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Accueil / Portraits et entretiens / Entretiens

The future of Economic Reforms in Saudi Arabia, by Dr. Sara Bazoobandi

Par Michel Makinsky, Sara Bazoobandi
Publié le 22/03/2019 • modifié le 11/06/2020 • Durée de lecture : 10 minutes

Dr. Sara Bazoobandi


Saudi Arabia’s young leadership vowed to undertake comprehensive and transformative reforms that encompasses a wide-range of socio-economic reforms. The reforms have already started to address some of the country’s long-standing issues such as: allowing women to drive, opening movie theatres and introducing value-added tax. Moreover, Saudi leadership have indicated reforms that are crucial to economic diversification from oil sector; such as: labour market reform, privatisation and opening the market to foreign investors. Although, some reforms have already taken place, various economic indicators suggest that, despite the promises for reform, Saudi leadership has been facing various socio-economic challenges in order to implement economic diversification policies. For example: foreign direct investments into Saudi Arabia has slowed down to $1.4 billion in 2018 from $7.5 billion in 2017 (1). Unemployment has been fluctuating over 12 percent is at its highest level in a decade (2); though, there has been some improvement in female labour participation between 2017 and 2018 (3). Moreover, privatisation, a crucial initiative for Saudi economic diversification, has not been yet materialised (4). In addition to domestic socio economic challenges Saudi Arabia has been struggling with various other issues such as: complex regional crises within the GCC, the war in Yemen, balance of power struggle with Iran and the Khashogghi affair. Dealing with such issues seem to have slowed Saudi government’s drive and momentum for reform. Moreover, the rise of oil prices, from average of around $40 per barrel (pb) in 2016 to above $60 pb in 2018, has made the need for reform in Saudi Arabia less urgent over the time. Therefore, there are two key issues about economic reforms and diversification in Saudi Arabia: how feasible are the promised reforms? (particularly those made in Vision 2030 of the Crown Prince) and how important are they for the Saudi leadership?

Heavy reliance on oil

Saudi economy has remained dependent on oil revenue since the discovery of oil and has been vulnerable to fluctuations in prices and output levels. Saudi Arabia’s government finances have been directly corelated with the country’s oil income. This is reflected in the most recent data on Saudi government reserves. The country’s reserves grew from less than $30 billion in 2003 to more than $750 billion in early 2015 (5). But low oil prices between 2015 and 2018 combined with government large expenditures slowed down the government reserves. In late 2018, Saudi Arabia had to cut down crude production in order to achieve higher prices. Higher prices, combined with the fiscal and structural reforms, prompted by low crude prices (e.g. including subsidy cuts), put Saudi government financing in an improved position (6). Nevertheless, given the degree of economic dependence on oil, the situation can rapidly change for Saudi economy towards the end of the current oil cycle.

Increase in social spending

The government’s social spending has also been directly linked to the price-led oil revenue. Over the past years, Saudi government has frequently initiated stimulating packages to support economic growth. For example: in January 2018 the government initiated a new cost of living allowance scheme that comprises of $266 monthly payment to civil servants and military personnel. The government confirmed that it will continue increasing the state spending programs in 2019 by more than 7 percent year-on-year (total $295 billion). This includes a 10 percent increase in student benefits. The government has also launched a number of projects, including a 33 acres complex in Riyadh, to build “entertainment hubs” in Saudi Arabia (7). Generous government social spending programmes are widely seen as tools to improve the Crown Prince’s popularity, particularly after months of controversy caused by the Khashogghi affair (8).

Oil price rebound

2019 fiscal year started for the Saudi oil sector on a happier note in comparison with the previous year. OPEC agreed to cut 1.2 million barrel per day (mbd) in December 2018 when oil price plunged as low as the prices in 2008. The production cut rapidly boosted the price. At the end of every oil cycle Saudi oil policy makers have found themselves caught in the historical dilemma of choosing between price increase and market share. In the 1980s, when Saudi Arabia supported significant production cut to boost the price, the country lost its market share. This is mainly due to the fact that Saudi Arabia had failed to raise production in time to avoid unsustainable price inflation that led to the subsequent downturns (9). However, such risk is significantly reduced in 2019 due to the US oil sanctions on Iran. Iranian oil is expected to reduce to under 1 mbd after May 2019 when the current sanction waivers on Iran’s major crude buyers in Asia and Europe come to an end. In his recent visit to China and India (two of major Asian buyers of Iranian oil), Saudi Crown Prince has officially asked the two countries’ leadership to substitute Iranian crude with that of Saudi Arabia (10). This will indeed allow Saudi oil production to increase within few months after the production cuts boost the price. Saudi Arabia has carried the title of being the ‘swing producer’ in OPEC for many decades. In reality however, production cuts have often worked against Saudi interests and pushed the country’s market share to levels that have damaged the economy. 2019 will be a fruitful year for Saudi oil sector as the US oil sanctions on Iran will open up new markets for Saudi crude to return back to the market rather rapidly.

Saudi Arabia’s role within OPEC

Saudi Arabia’s position within OPEC and the way the Saudi policy makers perceive the organisation has changed over the country’s (almost) 60 years of membership to the OPEC. Saudi Arabia, with nearly one third of total OPEC productions, has been the largest producer of oil in the organisation and one of the largest producers in the world. Since the Arab oil embargo of the 1970s, Saudi Arabia has not experienced any major influential role in the global oil market through its OPEC membership. Indeed, over the past decade, with the technological revolution and the rise of non-conventional crude production methods, the significance of OPEC has declined. Over the past decade, various agreements were reached within the organisation over critical matters such as production cuts. However, Saudi Arabia has often been seeking to create a ‘Saudi-led club’ amongst the OPEC members in order to unite some of the Arab producers behind its own strategies. In other words, Saudi oil policy makers have tried in various occasions to create a leading role for the country within OPEC. Most recently also, there has been some thoughts to leave the OPEC. According to The Wall Street Journal, the Saudi policy makers are reviewing two major possible non-OPEC scenarios: 1) major producers compete intensely after the demise of OPEC, 2) leveraging its high production level, Saudi Arabia acts as a stand-alone OPEC (11). The latter scenario will perhaps be the most favourable one for Saudi Arabia and perhaps more in line with the global and regional aspirations of the young leadership in Riyadh. In the current global market, having secured Asian buyers that are shying away from Iranian crude to avoid the harsh US penalties, may also encourage the policy makers to concentrate on maximum gain in such scenarios. This is perhaps a strategy inspired by the role of Russia in global energy market. Russia and Saudi Arabia have collaborated closely over the past few years to bring down the global production in order to achieve desirable price for both countries. Such collaborations may well have triggered aspirations amongst Saudi leadership, to establish a new position for the country as an independent market power outside of the OPEC like Russia. The two countries are similar in terms of their market share and their potential power in the global oil market and evidently capable of colluding in the market when required. However, unexpected shifts of market dynamics can present major challenges to Saudi Arabian economy whether the country remains in OPEC or leaves.

Future gas export plans

Saudi Arabia’s gas strategy is also changing under the new leadership. The country reportedly needs $150 billion investment over the next decade in order to achieve its gas export ambitions (12). As the Saudi domestic oil consumption is increasing, the country is aiming to offset its oil export decline by increasing gas production. Saudi Aramco is planning to boost gas production from 14 billion standard cubic feet (scf) a day to 23 billion scf. Saudi Arabia has also indicated interest in joint LNG development with Russian Novatek, a Russian energy company with interest in building regasification terminals in Saudi Arabia. Saudi Arabia’s gas production ambition is to double its gas production in the next decade (13). Until recently, Saudi Arabia’s strategy towards its gas reserves was to use all the productions domestically either for electricity production or in petrochemical industry. Collaboration with Russia in the oil market has motivated Riyadh to expand such real of cooperation to gas sector as well. Russia’s powerful position in the world’s energy market has inspired Saudi policy makers to create a similar role for Saudi energy sector globally; strong and independent (i.e. from OPEC). Finding the sufficient financial resources to invest in the gas sector, in order to achieve such level of production, may be challenging. Nevertheless, the country is undoubtedly seeking to strengthen its position in the global energy market.

Foreign investment inflows

Foreign investment in Saudi Arabia is slowing down. UNCTAD recent World Investment Report shows that FDI flows into the Saudi economy shrunk by 80% between 2016 and 2017 (from $7.4 billion to $1.4 billion). Saudi Arabia’s share of regional FDI has also declined from 53% in 2009, to 27% in 2015 and less than 6% in 2017. Political and social tensions, the labour market reforms (particularly the so-called ‘saudisation’) and reduced access to credit are amongst the list of factors that have been contributing to the decline of FDI into Saudi Arabia. The government has taken initiatives that are aimed at attracting foreign investors; such as: opening the retail and wholesale sectors to 100% foreign ownership, launching a large privatization programme and easing capital market regulations on foreign investors. However, such initiatives did not have the desired impact on attracting foreign investment to Saudi Arabia. Moreover, foreign purchase of Saudi shares has been declining. And investors still consider Saudi stock valuations as too high: Tadawul Index’s estimated price-to-earnings, reached the highest level in the beginning of 2019 (14). The Khashogghi affair, at its peak, has also had negative impact on global and regional investors. The reluctance of foreign investors was visibly reflected to the poor attendance of Western investors at the Future Investment Initiative conference hosted by the Public Investment Fund. Despite the temporary shock of the global community and the PR crisis for the Crown Prince, Saudi Arabia’s major economic partners did not show any significant change of strategy.

Privatisation plan

Privatisation was another important pillar of Saudi Arabia’s recent economic reform. Last April, authorities announced a $11 billion privatization target to be achieved by 2020. Saudi Aramco, the country’s national oil company, grabbed the biggest headlines related to the country’s privatization programme. However, the plan was not limited to Aramco. The government’s reform programme envisaged the sale of stakes in ports, railways, utilities and airports. The initiative is experiencing major delays. The initial public offering of 5 percent of Aramco is now expected in 2021 (15). that may be partly due to the rise of oil price. Brent index was price at less than $40 a barrel when the government announced its plans for privatisation. Three years after the initial plan was announced and with oil prices nearly twice as high, Saudi leadership is not under pressure to boost non-oil revenue by privatizing state assets (16). If the oil market prices remain stable at their current levels, delays in privatization plan are not going to have an immediate impact on the Saudi economy. However, the delays raise questions about the level of government’s commitment to reform. Privatisation is also a major step towards changing the role of the government in the labour market. For many decades, Saudi government has been the sole provider of employment for Saudi nationals. Public employment has been one of the key elements of Saudi social contract. Therefore, changing the government’s position in the existing social contract will be politically sensitive and requires gradual steps over a longer period of time.

Water and energy security

In addition to the main socio-economic reforms, Saudi Arabia is in need for solutions to address the country’s high water and energy consumption. Saudi Arabia is amongst the top five water scarce countries in the world with a considerably high water consumption level. As of 2014, the country’s per capita water consumption was twice the global average. Demand for water by households has been growing by more than 7 percent annually (17). Nearly half of Saudi Arabia’s water supply comes from desalination plants (18) that are energy intensive and consume a large portion of the country’s energy production (19). Unsuitable water management policies and consumption patterns have had significant negative impacts of Saudi Arabia’s water resources. Four-fifth of the Saudi Arabia’s fossil water reserves have been consumed by the country’s agriculture sector, mainly in dairy farms (20). Water consumption pattern in Saudi Arabia has been shaped by a combination of the following factors: high population growth, local culture of over consumption, inefficient water tariff system and lack of efficiency in the distribution network. For the past decades, the government has heavily subsidized water supplies. Until about three years ago, consumers paid less than 5% of the total water production cost (21). The government began to cut down on water and electricity subsidies and introduced new water tariffs. The new tariffs are covering about 30-35 percent of the total cost for water supply (22). The government plans to lower the subsidies for water and electricity further in to help reducing government expenditure and consumption.

As noted above, high energy consumption is another key challenge facing Saudi Arabia. Fossil fuels are the only source of energy in Saudi Arabia and the country has one of the highest levels of electricity consumption in the world. Saudi Arabia’s per capita electricity consumption is about 9.8 kilowatt hour (kwh), that is nearly twice as big as per capita consumption in Europe. Also, about 3 million barrels of Saudi crude oil are consumed domestically. Saudi Arabia does not export any natural gas and the country’s production is only consumed domestically. The country produces about 109 billion cubic meters of natural gas that makes per capita consumption more than 3000 cubic meters. This is nearly 4 times bigger than that of European countries. As a result, Saudi Arabia has considerably high per capita carbon foot print (CO2 emissions). As of 2014, the country’s per capita CO2 emission was more than 18 tones that is 3.5 times bigger than that of Europe (23). Therefore, at the current rate of domestic consumption, Saudi Arabia’s hydrocarbon export revenue will inevitably decline over time.


Saudi reform plans were introduced by the Crown Prince, Mohammad bin Salman, and as a part of his PR campaign (24). The Crown Prince has had a vision to rebrand Saudi Arabia as a modernised Arab country with a strong influence in the region. He also needed to introduce himself as a young, forward-looking and moderate future leader for Saudi Arabia. This has been particularly important in order to boost his popularity at home and increase his credibility internationally. A combination of heavy dependence on oil, vulnerability of Saudi economy to volatile oil markets and high government expenditure on items such as public sector salaries and subsidies have also been important factors that prompted the reforms. Due to the improved oil market dynamics, Saudi leadership is under less financial pressure in 2019 to push through the reforms. Moreover, some of the reform plans, like privatisation, are also developing at a slower pace in order to avoid higher social costs. Finally, the government’s effort, to portrait the country as a stable economy that provide opportunities to foreign investors, have not succeeded. Finally, some of the government initiatives, like natural gas production increase, require substantial resources that the government is able to provide easily and rapidly. The treats of water and energy security also are amongst the hardest challenges for the government to overcome as they require long-term programs to change domestic consumption pattern and the citizen’s perceptions. All in all, while the reforms are crucial for the future socio-economic stability of Saudi Arabia, due to factors discussed above, the government’s ability to implement those reforms is limited.

(18) Saudi Arabia has 31 desalination plants in 17 locations. Desalination plants employ more than 10,000 people, nearly 90 percent of whom are Saudi nationals.

Publié le 22/03/2019

Dr. Sara Bazoobandi is the managing director of Middle East Risk Consulting. Prior to this, she was a senior lecturer in International Political Economy at Regent’s University London and a visiting scholar at the Middle East Institute of the National University of Singapore. She served as an economic analyst for Nomura International and Robini Global Economics. Between 2013 and 2016, she was an associate fellow at the Chatham and a member of the global agenda council of the World Economic Forum. She holds a PhD from Exeter University and MSc. from University of Reading. Amongst her publications are “The Politics of Food Security” (ed.) and “Political Economy of the Gulf Sovereign Wealth Funds”.

Outre une carrière juridique de 30 ans dans l’industrie, Michel Makinsky est chercheur associé à l’Institut de Prospective et de Sécurité en Europe (IPSE), et à l’Institut d’Etudes de Géopolitique Appliquée (IEGA), collaborateur scientifique auprès de l’université de Liège (Belgique) et directeur général de la société AGEROMYS international (société de conseils sur l’Iran et le Moyen-Orient). Il conduit depuis plus de 20 ans des recherches sur l’Iran (politique, économie, stratégie) et sa région, après avoir étudié pendant 10 ans la stratégie soviétique. Il a publié de nombreux articles et études dans des revues françaises et étrangères. Il a dirigé deux ouvrages collectifs : « L’Iran et les Grands Acteurs Régionaux et Globaux », (L’Harmattan, 2012) et « L’Economie réelle de l’Iran » (L’Harmattan, 2014) et a rédigé des chapitres d’ouvrages collectifs sur l’Iran, la rente pétrolière, la politique française à l’égard de l’Iran, les entreprises et les sanctions. Membre du groupe d’experts sur le Moyen-Orient Gulf 2000 (Université de Columbia), il est consulté par les entreprises comme par les administrations françaises sur l’Iran et son environnement régional, les sanctions, les mécanismes d’échanges commerciaux et financiers avec l’Iran et sa région. Il intervient régulièrement dans les media écrits et audio visuels (L’Opinion, Le Figaro, la Tribune, France 24….).



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