Saudi Arabia's economy is centered around the
oil. Up to 90 percent of export earnings come from the
oil and gas industry, which also accounts for about half
of the gross domestic product (GDP). For a few decades,
black gold has transformed an underdeveloped
agricultural economy into a modern industrial state with
generous social benefits for its residents. However, oil
dependency makes the country sensitive to price changes
in the world market.
The dependency became clear in 2014, when the world
market price of oil suddenly fell by more than half in
six months. Saudi Arabia was faced with a sudden
shrinking of the state budget. The fall in prices was
partly due to overproduction in Saudi Arabia, which
wanted to assert its position as a leading oil producer
since the extraction of so-called shale oil increased
sharply in the US. A Saudi argument against production
cuts was that it would help rivals as soon as possible.
Otherwise, Saudi Arabia has often adjusted its oil
production to increase the balance when instability
occurs in the market.
Major imports by Saudi Arabia, covering a full list of top products imported by the country and trade value for each product category.
In 2016, Russia and Saudi Arabia, which together
account for more than half of the world's oil
production, agreed to restrict extraction to keep prices
up. The countries in the oil price cartel Opec and
non-member states (summarized with the description Opec
+) then concluded further agreements on production
restrictions; they chose to breathe new life into
international price cooperation. But in 2020, the
cooperation broke down and Saudi Arabia increased its
production, which led to a new price war.
Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including SAU which represents the country of Saudi Arabia.
The falling oil price of 2014 caused budget deficits
that forced the Saudi state into austerity, something
the population is not used to. As lower oil prices
appeared to be a lasting phenomenon, the regime was
given strong reasons to invest in broadening its income
base - through increased taxes, cuts in social programs
and efforts to get the private sector started. That had
long been the goal - agriculture and non-oil based
industries were already slowly increasing - but now
became necessary. In April 2016 (prior to the agreement
to limit oil production to raise prices), Vision 2030
was launched, a reform plan that was described as
pervasive and revolving. Among other things, it was
announced that part of the state-owned oil company Saudi
Aramco would be sold and the proceeds directed to a
welfare fund with the prospect of becoming the world's
largest. Furthermore, investments would be made to
increase domestic production, not least in the defense
industry. The partial privatization of Aramco has since
been implemented, but foreign investors were difficult
to flirt with; By that time, Saudi Arabia had taken a
number of measures that brought about distance, notably
warfare in neighboring Yemen, harsh attacks on wealthy
Saudis and the assassination of regime critic Jamal
Khashoggi (seeDemocracy and Rights). In the meantime,
the visionary government initiatives have had difficulty
reaching from the drawing board to the start of
construction, and have also met resistance from local
interests (see Calendar).
Before 2020, the government presented a state budget
with deficits for the seventh consecutive year. Revenues
from sources other than the oil account for about
one-third of the state's revenue, but both loans and
grants from the state's reserves are needed to make up
the difference. Government debt was projected to rise
from 24 percent to 26 percent of GDP. And soon there was
a harsher situation where they decided to try to shrink
spending compared to the original budget targets: the
2020 oil price war and the world economy crisis that was
simultaneously raging through the corona virus. In March
2020, large crisis packages were promised, among other
things, to small and medium-sized companies. The state
now expects to increase its borrowing further because it
does not want to sell any of Saudi Arabia's major
assets, both domestically and abroad.
A strong reason for the new oil price war was that
China's demand for oil was falling; The corona virus
(which first struck in China) hampered the economy. When
Russia, which is also a major producer, initially did
not want to cut back on extraction to raise prices,
Saudi Arabia chose to open the crane again and allow
prices to fall. Even for the Saudi economy, with
deficits in the state budget to be paired with the
transformation of society, it is a bold policy. But
Saudi oil is cheaper to extract than Russia and (in
particular) the US reserves, Saudi Arabia can handle
lower price levels than its competitors. A deal between
the major oil countries was reached, where Saudis and
Russians pledged to reduce their crude oil production by
2.5 million barrels each per day, but in the meantime
global demand for crude oil plunged (seeCalendar).
For Saudi Arabia, the virus pandemic also jeopardizes
the pilgrimage to Mecca and Medina, which usually
generate large revenue each year. Only Muslims are
allowed to visit the holy places. Western tourism has
not previously existed in Saudi Arabia. For non-Muslim
foreigners, it was previously difficult to obtain a visa
other than for work or business, but tourism has been
identified as a future industry that can generate
revenue for the state.
The economy is strictly state-controlled through
five-year plans. Privatizations and deregulations are
ongoing, but the process is slow.
In the early 1930s, the Saudi economy was based
mainly on livestock farming, farming and income from
pilgrimage pilgrims to Mecca. The first oil discovery in
the late 1930s changed the conditions drastically. After
King Faisal took power in 1964, a modernization of the
economy began. High oil prices in the 1970s provided the
state with huge income invested in infrastructure,
education, military equipment and a modern welfare
state. The regime built new industrial cities in the
Persian Gulf and built giant refineries, steel plants,
airports, roads, universities, hospitals and housing.
The latest investments include a high-speed rail link
connecting Jeddah on the Red Sea with the Mecca and
Medina pilgrimage sites, and the capital Riyadh has been
equipped with a metro.
After long and difficult negotiations, Saudi Arabia
became a member of the World Trade Organization (WTO) in
2005. It contributed to the country's relatively
protected economy being gradually opened to the outside
world, which has worried the strict religious
leadership. Exceptions have been made for certain goods
that are prohibited by Islamic law, such as pork,
alcohol and pornography.
Military equipment represents a significant part of
imports. Saudi Arabia is the largest single buyer of
military equipment from the United States and the second
largest (after India) in the defense industry in France.
But purchases are made in many countries, including the
UK, Canada, Germany and Spain. A radar system was
ordered from Sweden a few years ago. In several
countries, trade is being questioned, not least because
of the war that Saudi Arabia is waging against rebel
movements in neighboring Yemen.
Plastics and petrochemicals make up the majority of
exports that occur alongside oil.
One element of the reform work in progress is
investments in alternative energy. They should be viewed
in the light of the day when the oil will run out.
Intensive campaigns have been underway to increase
foreign investment in Saudi Arabia, which in 2017 was at
its lowest level in 14 years, according to the UN. The
Saudis face the threat of a future without oil, too,
with investments abroad, which will generate income.
Many Saudis have grown accustomed to living in
welfare thanks to the oil. Foreign migrant workers took
care of the body work (see Labor Market). There is no
state income tax. Citizens are still very much served by
the state: water, electricity and gasoline are
subsidized, even though the subsidies have been reduced
to strengthen the state's finances. The expected cuts in
social programs come after a period when spending in the
sector has increased sharply, partly as a way of keeping
the population in good spirits during the wave of
protests in the region from 2011. VAT was also not
available before 2018, when a 5% tax was introduced on
most goods and some services. In 2020, VAT will be
increased to 15 percent.
As elsewhere in the Arab world, Islamic banks have
become increasingly important alongside the usual
banking system. Since the Qur'an explicitly opposes
interest, these banks take no interest on loans and give
no interest on savings. Despite this, there are various
ways to solve, for example, a company's need for
financing. For example, a bank can enter as a co-owner
or participate as a co-owner in a venture that the
FACTS - FINANCE
GDP per person
US $ 23,219 (2018)
US $ 782 483 M (2018)
2.2 percent (2018)
Agriculture's share of GDP
2.2 percent (2018)
Manufacturing industry's share of GDP
12.8 percent (2018)
The service sector's share of GDP
48.2 percent (2018)
-1.1 percent (2019)
Government debt's share of GDP
19.0 percent (2018)
US $ 294,387 million (2018)
US $ 125,638 million (2018)
US $ 70,606 M (2018)
Commodity trade's share of GDP
55 percent (2018)
Main export goods
oil, products from the petrochemical and plastics
Largest trading partner
USA, China, Japan, South Korea, Germany, India
Saudi Arabia joins the WTO
Saudi Arabia becomes a member of the World Trade
Organization (WTO) after twelve years of negotiations.
Chambers of choice
For the first time elections are held for the
provincial chambers of commerce. Now women are allowed
to vote and in a couple of cases even to be candidates.
Two women are elected to the Board of the Chamber of
Commerce in Jeddah.
ACCESSION OF A NEW mONARCH
Former Crown Prince Abdullah becomes king when
half-brother Fahd dies.
Elections are held for the first time
The first political election in Saudi Arabia is held.
The election applies to half of the seats in the 178
relatively powerless municipal councils and only men are
allowed to vote.