymaking threatens to hamper substantial progress in any specific area.
In a highly anticipated interview on April 27, Crown Prince Mohammed bin Salman made a broad case for more centralization of economic policymaking, which he considers necessary to drive Vision 2030 forward. The government has reportedly set up a Budget Bureau and plans to launch a new Policies Office this year. These measures may help to provide much-needed coherence and sustainability to various economic strategies. Indeed, the International Monetary Fund recommended years ago that the Saudi government establish a broader framework to guide investment and borrowing decisions.
Any new government entities overseeing budgetary and economic policy matters in Saudi Arabia will have their work cut out for them. In November 2020, the crown prince announced that the Public Investment Fund would plow $40 billion annually into the domestic economy, forcing the country’s sovereign wealth fund to balance a desire to generate solid returns from international investments with injecting capital locally. “The Public Investment Fund motivates the economy of Saudi more than the budget and this will continue,” remarked the crown prince during his April interview. Meanwhile, the new public-private partnership program Shareek aims to drive $1.3 trillion of corporate investments in the private sector from national champions like Saudi Aramco and the Saudi Basic Industries Corporation by 2030. The Public Investment Fund and a forthcoming National Investment Strategy will inject trillions of dollars more into the economy over the next decade, according to the crown prince.
Other government-led initiatives aim to enhance the commercial capacities and international outreach of Saudi Arabia’s domestic firms. In February, Saudi Arabia announced plans to establish an export and import finance bank with a capitalization of $8 billion. The subsequent “Made in Saudi” initiative, which was launched in March, aims to support national products on a local level while also linking Saudi firms with global importers.
Mohammed bin Salman also announced “Green Initiatives” for Saudi Arabia and the broader Middle East. While largely environmental in nature, the initiatives include projects intended to improve livability, boost renewable energy capacity, and incorporate more clean hydrocarbon technologies – thus involving several commercial dimensions. Environmentally friendly objectives are increasingly interwoven in state-led development projects, such as The Line at Neom, and government investment strategies.
Foreign investors must not be overlooked, as the Saudi government hopes to attract $500 billion in foreign direct investment over the next decade. Recent investment figures reveal just how challenging this will be: From 2015-19, total net inflows of FDI reached a paltry $25.8 billion, according to the World Bank. On February 15, the Saudi government announced that, to secure government contracts, foreign firms would be required to establish a regional headquarters in Saudi Arabia as of January 1, 2024 – part and parcel of efforts to provide both sticks and carrots to lure investments. Additional plans are in motion to speed up the country’s privatization agenda and garner additional proceeds and savings from state assets.
The Saudi government likewise seeks foreign and local investments in new tourism development initiatives that emerged despite the coronavirus-induced economic downturn in 2020. In January, the Public Investment Fund launched Cruise Saudi to enhance Saudi Arabia’s reputation as a tourist destination. On February 23, Mohammed bin Salman announced the launch of the Soudah Development Company, another Public Investment Fund-owned entity that plans to inject $3 billion into tourism and infrastructure projects in the country’s Asir region. These newer commercial entities and projects come on top of existing development initiatives – Neom, Red Sea Development Company, Amaala, Qiddiya – all fully owned by the Public Investment Fund.
The Public Investment Fund’s ambitious growth plans undergird many of these economic programs and initiatives. The sovereign wealth fund’s new program for 2021-25 entails growing its assets under management from $400 billion in 2021 to $1.07 trillion by the end of 2025. In his interview, Mohammed bin Salman even hinted that Saudi Aramco shares may be transferred to the Public Investment Fund. This measure would enable the fund to more quickly grow its asset pool, but it would not necessarily reflect the non-oil growth promised in Vision 2030. The Public Investment Fund also aims to create 1.8 million jobs by 2025, up from the 331,000 created by 2020.
Public Investment Fund officials have some justifiable reasons to be bullish about the potential associated with domestic investments. Saudi Arabia has substantial economic weight to throw around. The country accounted for 49.8% of the nominal gross domestic product of all six Gulf Cooperation Council countries in 2020. Yet much of the Saudi government’s economic policies indicate a desire to create a reinforcing loop wherein Public Investment Fund investments generate greater investor interest, which in turn raises the value of these investments and leads to larger yields and more capital to inject back into the economy.
Such a cycle, however, does not operate in a closed system but rather is linked to regional and global forces. Neighboring Gulf Arab states – the United Arab Emirates in particular – have launched competing initiatives to attract foreign visitors and global firms. With Gulf Arab governments jockeying for position amid economic rebounds from the coronavirus-related downturns, regional competition for trade and investment flows is on the rise. Moreover, the willingness of prospective foreign investors to participate in the ongoing economic transformation of Saudi Arabia depends more on a high likelihood of profits and less on any personal commitment to Vision 2030.
Higher oil prices may provide the short-term financial cushion needed to get these economic programs and initiatives off the ground and increase their attractiveness to prospective investors. Oil prices are hovering over $60 per barrel, and the IMF forecasts that Saudi Arabia’s fiscal break-even oil price will drop to $65.70 in 2022. Aramco is seizing the opportunity to market various oil and gas assets to international investors, and the government is reportedly in talks to sell another 1% stake in Aramco.
When reinforcing loops create desirable results, a virtuous cycle appears. But nothing grows indefinitely. Although the Saudi government’s assessment of Vision 2030’s progress over its first five years is overwhelmingly positive, there are hints of more critical reflection. The next decade of the vision will involve “restructuring” of certain programs, more “flexibility” afforded to implementation schedules, and “transferring” other initiatives. The value-added tax rate may be scaled down from its current level of 15%.
Given the pace and scale of economic development initiatives in Saudi Arabia, any eventual progress is likely to be either broad and incremental or narrow and deep. A more moderate, balanced approach to economic development in Saudi Arabia may not make headlines, but it would present a sustainable path forward.
