Saudi Arabia has announced ambitious ‘Thatcherite’ economic reform, to reduce dependence on oil profits.
On Monday, King Salman bin Abdulaziz announced cabinet backing for the Saudi Vision 2030 plan. The plan details sweeping economic reforms including diversification, part privatisation of state assets, tax increases and spending and subsidy cuts (1).
Deputy Crown Prince Mohammed bin Salman says authorities want to generate $100 billion per year in additional non-oil revenue by 2020. The plan aims to reduce Saudi Arabia’s dependence on oil. Currently income from oil makes up around 70% of revenues for Saudi Arabia (2). This source of revenue has been put under severe pressure as oil prices have dropped sharply in recent years, from more than $100 a barrel in 2014 to just $40 a barrel this month (1).
Proceeds from a proposed 5% share sale of state owned oil company Aramco, value estimated at over $1tn, will be combined with $600bn in current assets to form a sovereign wealth fund worth c.$2tn. The fund would be the largest of its kind, over twice the value of Norway’s which is currently the largest in the world by assets (3).
The government has also reduced spending to narrow the budget deficit while seeking alternative revenue sources. Reducing subsidies for gasoline, electricity and water is expected to account for $30 billion, while a new value-added tax is estimated to generate $10 billion a year (4).
The reforms are inspired by McKinsey study ‘Beyond Oil’, which prescribed how the country can double GDP over the next fifteen years and reinvent itself with $4 trillion of investment across eight industries, from electrical manufacturing, to cars, healthcare, metals, steel , aluminium smelting, solar power, and tourism. McKinsey cautioned that half-hearted reform risks disaster, and bankruptcy (5).
The International Monetary Fund, however, has warned that it is very difficult for commodity producers to escape the ‘resource curse’ and diversify. The few success stories – Mexico, Chile and Malaysia – did so by taking radical action early on, when resource prices were booming (5).
- (1) – Saudi Arabia approves ambitious plan to move economy beyond oil – The Guardian
- (2) – Saudi Arabia agrees plans to move away from oil profits – BBC News
- Saudi Arabia plans to sell state oil assets to create $2tn wealth fund The Guardian
- (4) – Life After Oil: Charts Show Saudi Arabia’s Economic Challenges – Bloomberg
- (5) – Saudi prince vows Thatcherite revolution and escape from oil – Telepgraph