Saudi Arabia’s Economic Reforms: Towards A Liberal Economy?

The rumors of Saudi Arabia taking its government-owned oil company public with an IPO, have been strengthened again by statements from the Kingdoms Crown Prince, Mohammed bin Salman. While there is still no confirmation of how much of Aramco will be publically offered, or if a private sale will be preferable, what is clear is that the Kingdom is facing a period of cultural and economic change.

A time of change?

The Saudi Arabian economy has spent the past 6 months officially in a recession as the nation has been falling victim to plummeting oil prices and a rocketing unemployment rate of 12.3%. More alarmingly, the UN anticipates that it will only get worse with the state’s population forming a “demographic time bomb”, that is dependent on the states oil. Currently, the oil industry accounts for around 92.5% of the Kingdom’s economy – meaning that to survive the rentier state will have to diversify and the sale of Aramco is just one of many ways that the Kingdom has indicated they will do this. Last year, Crown Prince Mohammed bin Salman released his 2030 economic plan. The plan, which is to form the cornerstone of the rentier states move away from oil dependence, involves the construction of a US$500 billion mega city on the Red Sea.

The proposed mega city – coined the “entertainment city” – will see the Kingdom move away from its conservative roots. Jim Reid-Anderson, Six Flags chief executive, has announced that the mega city will see the first of three Sex Flags theme parks built in the country, each costing between $300m and $500m. Fahd Al-Rasheed, the chief executive of King Abdullah Economic City has indicated that plans for “entertainment city” will see the area transformed into 34,000 square kilometers of global upmarket tourism and leisure, including 50 islands. Rasheed went on to state that the project would be “Bigger than Belgium…Think Dubai’s highly successful Palm Jumeirah multiplied by nearly 6,000”.

The Kingdom has also announced that the region will be “governed by laws on par with international standards,” including changing laws in the area to allow women to wear bikinis in pool and beach areas – this would be a first for the country. The plan, which is expected to increase government non-oil revenue from US$163 billion to US$1 trillion annually and raise private sector contributions to the economy by 25% of the states GDP.

What will this mean?

Regardless of whether Aramco was to go to a private buyer or is listed across a range of stock exchanges, the company’s sale will mark an unprecedented liberalization of the Saudi Arabian economy – but it will not be an easy feat. The countries aspirations face two significant problems; the state’s political climate and their economic structure.

With regard to the former the reforms are radical – meaning they raise the risk of backlash from those who may face new problems, such as challenging their religious ideals or unemployment in a competitive economy. Simon Constable, a market commentator, commented to Al Jazeera that “the conditions necessary for a vibrant private sector include a robust rule of law, low corruption, a small bureaucracy, and limited government involvement in the economy.” These attributes are scarcely found in the structure of the Saudi Arabian economy. Constable remarked that “it can be done…but it will need a lot of changes”.

The country will also face the challenge of competitiveness. Currently listed 92nd (out of 190 countries) on the World Bank’s Ease of Doing Business 2018 list, Saudi Arabia has struggled to attract foreign investment. The International Monetary Fund (IMF) has stressed the importance of the state applying more austerity measures until it is able to “balance the books” and looking to restructure – moving completely away from an energy based system. These are both things that the state has not incorporated into its new plan. Moreover, the IMF went on to note that the skills required to work in the private sector are almost completely lacking from the Saudi workforce.

The movements of the Crown Prince, and indeed the entire Kingdom, are incredibly positive. While the proposed changes are incredibly optimistic and fail to consider the cultural climate of the country they show the Kingdoms openness to change. This openness will be potentially the most important attribute if the country’s economy is to survive.

Montana Vaisey

Montana is studying International Relations and Law at Deakin University. She is passionate about resource shortages and policy development.
Montana Vaisey

About Montana Vaisey

Montana is studying International Relations and Law at Deakin University. She is passionate about resource shortages and policy development.