Renowned for its excessive oil reserves, Saudi Arabia is one of the largest economies in the world. Its economy is the largest in the Arab world with a GDP of $700bn, far exceeding that of Egypt in second place with a GDP of $360bn. With this said, the long-term health of the Saudi economy is looking precarious. An over-reliance on oil and tourism, combined with growing debt paints a bleak economic picture going forward.
The Kingdom of Saudi Arabia was founded at the beginning of the 1930s, unifying many areas of land of the Arab peninsula. Its vast oil reserves were first discovered in 1938, just prior to the start of WW2. During the global war, oil gradually became a significant part of the Saudi economy, as large numbers of oil workers suddenly entered the country. Aramco (the Arabian American Oil Company) was quickly made into a joint-venture between the American oil firms and the Saudi government. The end of WW2 marked the beginning of an age of economic growth and prosperity for the Saudi economy, as oil demand surged within Europe as its nations looked to rebuild.
Tax revenues surged at the start of the 1950s from the subsequent boom of the oil industry. This led to a sharp increase in foreign investment into major cities, prompting a large population shift from rural to urban areas. The result was extravagant government spending, leading to continuous government deficits by the end of the decade – even despite the large boost in tax revenues. During the following decades, schools, palaces, apartments and roads, gradually replaced the dirt trails and mud-houses that had previously existed. The Saudi state played a large part in inducing economic growth. Saudi Arabia quickly become the largest single oil producer in the world during the 1970s and 1980s, as oil revenues continued to play a crucial part in the Saudi economic output. The US in particular relied heavily on Saudi oil production, which was highlighted in the Iraqi invasion of Kuwait in 1990. Following the First Gulf War, attempts to diversify the Saudi economy away from oil became more apparent; however, this was far more difficult than initially anticipated.
One of the main industries that the Saudi government attempted to diversify into was the financial sector. The stock exchange was established in 1983, following the neoliberal revolution that took place in the US and UK. It was largely seen as a vehicle for domestic investors to acquire and hold long-term investments. However, following the first Gulf War, investors suddenly became attracted to the Saudi stock exchange, leading to share prices and volumes reaching unprecedented levels by 1992. In 1990, the official Saudi stock market index grew from 98.0 to 187.7 by the end of 1991. One of the main reasons for this sudden growth in financial activity was internationally low-interest rates, providing cheap credit to investors, making investing in the stock market more attractive. This is due to the lower returns on bonds that the subsequent low bond yields from low-interest rates give investors, prompting more investment in equities. At the same time, a more restrained government budget led to many public institutions borrowing money from private financial markets, due to less government spending, thereby prompting more borrowing through the increased capital at the disposal of Saudi banks. This is not to understate the importance of greater investor confidence in the region, due to the end of the Gulf War alongside record-high oil prices, leading to investors repatriating foreign funds.
Saudi Arabia: 2022
Whilst oil certainly produced the economic prosperity that is enjoyed by the Saudi population, this is unlikely to continue for much longer. Since the oil crash of 2014, Saudi Arabia has been making a loss with oil. This is because the global price of Brent Crude has consistently been below the break-even price of oil in Saudi Arabia. As a result, oil exports have been down, falling from $340bn worth in 2012 to just $140bn in 2016. A sharp decline in oil prices also accompanied the pandemic, resulting in a 65% fall in crude export revenues in 2020, at a time when oil exports had begun to start picking up again. In addition, the tourism industry of Saudi Arabia isn’t as strong as that of neighbouring Qatar and the UAE. Following the outbreak of covid-19, tourism revenues fell by $28bn – equivalent to a 40% decline. Whilst this figure should recover in the long run, the Saudi economy looks to rely on tourism as a major source of tax revenue in the future. This raises concerns over whether Saudi Arabia can continue to attract tourists to its nation, given that the number of tourists visiting the nation was beginning to stagnate even prior to the pandemic.
Due to the large role played by the Saudi government, Saudi Arabia struggles with an unemployment crisis. The Saudi government has been largely responsible for the growth of oil, fully nationalising Aramco in the 1980s. At the same time, the Saudi government has been the driving force behind most economic initiatives, such as the construction of new energy industrial centres. The problem with such government intervention is the lack of private sector involvement in creating jobs. As of 2021, the private sector is only responsible for 40% of GDP in Saudi Arabia. As a result, 63% of the population under 30 are unemployed, despite 58% of those under 30 having degrees. In the long term, this will result in falling tax revenues, thereby producing an even greater calamity given the continued decline of oil.
Ultimately, the Saudi economy looks as if its best days are gone. An over-reliance on the energy sector, combined with an overly large public sector has created a long-term economic problem for Saudi Arabia. With oil on the decline and a highly educated workforce without any employment opportunities, the Saudi economy will likely struggle for decades to come.