A look back at history shows that desperate times do indeed call for desperate measures. After all, it was not until Saudi officials watched in horror as oil prices plummeted by 70% that, in 2016, Vision 2030 was born. While other Gulf Cooperation Council (GCC) members presented their own initiatives, true to form, Saudi Arabia’s economic reform agenda is the most ambitious yet. 2020 was set to mark the agenda’s first benchmark achievement. Instead, an oil price war, a disastrous bombing campaign against Yemen and a 5.4% contraction in GDP set a different tone than the kingdom may have intended.
The Line: Mohammed bin Salman’s Green Blockbuster
The disruption ensued by the COVID-19 pandemic wreaked havoc on economies and markets worldwide, but none saw the eye-watering lows experienced by the oil industry. This was exacerbated by Saudi Arabia and Russia going head-to-head in a price war that brought about further carnage. Despite production cuts being eventually agreed upon, the global downturn and persistent oversupply of oil reached its crescendo with US oil dropping spectacularly into negative for the first time in history.
As the dust began to settle, a sense of urgency set in among leaders as they were faced with the aftermath of the crisis. Not only did COVID-19 highlight the risk of oil dependency, but it has further exposed oil-exporting economies to fiscal vulnerabilities. With growth contractions across the MENA region, the current price of oil is far below the break-even level required to balance the budgets. With the exception of the UAE, oil represents over 50% of GCC budgets, highlighting the urgency to diversify in order to pay off the fiscal bill. While the impact of COVID-19 on Vision 2030 is unclear, an analysis of existing achievements and overall aims can paint a clearer picture of how Saudi Arabia should reassess its grand plan in light of the pandemic.
Only a year after the announcement, it seemed that Vision 2030 was not enough to satiate the Saudi appetite for grandiose ideas. So, in 2017, Crown Prince Mohammed bin Salman announced the construction of a $500-billion smart city of NEOM. Aside from talk of a fake moon and flying cars, the Saudis managed to hit a more palpable note with investors with the city’s $5-billion green hydrogen plant. By 2025, the facility will supposedly produce 650 tons of hydrogen daily and 1.2 million tons of green ammonia for export.
Despite the challenges hydrogen fuel presents, this project offers Saudi Arabia an unparalleled opportunity to pioneer a market gaining “unprecedented political and business momentum,” according to the International Energy Agency. Beyond this, while there is little publicly available information on the kingdom’s key performance indictor achievements, visible progress has been made in the one thing it does best — state-managed tasks. Notable regulatory reforms in 2018-19 earned Saudi Arabia a spot in the World Bank’s top 10 global business-climate improvers.
Strong development has also been observed in capital markets and the banking system, whereby the growth of Tadawul, the Saudi stock exchange, has been the standout achievement. Such praiseworthy steps have also been accompanied by progress in the realm of digitization and social reforms. Yet this is not enough.
While the kingdom is certainly achieving its goal of being an ambitious nation, less can be said for its key pillar — a thriving economy. Job creation, foreign direct investment (FDI), entrepreneurship and private sector growth are all core areas where Saudi Arabia has fallen short. A recent string of PR disasters, like the murder of Washington Post journalist Jamal Khashoggi in 2018 and the 2017 high-profile purge that included the arrest of 11 senior princes, have further tainted the kingdom’s image, harming investor confidence. At mere 0.57% of GDP, current FDI levels are simply not enough to fund the diversification plan.
Needless to say, the economic challenges spurred by the pandemic will require a tightening of the Saudi purse strings to rein in the growing budget deficit. Such fiscal prudence will inevitably impact the ever-more necessary reform agenda, indicating that a stringent revaluation of the Vision 2030 objectives will be needed to deliver on its promises.
The To-Do List
To lay the foundations of their revised plan, the kingdom must first reprioritize spending and maximize income from existing revenue streams while attracting and retaining investor funding. This will require boosting FDI through greater transparency, accountability and generally better self-conduct on the international stage. In the longer term, focusing on strategically sound, high-impact projects while delaying those with little real-time value will be an integral step in the agenda’s revaluation.
Much to Saudi Arabia’s dismay, this will mean moving away from the likes of NEOM to the less glamourous task of actual economic reform. Yet if NEOM were not enough, within it there is now The Line — a linear, AI-run city free of carbon, cars and any sense of realism. Regardless of its supposed economic benefits, the fact of the matter remains that problems are not solved through procrastination, even if it costs billions.
Arguably the hardest yet most important step for Saudi Arabia will be to cede state control to make room for a diverse, competitive and independent private sector. The kingdom’s strategy of spreading itself thin across all sectors is not only inefficient, but unattractive. A more market-based approach will stimulate entrepreneurship, competition and, most importantly, draw in foreign investment.
This ties into the second key step: optimizing the business environment. This means pushing for greater access to capital, greater ease of doing business and greater stringency and transparency in the legal system, encouraging entrepreneurship both at home and from abroad. The third and most important step is human capital development. In a country where 67% of the population is below the age of 34, disregarding the youth would mean neglecting Saudi’s greatest asset.
Quality of education and upskilling the youth must be prioritized alongside creating jobs suited to the existing workforce. The importance of human capital cannot be overstated: In order to create a successful economy that best serves the people, investing in its citizens must be the crux of Vision 2030.
Finally, to reinvent itself as the business hub of the Middle East, the kingdom must rein in its regional military interventions, a massive burden on both its budget and international image. In order to truly convince investors, Saudi must actively channel its efforts away from conflict and toward long-term economic reform.
On the whole, despite some notable achievements, progress is slow, and the Kingdom of Saudi Arabia has a long journey ahead. However, COVID-19 has prompted a much-needed agenda revaluation, revealing some shortcuts and pushing Saudi leaders to move with a greater sense of urgency. The Word Bank itself warns that “higher than expected oil and gas revenues could reduce the pressure for [GCC] governments to reform,” exemplified in Vision 2030 itself being the result of such a price shock. However, with the eye-watering oil price drops of 2020, COVID-19 may have been the rude awakening Saudi leaders needed.
The challenge now lies in both pioneering change while stimulating an economy in a world experiencing the greatest recession since the Second World War. This, of course, is no easy feat, but the key to success will lie in focusing on projects that truly add value. This will mean ceding control to facilitate private sector growth, optimizing the business environment and committing to its citizens by investing in the youth. Only then can Saudi Arabia unlock its potential and become, as it envisions, the “epicenter of trade and the gateway to the world.”
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.