Saudi Arabia’s Cabinet Approves Ambitious Plan To Reduce Oil Dependence, Diversify Economy

Saudi Arabia’s cabinet approved the National Transformation Program (NTP) — an initiative aimed at diversifying the country’s economy and weaning it away from oil — late Monday. The plan, which seeks to more than triple the kingdom’s nonoil revenue to 530 billion riyals ($141 billion) by 2020, is part of Saudi Arabia’s Vision 2030 reform initiative, which was introduced by Deputy Crown Prince Mohammed bin Salman in April.

“[The proposed measures] will technically make investments the source of Saudi government revenue, not oil,” the prince, whose father gave him complete control over the country’s economic policy when he ascended the throne in January 2015, told Bloomberg in April. “So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

In addition to maintaining the country’s oil output capacity at 12.5 million barrels a day until 2020 and selling just under 5 percent of the government’s stake in the state-run oil giant Saudi Aramco through an initial public offer — which is a key plank of the Vision 2030 reform — the plan seeks to reduce subsidies on water and electricity, which the government says would result in savings of up to 200 billion riyals by 2020.

The kingdom, which derives 80 percent of its revenue from oil, has been hit hard by the precipitous drop in crude prices over the past two years. Between September 2014 and February 2016, for instance, global oil prices dropped by about 70 percent, and the ensuing decline in oil-dominated export revenue led to Saudi Arabia’s budget deficit ballooning to $98 billion last year — a figure equivalent to nearly 15 percent of its gross domestic product.

This year, the deficit is expected to narrow to 13.5 percent of GDP.

In December, the Saudi government announced a raft of spending cuts and reforms aimed at reducing the budget deficit to approximately $87 billion by the end of this year after the International Monetary Fund warned that the country may run out of cash in less than five years.

“It’s a challenging exercise, but they have to do it,” John Sfakianakis, a former economic adviser to the Saudi government and the Riyadh-based director of research for the Gulf Research Center, told the Wall Street Journal, referring to the steps outlined in the NTP. “At stake is stability, the country’s greater social and political stability.”

However, before things get better, they are likely to get worse. The NTP estimates that Saudi Arabia’s ratio of debt to gross domestic product will surge to 30 percent by 2020, up from the current 7.7 percent. The government will also cut its spending on public sector wages to 40 percent of the total spending, from the current 45 percent.

At present, about two-thirds of the Saudi workers are employed by the state. The plan also seeks to create over 450,000 private sector jobs by 2020 at a cost of roughly 270 billion riyals.

“A productivity-led economic transformation could enable Saudi Arabia to double its GDP again and create as many as six million new jobs by 2030,” analysts at the McKinsey Global Institute wrote in a report released in December. “To enable this transformation, Saudi Arabia will need to accelerate the shift from its current government-led economic model to a more market-based approach. In the labor market, greater workforce participation by Saudi men and women is essential to achieve higher household income.”