Saudi Arabia Economy Facts
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.
- Countryaah.com: 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. Check findjobdescriptions to learn more about 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 company plans.
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 industries
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.