A version of this article was originally published by Al Majalla on 07/11/2023

At the midpoint of Vision 2030, Saudi Arabia is well positioned to consolidate and deepen the economic transformation by increasing FDI inflows – robust national capacities, the strength of institutions, and education and skills development should be at the top of the agenda in 2024.

Anchored in a comprehensive vision to reform and diversify the economy and supported by an ambitious national investment strategy and a strong buy-in from a young and dynamic population, Saudi Arabia’s economic and social transformation is impressive.

The latest IMF report attests to the Kingdom’s remarkable achievements to date and the economy’s exceptional performance during 2022. At 8.7%, overall growth in 2022 was the fastest the country had experienced in almost a decade, with non-oil GDP growing at close to 5% and inflation contained throughout.

The overall unemployment rate dropped to a 4.8% historical low; unemployment of Saudi nationals fell to its lowest level in 20 years; and women’s participation in the labour force hit 36% – double the rate of five years earlier.

Supported by favourable oil market developments, the Kingdom’s fiscal position registered its first surplus since 2013, and the current account surplus reached a ten-year high while reserve buffers remained ample. The deepening of the capital market is evident in the record overall listings and foreign capital inflows and the rating agencies’ sovereign upgrade vouches for the Kingdom’s solid reform momentum.

Seven years into the Vision, the work Saudi Arabia has put into economic diversification is starting to pay dividends. On the output side, new economic sectors have emerged, including tourism, entertainment and culture, media, mining and metals, digital technologies, and renewable energy.

Notable progress has also been made towards export diversification: the share of non-oil exports to total exports has increased to around 25%. Similarly, non-oil revenue has risen to a third of total revenue from around 10% a few years ago.

Seven years into the Vision, new economic sectors have emerged, including tourism, entertainment and culture, media, mining and metals, digital technologies, and renewable energy.

These positive developments indicate the beginning of a reduced dependence on the hydrocarbon sector that could pave the way for a more profound delinking between oil prices and economic activity. In its recent report, the IMF projects annual non-oil GDP growth of over 4% over the next five years.

In its 2022 report, the Fund indicated that non-oil GDP growth could reach as high as 8.8% by 2025 under a scenario of reforms and a full and efficient scale-up of the $3.3tn National Investment Strategy launched in 2021.

However, sustaining the high-growth trajectory for the non-oil economy will require a greater role for the private sector and higher, diversified, and knowledge-intensive foreign direct investment (FDI) inflows.

Building up FDI and expanding the private sector

While many Vision 2030 targets are on track, and some have already been surpassed, a few are lagging. At around 1% of GDP, FDI remains well below the 2030 target of 5.7%, a goal that is admittedly ambitious – particularly for an emerging economy. In the same vein, private sector GDP stands at around 40% of the total, falling short of 65% of the vision’s target, although this may have been skewed by an exceptionally robust year for oil in 2022.

The growth in non-oil activity has so far been largely driven by the Public Investment Fund, which has played a critical catalytic and effective role both in strategic sectors where the private sector has a limited presence and in sectors requiring restructuring.

A greater role for the private sector and FDI may well ensue in the second half of the Vision’s implementation as the Kingdom makes further advances in building the foundation it needs to achieve such fundamental objectives.

Major progress has been achieved in this regard since 2016. One important building block put in place is the introduction by policymakers of significant measures and legislation to render the business and regulatory environment more attractive to investment.

The growth in non-oil activity has so far been largely driven by the Public Investment Fund, which has played a critical catalytic and effective role both in strategic sectors where the private sector has a limited presence.

The Kingdom’s global ranking in several competitiveness and efficiency indices has improved as a result, and over the past year, the number of new investment deals and licences increased considerably.

Another key move is the Kingdom’s ramping up of investment in strategic sectors at home, notably transport and logistics. This sector is expected to receive an estimated $150bn by 2030, thereby positioning the Kingdom as an advanced logistics hub globally.

A third development is the forging of strategic projects and partnerships beyond the region. The recently announced India–Middle East–Europe Economic Corridor will reinforce Saudi Arabia’s objective to develop into an investment hub at the crossroads of three continents.

Saudi Arabia is forging strategic projects and partnerships beyond the region. The recently announced India–Middle East–Europe Economic Corridor will reinforce Saudi Arabia’s objective to develop into an investment hub at the crossroads of three continents.

Setting priorities for 2024

Next year is an important milestone for economic transformation. It is the moment at which Saudi Arabia can reflect on achievements made to date and priorities objectives for the second half of the Vision’s implementation.

Consolidating and deepening progress on expanding the role of the private sector and attracting FDI from this point on will reduce the risks of procyclicality.

While pursuing the Vision’s objectives, prioritising programmes aimed at further enhancing national capacities and skills will be essential.

One of the first items on the agenda should be to ensure that the new business legislation introduced in recent years is appropriately implemented and to provide investors with certainty and clarity regarding the implementation process.  

This will require strengthening the institutional capacities of implementing agencies to ensure procedures and civil servants who administer them are better aligned with the reforms.

Second, programmes to invest in education and national skills development should be accelerated, in close coordination with the private sector, to equip the Saudi workforce for the private sector jobs of the future.

This will help the Kingdom meet its Saudisation plans as the skills and talents of nationals will be aligned with the labour market needs that emerge from the diversification drive.

Riyadh city towers in Saudi Arabia

Saudi Arabia has come a long way in a relatively short period of seven years. Building on the progress made in the first half of Vision 2030 will increase the impact of the Kingdom’s diversification journey and ensure that Saudi Arabia successfully builds a resilient and inclusive growth model.

It will also result in positive spillovers on the region’s economies as new opportunities for private-sector cooperation and business joint ventures emerge. Moreover, the Kingdom’s success in diversifying away from oil could be replicated in resource-dependent countries beyond the region.

A version of this article was originally published by Al Majalla