Saudi Ara­bia’s bold vi­sion for eco­nomic di­ver­si­fi­ca­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Saudi Ara­bia has cap­tured the world’s at­ten­tion with the an­nounce­ment of an am­bi­tious agenda, called Vi­sion 2030, aimed at over­haul­ing the struc­ture of its econ­omy. The plan would re­duce his­tor­i­cal high depen­dence on oil by trans­form­ing how the King­dom gen­er­ates in­come, as well as how it spends and man­ages its vast re­sources. It is sup­ported by de­tailed ac­tion plans, the ini­tial im­ple­men­ta­tion of which has al­ready in­volved head­line-grab­bing in­sti­tu­tional changes in a coun­try long known for cau­tion and grad­u­al­ism.

While the im­me­di­ate cat­a­lyst for eco­nomic re­struc­tur­ing is the im­pact of the sharp fall in in­ter­na­tional oil prices, the ra­tio­nale for th­ese re­forms has been ev­i­dent for much longer. With oil sales gen­er­at­ing the bulk of gov­ern­ment rev­enues, and with the pub­lic sec­tor be­ing the pre­dom­i­nant em­ployer, Saudi of­fi­cials have long wor­ried that the King­dom’s lack of eco­nomic di­ver­sity could place at risk its long-term fi­nan­cial se­cu­rity.

The more than halv­ing of oil prices in the last 18 months has been ac­com­pa­nied by a ma­jor change in how the oil mar­ket func­tions. With growth in non­tra­di­tional sources of en­ergy – par­tic­u­larly the “shale rev­o­lu­tion,” which drove a near-dou­bling in US pro­duc­tion, to al­most ten mil­lion bar­rels per day, in just four years – the Saudi-led OPEC oil car­tel has less in­flu­ence on mar­ket prices. In ad­di­tion, cer­tain mem­bers of OPEC, again led by Saudi Ara­bia, are now less will­ing to try to mod­er­ate fluc­tu­a­tions in the price of oil, as they cor­rectly recog­nise that “swing pro­duc­ers” risk durable losses in mar­ket share.

That’s why Vi­sion 2030 is so im­por­tant. Seek­ing to re­gain bet­ter con­trol over its eco­nomic and fi­nan­cial des­tiny, the King­dom has de­signed an am­bi­tious eco­nomic re­struc­tur­ing plan, spear­headed by its en­er­getic new deputy crown prince, Mo­hammed bin Sal­man Al Saud. In sim­pli­fied terms, Vi­sion 2030 fo­cuses on three ma­jor ar­eas, to­gether with ef­forts to pro­tect the most vul­ner­a­ble seg­ments of the pop­u­la­tion.

First, the plan seeks to en­hance the gen­er­a­tion of non-oil rev­enues, by rais­ing fees and tar­iffs on pub­lic ser­vices, grad­u­ally ex­pand­ing the tax base (in­clud­ing through the in­tro­duc­tion of a value added tax), and rais­ing more in­come from a grow­ing num­ber of vis­i­tors to the King­dom.

Sec­ond, the au­thor­i­ties want to re­duce spend­ing by low­er­ing sub­si­dies, ra­tio­nal­is­ing the coun­try’s mas­sive pub­lic in­vest­ment pro­gram, and di­vert­ing spend­ing on arms away from for­eign pur­chases.

Third, the King­dom seeks to di­ver­sify its na­tional wealth and, in the process, in­crease cur­rent in­vest­ment in­come. For ex­am­ple, the plan would raise funds via the IPO of a small part (up to 5%) of Saudi-Aramco, the gi­ant oil con­glom­er­ate, and in­vest the pro­ceeds in a broader range of as­sets around the world.

This bold eco­nomic vi­sion is not with­out risks. Eco­nomic tran­si­tions are in­her­ently tricky, es­pe­cially one of this scale and scope. Early suc­cesses are of­ten needed to so­lid­ify the over­whelm­ing buy-in of key con­stituen­cies, par­tic­u­larly those that nat­u­rally may be re­sis­tant to change at first (es­pe­cially change that elim­i­nates some of the tra­di­tional fi­nan­cial en­ti­tle­ments in mov­ing from a fa­mil­iar, al­beit less se­cure, present to­ward what is now an un­fa­mil­iar fu­ture).

The ac­tion plans un­der­pin­ning the im­ple­men­ta­tion of Vi­sion 2030 in­evitably in­volve pro­gress­ing on mul­ti­ple fronts si­mul­ta­ne­ously and in a care­fully co­or­di­nated and mon­i­tored fash­ion. Re­quir­ing in­vig­o­rated ad­min­is­tra­tive and op­er­a­tional re­sources, it comes at a time when the King­dom is not only deal­ing with lower oil earn­ings and draw­ing down its large re­serves, but also is in­creas­ingly as­sert­ing its re­gional role, in­clud­ing in Syria and Ye­men.

Against

this

back­ground,

it

is en­cour­ag­ing that the an­nounce­ment of Vi­sion 2030 has been fol­lowed rapidly by the im­ple­men­ta­tion of some ini­tial and no­table steps. Sus­tain­ing this mo­men­tum in a man­ner that main­tains con­sis­tent com­mu­ni­ca­tion with key do­mes­tic stake­hold­ers will likely prove crit­i­cal in de­ter­min­ing the plan’s suc­cess. How the Saudis pro­ceed on this im­por­tant eco­nomic re­struc­tur­ing is be­ing closely watched by the other five mem­bers of the Gulf Co­op­er­a­tion Coun­cil – and by many other coun­tries as well.

The at­ten­tion at­tracted by Vi­sion 2030 is not sur­pris­ing. The plan, af­ter all, is about a lot more than fun­da­men­tal eco­nomic re­forms. If Saudi Ara­bia suc­ceeds in trans­form­ing its econ­omy, in­clud­ing re­form­ing in­sti­tu­tions and re­struc­tur­ing eco­nomic incentives, other coun­tries that face sim­i­lar chal­lenges, in the re­gion and be­yond, will be in­spired to fol­low suit.

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