Economy of Saudi Arabia

Author: Ali Noureddine
Edited by: Erik Prins

From 2017 onwards, the cultural and social opening promoted by bin Salman was integrated with a new economic policy. Turning Saudi Arabia into a regional tourist destination, competing with the United Arab Emirates (UAE) for foreign investment and regional headquarters of international companies, and increasing women’s participation in the labour market were the focus points in this regard. At the same time, Saudi economic plans set goals to diversify the local economy, reduce reliance on oil, and set up a productive economy.

However, it is still too early to say if these goals have been achieved, even if there has been notable progress. An analysis of economic growth rates and Gross Domestic Product (GDP) from 2017 to 2023, as well as Saudi Arabia’s budget, financial deficit, and public debt levels, shows that the oil prices remain the main factor influencing Saudi Arabia’s economic and financial stability.

According to OPEC data, Saudi Arabia has the second-largest crude oil reserves in the world, with about 21.5 per cent of total proven global reserves, amounting to approximately 267 billion barrels. In 2024, Saudi Arabia’s share of OPEC+ production was around 10.478 million barrels per day, which is about 10.25 per cent of global production and roughly a quarter of the OPEC+’s combined production capacity. Because of this, Saudi Arabia continues to play a key role in shaping global oil prices, working closely with Russia, its powerful ally in OPEC+.

In recent years, economic diversification plans have successfully increased the contribution of non-oil private sector activities to 50 per cent of real GDP by the end of 2023, according to the Saudi Ministry of Economy and Planning. This is the highest level ever recorded. A decade ago, in 2013, it was only 37.6 per cent.

This achievement aligns with one of the main objectives of Vision 2030, which aims to raise the share of non-oil activities to half of the GDP, up from about 40 per cent ten years ago. These figures match the estimates of the Saudi Minister of Economy and Planning, who stated in January 2024 that Saudi Arabia’s non-oil economy has grown by 20 per cent since 2016, the year Vision 2030 was introduced.

Source: GSTAT

However, by the end of 2023, crude oil and natural gas extraction still accounted for 25.4 per cent of GDP, making these the largest and most significant contributors to the Saudi economy. When adding oil refining activities, which contribute 6 per cent of GDP, the total share of the oil and gas sector rises to 31.4 per cent. Therefore, despite Saudi Arabia’s progress in developing the non-oil private sector, the Saudi economy remains largely dependent on oil revenues.

In addition to the oil and gas sector, government services ranked second, contributing 15.7 per cent of GDP. According to the Saudi Ministry of Finance, oil revenues made up more than 62 per cent of total public revenues, linking government spending and public services closely to the oil and gas sector’s performance.

Private investments boosted a diverse range of non-oil private sector activities in 2023. Since the introduction of Vision 2030, foreign direct investment increased from $133.8 billion in 2017 to $215.5 billion in 2023, as reported by the Saudi Ministry of Investment.

Similarly, foreign tourist spending grew by 319 per cent in 2022 and 2023, supported by the government’s push to make Saudi Arabia a regional tourist destination. This contributed to growth in sectors like hotels, restaurants, and wholesale and retail trade by 7.5 per cent in the last quarter of 2023. The community, social and personal services sector grew by 6.6 per cent, while the finance, insurance, and business services sector saw the highest growth at nearly 10.6 per cent.

These three sectors were key drivers of growth during this period, and contributed to an increasing share of the private sector in the GDP in 2023. By the end of the year, the wholesale and retail trade and restaurants sector held the largest share of non-oil private sector activities at 9.7 per cent of GDP. Furthermore, the industrial sector (excluding oil refining) maintained a balanced GDP share at 8.8 per cent, despite shrinking by 0.7 per cent during the year.

The real estate and construction sectors together held a notable share, nearing 11.1 per cent of GDP in 2023. However, real estate activities grew modestly by about 1.2 per cent, while the construction sector grew by 4.3 per cent, driven by large government housing projects.

Source: IMF, OPEC

Despite a 4.4 per cent growth in non-oil private sector activities and a 2.1 per cent growth in government services in 2023, Saudi Arabia experienced an economic contraction of 0.8 per cent that year. This contraction was due to a 9 per cent decline in oil activities, which overshadowed the growth in other economic sectors.

Two factors led to a decline in oil activities during 2023: a 17 per cent drop in average oil prices compared to the previous year and an 8 per cent reduction in average daily oil production due to voluntary and mandatory cuts agreed upon within the OPEC+ group.

In previous years, economic growth figures were significantly influenced by the oil and gas sector’s performance. For instance, the economic impact of the COVID-19 pandemic caused the annual average price of crude oil (OPEC basket) to drop to $41.47 per barrel in 2020, compared to $64.04 per barrel the previous year. This led to a 3.6 per cent contraction in Saudi GDP in 2020, reducing the GDP size to $734.27 billion, down from $838.56 billion the year before.

In the following two years, the OPEC basket price rose to $69.89 per barrel in 2021 and then to $100.08 per barrel in 2022. Consequently, Saudi Arabia’s economic growth rates increased to 5.1 per cent in 2021 and 7.5 per cent in 2022. The 0.8 per cent contraction recorded in 2023 was linked to the decline in oil prices and production, as previously mentioned.

For 2024, the International Monetary Fund (IMF) expects Saudi non-oil activities to grow by 3.5 per cent, while oil output is projected to contract by 4.6 per cent due to extended oil production cuts.

Based on this, the IMF expects Saudi Arabia’s GDP to stabilise at around $1,110 billion in 2024, making Saudi Arabia the largest economy among Arab states. In comparison, the UAE ranks second in the Arab world with a GDP of approximately $527.8 billion, which is about 47.5 per cent of the size of the Saudi economy.

Source: IMF

By 2023, the GDP per capita in Saudi Arabia reached approximately $68,310 per year, according to figures from the IMF. This places Saudi Arabia third in the Arab world and the Gulf region, following Qatar, where the per capita GDP is $108,570, and UAE, where it is about $92,070, according to the IMF.

Source: World Bank, IMF

In 2022 and 2023, Saudi Arabia successfully maintained inflation rates at low levels of 2.5 per cent and 2.3 per cent, respectively. The International Monetary Fund predicts that inflation will remain below 1.9 per cent in 2024. These rates are among the lowest in the Middle East and North Africa, where inflation is expected to reach 15.4 per cent in 2024 and 12.4 per cent in 2025, according to IMF estimates.

Low inflation rates in Saudi Arabia are linked to monetary stability, achieved through the local currency’s peg to the US dollar and the Central Bank’s external reserves and assets, which total approximately $457.95 billion as of late 2023. This reserve level allows the Central Bank to sustain the exchange rate and avoid monetary instability experienced by other Arab states.

The IMF’s Article IV mission report confirms that these reserves are sufficient to cover 13 months of imports, supporting confidence in monetary authorities’ ability to sustain future monetary stability.

Saudi government policies also play a role in controlling inflation, despite a global increase caused by the COVID-19 pandemic and the war in Ukraine. These policies include stabilising fuel, energy, and essential food prices with direct government support.

Additionally, Saudi Arabia has aligned its interest rate decisions with those of the US to control its inflation rates and leveraged its financial capabilities in diversifying food import sources to mitigate supply chain disruptions from Russia and Ukraine.

Source: IMF, World Bank, Saudi MoF

Public spending on strategic projects under Vision 2030 led to significant budget deficits from 2017 to 2019. This raised the public debt-to-GDP ratio from 16.5 per cent in 2017 to 21.6 per cent in 2019. The ratio then surged to 31 per cent in 2020 due to a high deficit of 10.3 per cent of GDP, driven by a sharp drop in oil prices.

In 2021, the debt-to-GDP ratio decreased to 28.6 per cent despite a modest budget deficit of 2.1 per cent, thanks to a GDP growth rate of 5.1per cent. The ratio fell further to 23.9 per cent in 2022, as the budget recorded a surplus of 2.6 per cent and GDP grew by 7.5per cent.

This improvement was linked to rising global oil prices after the decline of COVID-19 pandemic’s impact and the outbreak of war in Ukraine.

However, in 2023, oil revenues decreased by 12 per cent due to OPEC+ mandated reduced production and a 17 per cent drop in average oil prices. This resulted in a budget deficit of 2 per cent of GDP and a rise in the public debt-to-GDP ratio to 26.2 per cent.

Despite these deficits recorded during the past seven years, except for 2022, Saudi Arabia’s public debt-to-GDP ratio remains low compared to some Gulf Cooperation Council (GCC) neighbours, such as Bahrain (12.6 per cent), Qatar (37.3 per cent), and Oman (35.4 per cent). Saudi Arabia has the second-lowest ratio in the GCC, after Kuwait (7.1per cent).

The IMF predicts that the budget deficit will increase to over 3 per cent of GDP in 2024, due to extended production cuts agreed upon with OPEC+ and increased public spending. In the medium term, the IMF expects deficits to remain between 2.5 and 3 per cent, unless the Saudi government introduces new taxes. Consequently, the public debt-to-GDP ratio is expected to reach 35 per cent by 2035.

By 2024, OPEC+ members will contribute 40.46 million barrels per day (bpd) to global oil production, about 39.5 per cent of the total global production of 102.2 million bpd. Saudi Arabia leads OPEC+ with a production quota of 10.478 million bpd, making up a quarter of the coalition’s total output. Russia is the second-largest producer in OPEC+ at 9.828 million bpd.

Since the last quarter of 2022, Saudi Arabia and Russia have jointly implemented a series of production cuts, reducing OPEC+ total production by 5.86 million bpd, or roughly 5.7 per cent of global daily demand. In June 2024, OPEC+ decided to extend these cuts until the end of 2025. Additionally, Saudi Arabia started a voluntary reduction of one million bpd in July 2023.

These measures aimed to stabilise global oil prices after their decline in 2023. However, they have led to sharp disagreements between the US administration and Saudi Crown Prince Mohammed bin Salman. The US views these production cuts as contributing to a gradual increase in global oil prices, which conflicts with its efforts to control inflation.

The Saudi labour market went through significant changes due to major projects initiated as part of Vision 2030, alongside policies aimed at increasing women’s participation, diversifying the local economy, and nationalising the workforce (‘Saudization’). This transformation is reflected in various labour market indicators:

• By late 2023, Saudi Arabia successfully reduced the unemployment rate among Saudi citizens to 7.7 per cent, down from 8.6 per cent at the end of the third quarter of the same year. At the end of 2017, one year after the approval of Vision 2030, this rate stood at around 12.8 per cent.
• In the last quarter of 2023, the unemployment rate among males remained relatively unchanged. The overall decrease in the unemployment rate was driven by a drop in the rate among Saudi females, which fell to 13.7 per cent by the end of 2023, compared to 16.3 per cent at the end of the previous quarter.
• Within seven years, Saudi Arabia increased the female economic participation rate, from 17 per cent in 2017 to about 35.5 per cent in 2023. Additionally, the percentage of women in middle and senior management positions has risen from 28.6 per cent in 2017 to 43.7 per cent in 2023.
• Similarly, the percentage of people with disabilities in the workforce increased from 7.7 per cent in 2016 to 12.6 per cent in 2023.
• Regarding the nationalisation of private sector jobs, Saudi Arabia has made notable progress, raising the ‘Saudization’ rate to 21 per cent by the end of 2023, up from 16.47 per cent at the end of 2016.

However, despite an increase in ‘Saudization’ rates as a result of government efforts to nationalise labour in the private sector, the private sector still heavily relies on expatriate workers. According to the National Labor Observatory, as of April 2024, Saudi workers make up around 21 per cent of the private sector workforce, with only 2,356,829 Saudi workers among a total of 11,274,689 workers.

In contrast, Saudi citizens occupy the majority of public sector jobs. The concentration of Saudi workers in the public sector is a significant challenge for Saudi authorities, as it affects Saudization of the private sector. According to figures from the General Authority for Statistics (GSTAT), at the end of the first quarter of 2024, 97 per cent (1,167,883) of the 1,208,845 employees in this sector were Saudis.

Over the past decade, Saudi Arabia has gradually updated the desired rate of Saudization within companies, applying different requirements based on profession, job title, and sector. Establishments must ensure a minimum number of Saudi employees for specific positions or economic activities.

Saudi businesses must comply with these Saudization rates or face penalties, which may include: cancellation or suspension of contracts with the Saudi public sector, cancellation of work visas for foreign workers, financial fines, and legal actions before local courts.

Saudization focused on six main sectors: trade, industry, tourism, transportation and logistics services, real estate and contracting, and health. This also targets jobs with monthly salaries of at least 5,000 Saudi riyals ($1,333) and professions requiring high technical skills. Jobs paying less than 5,000 Saudi riyals are not included in these nationalisation requirements.

Historically, Saudi Arabia has relied on religious tourism as a major source of national income, particularly during the Hajj and Umrah seasons. In 2023, the number of Umrah pilgrims rose to 26.86 million, an increase of 8.7 per cent from the previous year, with 13.56 million coming from outside Saudi Arabia. In the Hajj season, the Kingdom received 1.85 million pilgrims, with 90 per cent of these being international visitors.

However, since 2017, Saudi Arabia has been aiming to become a destination for cultural and entertainment tourism, focusing on the Riyadh region and the Red Sea coast. This shift has led to an increase in international tourists, reaching 27.4 million in 2023, up from 16.6 million in 2022 and 3.5 million in 2021.

Domestic tourism increased from 63.8 million visits in 2021, 77.8 million visits a year later and 81.9 million visits in 2023. As a result, religious tourism, which accounted for 90 per cent of the country’s tourism activity in 2019, dropped to 50 per cent in 2023.

To attract foreign investment in the industrial sector, Saudi Arabia has established five special economic zones (SEZs): the Cloud Computing Special Economic Zone, the Ras Al-Khair Special Economic Zone, the Riyadh Integrated Special Logistics Zone, the Jazan Special Economic Zone, and the Special Economic Zone of King Abdullah Economic City.

These zones offer various incentives, including exemptions from financial fees for workers and their dependents, a unified platform for government services, income tax reductions, value-added tax exemptions, and deferred customs duties on imported raw materials. These incentives, combined with government investments in infrastructure, are designed to attract industrial activity.

By 2023, the number of factories in Saudi Arabia had increased to 10,518, marking a 10 per cent rise from the previous year, with total investments amounting to approximately $411 billion. Riyadh led with the highest number of new factory licences at 479, followed by the Eastern Province with 340 licences.