Alternative Economic Income besides Oil in Saudi Arabia

Introduction

Saudi Arabia is the largest country of the Arabian Peninsula. The Kingdom of Saudi Arabia is the holiest place for Muslims and is famous for its petroleum exports (Energy information administration, n.p). Oil exports account for almost 75% of the total government revenues. Moreover, Oil is also responsible for almost 90% of the total exports from Saudi Arabia. However, during the low oil price periods it becomes difficult for the government to manage the revenues coming from oil exports. The negative impact of depending on one source of icome in the economy is many. The main reason however is that any problem in the petroleum sector can cause the whole economy of Saudi Arabia to come down. The Saudi Stock Exchange already faced its largest decline a few months back. For past four years the Saudi Economy had managed to reduce the impact over dependency on the petroleum sector problem. (CNN, 2008)

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The government of Saudi Arabia derives most of its revenues from the petroleum sector. The oil exports in Saudi Arabia are the major contributors to the economy of the country. Even the private sector companies are also dependent on the oil exports. This reflects the importance of oil for the Saudi economy. On the other hand, a sharp decline in the oil prices for past three years has had a negative impact on the economy of the country. (AME Info, n.p).

Economic overview

The oil and petroleum sector of Saudi Arabia accounts for almost 45% of the total GDP of the country. The over dependence of the Saudi Economy on this sector is reflected from the fact that almost 90%of the export earnings come from this sector. More than five million foreign workers are employed in this sector and therefore this sector not only beneficial for the Saudi economy but also for the workers coming from other economies. However, Due to a decline in the oil prices in the recent years the petroleum exports of the country were affected adversely. This also affected the economic growth of the country and therefore the government started encouraging diversification of economy and less dependence on oil exports. Before this the Saudi Economy was centrally planned and therefore the private sector companies which tried to get in the power generation or telecom sectors were strictly regulated by the government. Therefore, due to restrictions by the government not much diversification in the economy of Saudi Arabia took place. However as the government now realized the importance of a diversified economy and learnt that revenues coming from various sectors were better than coming from only one sector, hence the government now encourages new companies in the private sector to come up in various sectors in order to help diversify the economy of Saudi Arabia. (Advameg Inc, n.p)

(SR mn) Worst Case Most Likely Best Case
Oil Revenues 531,759.4 600,060.0 719,004.4
Other receipts 69,128.7 78,007.8 93,470.6
Total Revenue 600,888.1 678,067.8 812,474.9
Total Expenditure 603,250.0 598,500.0 593,750.0
Surplus/(Deficit) (2,361.9) 79,567.8 218,724.9

Table 1: Scenarios for FY 2009 Budget Outcome

Background to the issue

Oil was discovered in Saudi Arabia in 1930s. Even though the oil was discovered long before World War II its large-scale production began a decade after its discovery. It was after the 1960s and during 1970s that the Saudi economy started benefiting from this sector. Saudi oil reserves are the largest in the world and no doubt the Saudi economy has prospered and grown due to this sector alone. Almost 95% of the total oil production in Saudi Arabia came from a giant company named Saudi ARAMCO. In 1993 this company became even bigger by taking in SAMAREC and is now officially the world’s largest oil company. Majority of Oil exports from the Saudi petroleum sector goes through the Gulf terminals. During the 1970s, Saudi Arabia was the fastest growing economies and all the efforts of the Saudi government were focused to make this sector better and even more powerful. Saudi government thought that as they had abundance of oil they could use to have a prosperous economy and for sometime this held true. There was a sharp rise in the petroleum prices after the Arab Israel War. Due to this Saudi Arabia became one of the fastest growing economies of the world. Not only Saudi Arab was able to fund its development, defense and other programs in a better way, but also provided aid to many Muslim countries.

Petroleum Net Exports of Saudi Arbia
Graph: Petroleum Net Exports of Saudi Arbia

At this point due to higher oil prices development in the oil and petroleum sectors of many countries had an impact on the consumption of oil. Therefore, during the beginning of the mid 80s the oil production of Saudi Arabia came down from 10 million barrels a day to only 2 million barrels. This was the beginning of the problem which was caused due to the over dependency on this sector. The oil prices started coming down after 1997 and Saudi Arabia tried in OPEC campaign to raise the prices of oil once again. It was then that the Saudi government realized that they had been depending a lot on this sector and that they should have had a more diverse economy.

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Impact of the oil problem and its responses

There was almost 30% drop in the oil and petroleum prices when the oil prices started to drop in 1998. Saudi Arabia instantly entered recession as its economy was dependent mainly on petroleum exports. The per Capita income of Saudi Arbia came down to almost $6,300 which was$11,700. (Caountry Profile Study, 2008).The government had to take quick action in order to minimize the impact of this reduction in the oil prices. (Obaid, 50-129)

The first step by the government was to take austerity measures. The government expenses were cut down by almost 10%. The payments of bills were postponed to the very last date of the contract. The recruitments were stopped and wages in the government sector were frozen. In 1999, the budget reflected the measures taken by the government. Taxes on luxury items were increased and subsidies were reduced. A 50% reduction on the subsidies reflected the willingness of the government to bring a change in the economy of the country. At this point the quota system in oil and petroleum had already been implemented. Therefore, in 1999, in the meeting of OPEC, Saudi announced a decline in its petroleum production. At this point many analysts were astonished by this step from the Saudi Government. The Saudi government reduced its production by 585,000 barrels per day. (Obaid, 50-129). The oil prices quickly rose due to this step by the Saudi Government. In just one month the government was able to reverse the prices. This step by the Saudi government helped the country come out of the biggest and the first recession it had in almost 6 years. The quick hike in the prices which had now risen to almost $20 per barrel was due to lower production, which on the other hand was a response to the lowered prices (Energy information administration, n.p).

Even with so much improvement in the oil prices the country still lacks some structural elements. It was in 1999, when Prince Abdullah announced that the oil boom was over (Cordesman, n.p) and that the economy of Saudi Arabia cannot rely on the petroleum exports alone. This was the first step towards the diversification of the economy, as the Crown Prince pointed out that there was a need to find out alternative economic income (Kanovsky, n.p).

The main reason for the diversification in the economy of Saudi Arabia is the fact that little fluctuation in the price of oil bring massive changes in the economy and GDP of Saudi Arabia. The over dependence of Saudi economy on oil and sways it from surplus to deficit with little changes in the demand too.

The need for an alternative economic income

In order to reduce the dependence on oil Saudi Arabia is constantly trying to transform its economy from oil dependent economy to a more diverse one. For decades Saudi Arabia was known as the oil capital of the world. However, today Saudi Arabia is now focusing more on other sectors such as the manufacturing sector etc in order to have a more diverse economy which is not dependent on only one sector so that even if one sector is not performing well, other sectors can help cover up the loss in the economy. For this reason Saudi Arab is trying to build its competitive edge in the world and have a diversified economy.

The first efforts to bring changes in the sources of economic income and make the Saudi economy more diversified were in 1980s when the oil prices went down drastically.

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In 2000 the government of Saudi Arabia laid a five year plan which was meant to diversify the economy of the country. However, it was after six years after this plan was laid that the main groundwork for this plan was worked out. This plan focuses on the fact that the economy of the country needs to be diversified and for this reason other sectors such as the manufacturing sectors are funded in order to develop these sectors and so that these sectors contribute more to the economy of the country.

The chart below reflects the trend of gross domestic product of the country. An increase in the trend can be noticed however it can also be noticed that this increase is not enough and the economy still at that time remained an oil based economy and the need of diversification persists. The country kept on doing well till the prices of oil were up.

Year Domestic Product US Dollar Exchange Inflation Index (2000=100)
1980 546,602 3.32 Saudi Arabian Riyals 95
1985 376,318 3.62 Saudi Arabian Riyals 92
1990 437,334 3.74 Saudi Arabian Riyals 91
1995 533,504 3.74 Saudi Arabian Riyals 101
2000 706,657 3.74 Saudi Arabian Riyals 100
2005 1,152,600 3.74 Saudi Arabian Riyals 100

Table 2: GDP of Saudi Arbia

Since 1970 the main goal of the King of Saudi Arabia was to create an economy which was less dependent on oil. As oil dependent economy cannot incorporate modern technologies and hence can never have competitive edge over other countries. Such economies will always be dependent on the demand of oil from other countries to have a prosperous economy themselves. It is evident that the Saudi economy is dependent on the oil price fluctuations which later become focal point of any tension which might arise within the country. This is the main issue of this paper. Saudi Arabia is known as a resource based economy. This means that the country relies on its natural resources to have a prosperous economy. These types of economies were better in 1800’s when most of the economies were resources based. However today with the advancement in technologies countries are now looking for other options so that other sectors of the country also contribute towards the prosperity of the economy and so that only one sector does not play major role in the country’s well being. Same is the case with Saudi Arabia. With the fluctuations in the oil prices the entire economy of Saudi Arabia wither becomes better or worst in an instant. IF the economy would have been diverse it would have been difficult for one element to bring in such drastic changes.

Alternative economic income

Despite many measures taken by the government to act in response to the lowered oil prices the Saudi Economy still faces many challenges. Major structural problems have raised the issue of over dependency of the economy on the petroleum sector. For this reason the Saudi government is now focusing more on manufacturing, telecom and other private sectors in order to diversify the economy of the country.

Saudi Arabia has recognized its manufacturing sector to be an important element in alternate income besides oil. However, the main aim is to diversify the economy and make sure that the economy is not dependent on one or two sectors. Therefore, even though manufacturing sector plays an important role in the diversification of the economy, there is still need to bring in new industries.

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The manufacturing sector contributed almost 10% of the total non-oil Revenue in 2007. It also makes up more than 6% of the total employment rate. (AME Info, n.p). On the whole the demand for Saudi products has grown. It was found that in 2007 alone the non-oil sector of Saudi Arabia grew almost 5.8%. This growth is also due to the information technology and other industries which are now moving towards excellence and are now contributing more towards the Saudi economy. According to a study done by central department of statistics, the manufacturing industry has been growing and the contribution of this sector has been continuously increasing. In 1974, this sector contributed only 15 billion to the Saudi economy as compared to 93 billion in 2007. The economic growth of this sector has been one of the highest and no doubt it can act as an alternate for the Saudi economy which was initially over dependent on oil and petroleum products. (Saleem, n.p).

The total contribution of the manufacturing sector has been initially 4.1 % only when this sector started growing in 1975. In 2007 this contribution had increased to almost 11.6% reflecting this sector’s growth of almost 6% which is considered to be one of the highest in fast growing economies. Another important sector of Saudi Arabia which can contribute more to the economy is the information technology. The information technology is still in its infancy stages in Saudi Arabia and with the government spending more on this sector; it can definitely play a better role in the economy.

Saudi Arabian government is continuously trying to diversify its economy by working on various projects. Manufacturing and production, gas exploration, banking and financing and education sectors are now invested in so that the economy becomes less dependent on one factor only.

The agriculture sector is also playing an important part even though Saudi Arabia is a desert peninsula. The agriculture sector uses up almost 50% of the total water resource in the country and contributes only 7% in the economy of Saudi Arabia. Agricultural sector employs almost 4% of the total workforce. Hence it can be seen that the agricultural sector even is not contributing enough to the economy of the country and if worked on and invested in can contribute more. The government is trying to invests more in this sector so that the country, if not exports food products at least becomes self sufficient and has been successful up to an extent. Even though the agricultural sector has improved a lot in the past few years, there is still need to improve the desalination and irrigation facilities and bring in new technologies for this sector to really contribute to the economy.

Saudi Arabia also has abundance of mineral resources which can also contribute to the economy of the country. Saudi mineral resources consist of Copper, Uranium, Iron ore and many other precious metals. The government is trying to fund this sector also and bring in new opportunities not only for the government sector but also for the private sector so that the economy of the country moves towards the diversity and becomes less dependent on the oil sector alone.

Like Israel, Saudi Arabia has to work on its people through education and skill so that these people become a resource instead of being a burden on the economy. As Israel lacks natural resources therefore it has turned its people into their resource and helped them create technologically advance industries who are working in sectors like telecommunications, computer and research.

Saudi Arabia has started investing in the education sector too and has in fact started to fund this sector even more than before. Saudi Arabia is now trying to develop its own industrial base where educated personnel from their own educational institutions can get jobs.

IF we look at the table below we can see that the government is now investing more on education and more funds are allocated for many non oil sectors of the economy. This reflects the government’s intentions towards the diversification of the economy.

Sector Allocation (SR billion) %
Education 105 25.6
Transportation & Telecom. 16.4 4.0
Health & Social Welfare 44.4 10.8
Municipal Services 17.0 4.1
Water, Agriculture & Infrastructure 28.5 7.0
Credit Institutions & Financing Programs 25.0 6.1
Others 173.7 42.4
Total 410.0 100.0

Table 3: portion of funds allocated for each sector

Conclusion and recommendations

The above over dependence of Saudi Arabia does to reflect that this country is totally helpless and cannot recover. The government of Saudi Arabia has finally realized that they cannot depend on oil alone and need to invest in more sectors. Saudi Arabia can become competitive in many other sectors too. Manufacturing sector is no doubt one of the most important sectors for the Saudi economy which can help change it into a non-oil based economy. However, for diversification the government needs to invest in other sectors too such as information technology and education. This will also help the country to attract foreign direct investments. FDI does also play an important role in the economic prosperity of any country. However, due to many regulations in Saudi Arabia the business environment was not very friendly. The government of the country has also realized this and is now not only encouraging investments in new businesses but has also reformed many of its trade rules and regulations. With the information technology sector of Saudi Arabia prospering as now the government has realized that technology has become a key element in the success of any business, therefore many new foreign companies are now investing in Saudi Arabia. (Al Rajhi Bank, 7).

The Saudi computer industry is now booming at an exceptional rate. In 2002 the PC per capita rate was just 13% which grew almost to 43% in just 2 years. On the other hand the electronic market of Saudi Arabia is also noticing noticeable growth.

Saudi Arabia membership with WTO has opened many options for the Saudi Economy. The government of Saudi Arabia through its 5 year development program has tried to convert this oil based backward economy in to a more modernized and technologically wise non oil based economy. Even though all the targets for this five year plan has not been achieved, it has served well and has brought many changes in the economy. After the infrastructure and defense strengthening plans, the government now focuses on diversification of the economy. The private sector of Saudi Arabia plays a very vital role in the last phase of this five year developmental program. The government is now focusing on education ad hiring its own people in order to become self sufficient in everything and have a technologically aimed industrialized nation.

References

Advameg Inc (2008). Saudi Arabia; Overview of Economy. Web.

Al Rajhi Bank (2008). Saudi Arabia’s national Budget Highlights and Analysis.

AME Info (2003). Saudi Arabia in 2004. Web.

CNN (2008) Saudi Stocks tumble with world markets, oil prices. Web.

Cordesman, Anthony H. (2005). The Saudi Succession and Economic Stability. Web.

Country Profile Study on Poverty: Saudi Arabia. Web.

Energy Information Administration (2008). Saudi Arabia energy Profile; Official Energy statistics from US government. Web.

Energy information administration (2008). World Proved Reserves of Oil and Natural Gas, Most Recent Estimates. Web.

IMF (2008) International Monetary Fund; World economic outlook. Web.

Kanovsky, Eliyahu (1994) Implications of economic decline in Saudi Arabia. Policy Watch #118: Special Forum Report. The Washington institute for Near East Policy

Obaid, Nawaf E (2000) the oil kingdom at 100: petroleum policy making in Saudi Arabia.

Saleem, Nadia (2008). Manufacturing sector’s investments drive IT growth in the Saudi Arabia. Web.

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