Saudi Arabia pushes ahead with plan to reduce oil dependency

Top cabinet ministers give go ahead to the National Transformation Plan that aims to reduce country'’s dependency on oil exports.

Photo by: Reuters
Photo by: Reuters

Saudi Arabia's Deputy Crown Prince Mohammed bin Salman chairs a meeting for the Council of Economic and Development Affairs in Jeddah. (Reuters)

Updated Jun 9, 2016

Saudi Arabia aims to spend billions of dollars to more than triple the government’s non-oil revenues in a bid designed to reduce its dependence on oil and build a sustainable future, ministers said on Monday.

The National Transformation Plan (NTP), a part of the Vision 2030 strategy, was approved by top cabinet ministers in the government on Monday evening. The plan aims to restructure the economy so that it can survive an era of low oil prices. It is the biggest overhaul of policy in decades.

If successful, it will boost non-oil revenue to $141 billion by 2020, creating some 450,000 non-government jobs, according to the 110 page document.

It will cost the government around $72 billion to implement and includes over 500 projects and initiatives as well as performance indicators for ministries and other government agencies.

The plan would also increase the percentage of government debt as gross domestic product to 30 percent from 7.7 percent.

The Kingdom’s economy has long been dependent on oil exports, but crude prices dropped steeply in 2014 and the state budget saw a deficit of nearly $100 billion last year.

Non-oil revenue will be generated with the introduction of value-added taxes – "sin taxes" – on sweet drinks and tobacco, and fees imposed on the private sector.

The full extent of the tax plans is not yet clear and government officials have declined to comment further.

According to the NTP, the Saudi government also plans to reduce the value of public salaries and wages as a proportion of the budget to 40 percent by 2020 from the current 45 percent. Outright layoffs of public employees or salary cuts are unlikely to happen as state employment is used as a social welfare tool, but this move is still seen as a dramatic step for the country.

"The average public sector employee is paid about 70 percent more than the private sector average. This wage gap is one of the highest in the world and goes a long way to explaining why so few Saudis are employed in the private sector," James Reeve, deputy chief economist at Samba Financial Group in London, told Reuters

Other aspects of the plan aim to accelerate privatisation by transferring all power generation to "strategic partners" by 2010. New opportunities in mining are predicted to lead to an extra 25,000 jobs, while investment in tourism is aimed at creating about 400,000 jobs in the private sector.

Additional plans include increasing renewable power capacity, restructuring the postal sector, maintaining cultural heritage and improvements in civil service performance.

Market reaction

Investors are cautious over the Kingdom’s economic reform plan, as they are worried that steps to rein in the $100 billion state budget deficit could cause an economic slowdown.

Trade was modest on Tuesday as the market remained 4.9 percent below its level in late April and the Saudi stock index edged up 0.9 percent.

"The announcement is positive in that is shows a commitment to fiscal reform – the government is clearly focusing on it," Monica Malik, chief economist at Abu Dhabi Commercial Bank, told Reuters.

Analysts expect GDP growth to slow to around 1.5 percent this year from 3.3 percent in 2015, indicating the economy may risk stagnation as the NTP proceeds.

"But the key is whether the plan can be implemented, and that will be difficult. It’s not clear that the time scale is doable," said Malik.

TRTWorld and agencies