Saudi Arabia: From National Strategies to Economic Realities

Posted on March 18, 2011 by Tatjana de Kerros – Editor of the Entrepreneurialist – http://theentrepreneurialist.net/

Today, after the Friday prayers at 11am GMT, the Custodian of the Two Holy Mosques, King Abdullah addressed the Kingdom of Saudi Arabia in a rare move to announce the implementation of new reforms and royal decrees. Among the most important economic reforms announced were the creation of more jobs in the public sector; increasing salaries for public sector, civil service employees and state students; the building of more housing units; the allocation of funds to health facilities; as well as unemployment benefits and the implementation of a minimum wage. Central to the royal decrees, was also a vow to boost the yet flagging move to replace expatriates with a Saudi workforce, in a pursued Saudization effort.

Some of the decrees announced today include[1]:

  • Immediate payment of two months’ salary to all government employees, both military and civil, as an ex-gratia payment to help people face the rising cost of living.
  • Two months scholarship fees for all higher education students getting scholarship.
  • Payment of SR2,000 as unemployment allowance monthly for all starting from next Hijra year.
  • Minimum wage for Saudis in government jobs has been fixed at SR3,000.
  • Allocation of SR250 billion to build 500,000 new houses throughout Kingdom and a steering committee comprising ministers of municipality and rural affairs, finance and economy and planning to supervise the projects.
  • The real estate fund has been instructed to raise the minimum level of housing loans from SR300,000 to SR500,000.
  • A national anti-corruption commission has been set up under a chairman with a status of a Cabinet minister. The first anti-graft czar will be Muhammad Abdullah Al-Sharif. The commission will report directly to the king.
  • SR16 billion has been allocated to the health sector to enhance medical and health facilities throughout the Kingdom.
  • Loans given by the Health Ministry to private hospitals have been raised from SR50 million to SR200 million.
  • 60,000 new posts have been created in the Interior Ministry to boost internal security while also providing job opportunities for the youth. Wide-scale promotions were also announced for military personnel.

 

This follows in the steps of the expansionary governmental budget that was disclosed in December 2010, marking a public spending of $US 154.7 billion for the 2011 annual budget- an increase of 7.4% from 2010. Enhancements in government spending have been outlined by the vision set out in the 9th Five Year Development Plan, which sets out a framework for transforming Saudi Arabia into a knowledge-based economy, eliminating oil revenue dependence, supporting and diversifying the private sector. Saudi Arabia has been on the cusp of economic growth, seeing a GDP increase of 3.8% in 2010, and a projected record growth of 4.0% to 4.5% in 2011. The government expenditure outlined for 2011 demonstrates the Kingdom’s pursued commitment to development and investment programs, particularly in the areas of education, health, housing and infrastructure. The appropriation of funds for major developments and public service sectors recorded an increase of US$ 9.9%, reaching US$85.1 billion in 2010[2].

Despite a booming economy, large infrastructure projects and the rise of a new middle class, oil revenues officially contribute to more than 85% of budget revenues, and over 40% of GDP. Although it is these revenues which are fueling the Kingdom’s ability to invest in such large infrastructure and investment programs, oil dependence is a ticking time bomb, and economically unsustainable in the long-term. 60% of Saudi Arabia’s population is under the age of 29, creating a growing concern for the ability to provide employment, both within, and outside of the public sector. According to the International Labour Organization, unemployment among youth stood at 30.2%, nearly triple times that of Saudi national overall[3]. The Five-Year Development Plan 2010-2014 aims to halve unemployment by the end of 2014 by spending US$ 385 billion on schools, hospitals and other infrastructure projects. According to the Ministry of Labour, unemployment stood at 10.5% in 2009, and aims to be cut by half to 5.5% by 2010[4]. However, a lack of systematic data gathering could mean current unemployment is much higher, particularly outside of the financial and industrial hubs of Riyadh, Jeddah, Al Khobar and Dhammam, and the data provided by the Ministry only includes the male population.

This week, the government announced a new US$ 36 billion package under the Hafiz (incentive) program that would enable Saudi jobseekers to claim unemployment benefits for a period of twelve months. The package also includes a two-year moratorium on payments by employers who have borrowed money by the Saudi Industrial Development Fund[5]. This scheme is part of the larger strategic priority of providing employment, training and rehabilitation, and will also allow gathering valuable data in relation to employment trends, enabling better localized responses.

Since the 1970’s until the end of 2009, the contribution of the non-oil sector to GDP has not exceeded 11.5%. Although the private sector and SMEs account for over 90% of registered companies and 82% of employment, the reality of these figures unveils a different story. Saudi nationals account for 92% of employment in the public sector, but only 13% in the private sector, with non-nationals accounting for 80% of the total workforce[6]. To counter this economically and socially crippling scenario, the Saudi Arabian government has budgeted US$ 800 billion in privatization efforts[7], and adopted the Saudi National Employment Strategy in 2009. The Strategy aims not only to lower unemployment in the short-term through policies aimed at reducing dependency of foreign labour, but enhance competitiveness and productivity in the long-run. The reality includes the need for a full realignment of the composition of the labour market.

In light of these complex challenges, and as a response to growing discontent across the region, the government launched at the beginning of the month an additional US$37 billion social benefit plan, to ease the pain of inflation, and ensure economic stability. Part of these new handouts are aimed at securing new housing loans, as the Kingdom suffers from an acute housing shortage, primarily due to a lack of mortgage financing laws, and affordable land which is having a negative effect on inflationary pressures. As the2010 ASDA’A Burton-Masteller Arab Youth Survey portrayed, one of the highest priorities for Saudi Arabian youth is concerns over the costs of living, which is coupled with decreasing purchasing power.  

Despite this rather grim scenario, Saudi Arabia is instigating a true economic revitalization. Although its effects may not yet gleam the desired affects in the short-term, if the Kingdom continues to push on the path for privatization and Saudization, diversifying away from oil and promoting competitive industries, it will be well on its way to compete against other economic powers. According to an economic forecast published by Citibank, Saudi Arabia is set to be the Middle East’s largest economy and the world’s 6th largest economy by 2050.  The report also states that the Kingdom will contribute to 4% of global GDP by 2030, and 5% by 2050.

The solution lies in harnessing the Kingdom’s natural competitiveness, which depends on its ability to harness its human, capital and physical resources. The right combination of national and foreign presence needs to be achieved, and the public sector needs to work in concert with the private sector to meet the demands of new demographics and industries. Economic stability needs to be infused by sound macroeconomic policy, social infrastructure, political institutions, and microeconomic competitiveness. Saudi Arabia has already made considerable advances in decentralizing economic policymaking, and is slowly eradicating a tradition of a rentier-state system. It ranked 11th in the World Bank’s ‘Ease of Doing Business’ Index in 2010, and has increasingly become an attractive location for FDI. Large investments have been made in the building of new economic cities and industrial clusters, and the launch of ambitious educational institutions such as KAUST provides solid foundations in building a cross-industry knowledge base.

The opportunities reside not only in marketing the Kingdom as an attractive destination for the international community, but marketing itself among its own population. Creating high expectations in relation to its economic and social goals require to be countered by setting achievable and realistic targets. Change is already occurring and fast, and policymakers are ready, aware and willing to fuel economic recovery and growth, which will be achieved if it maintains a nation-wide consortium.

© Tatjana de Kerros | 2011  | The Entrepreneurialist

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