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Saudi Arabia’s New Oil Policy

Posted By June 14, 2016 No Comments

(Written by Sabah Khadri and originally published on June 14, 2016 by the Gatestone Institute.) 

Saudi Arabia, long associated with oil wealth and extravagance, has decided that time has come for it to revamp its image. Last year, King Salman, 80, ascended the Saudi throne, and since then has unleashed major reforms, introduced a more assertive domestic and foreign policy, and handed over the reins of some of the most significant posts of the Saudi leadership to a younger group of Saudi leaders.

The driving force behind these reforms is the 30-year-old deputy crown prince, Mohammed bin Salman, otherwise known as MBS. Prince Mohammed’s vision for Saudi Arabia, the way he puts it, is as a country no longer dependent on oil; with a growing economy and transparent laws, which will consequently give it a strong position in the world. All of this may come across as appealing, but the ability of Prince Mohammed to deliver these reforms depends on several variables. To succeed, Prince Mohammed, although he enjoys a broad mandate, still needs the support of the rest of the country.

Saudi Prince.Kerry

Saudi Prince Mohammed bin Salman meets with U.S. Secretary of State John Kerry in Riyadh, Saudi Arabia, on May 7, 2015. (Image source: U.S. State Department)

Mohammed’s economic vision for Saudi Arabia, more commonly referred to in Saudi Arabia as “Vision 2030,” essentially intends to introduce major policy and economic reforms by turning its focus towards investments; creating more jobs; privatization; increased exports and creating a sustainable business environment.

Coming amid the oil price crunch in the region, Vision 2030 aims to move away from a dependence on oil and increasing private sector contribution towards the GDP from a current 40% to 65% by 2030, by investing more in sectors such as tourism, healthcare, education and manufacturing; increasing women’s participation in the workforce; reducing the youth unemployment rate, and privatizing major industries, such as the state owned oil company, Aramco.

The Saudi leadership apparently now wishes to turn Aramco into a conglomerate and sell 5% of its share in 2017 simultaneously in the London, Hong Kong and New York stock exchanges. The kingdom has also announced plans to cut subsidies on basic commodities such as water and electricity, in addition to introducing sales and transportation taxes.

As a part of these reforms, King Salman has also reshuffled various ministries, announced new ministers and ousted older ministers. A recent, much talked-about change has been the dismissal as Oil Minister of Ali Al-Naimi, whose name is synonymous with the Saudi oil economy, and who drove the country’s oil policy for the last two decades. He was replaced by the head of Aramco, Khalid Al Falih, who happens to be a close ally of the Crown Prince and relatively new to oil diplomacy.

These reforms are a clear indication that the Saudi government is coming to terms with the reality that, although oil revenues have been a great source of wealth, they have restricted Saudi economic growth and development in other sectors, while turning the country state into a rentier state — a condition that induced systemic and institutional problems in the country, such as lack of transparency, ingrained bureaucracy and growing corruption.

Is it possible, however, for Saudi Arabia, which derives 80% of its revenue from oil income, to break the dependence on oil?

The Saudi manufacturing sector has remained relatively small, with demand driven by limited domestic needs. Furthermore, the lack of an established prominent Saudi industry or alternative manufactured products that could appeal to foreign markets only makes it harder to consider venturing into other manufacturing.

Despite all the developments promised by Prince Mohammed, one question that lingers is the possibility of any of these reforms actually seeing the light of the day. Their success depends on support from Saudi society, which has heretofore provided strong allegiance to the leadership — royals, elites, the Wahhabi religious sect — and most importantly, the Saudi youth. Vision 2030 may call for comprehensive economic reforms, but might be perceived as insensitively turning a blind eye to the political, social, cultural and legal traditions with which it would be tampering. Prince Mohammed has already received negative blowback from conservative members of the Al Saud clan. They have been resistant to change in the past and may not appreciate new reforms which might threaten their authority in the country.

Another concern is how these reforms would be received by the ordinary Saudis. The status quo is that Saudis are raised with the conviction that the state will always provide for their needs, healthcare and security, in exchange for their loyalty to the ruling Al Saud clan. However, the recent oil crisis has witnessed many luxuries stripped away from the Saudi people, as the state prepared to deal with a growing budget deficit. The move to impose taxes, a concept alien to the country, is sure to create discontent among ordinary Saudi people. It is still unclear how reforms might affect and perhaps reinvent the social contract in the country.

Reforms to diversify the economy while an environment for growth, development and transparency, are much needed. Yet, while Prince Mohammed’s vision seems ambitious, it seems to lack concrete plans to achieve that vision. It may require years for change on the social, economic, cultural and political fronts. Until then, new reforms will be pitted against age-old partnerships, as Saudi Arabia rebuilds itself from scratch.

Sabah Khadri, a specialist in international economics, is based in Doha, Qatar.