Why Saudi Arabia is reforming its economy?

Kingdom of Saudi Arabia, world’s largest oil producer faced a troubled previous year which pushed its rulers to re think their economic policies, and new Saudi monarch Salman Bin Abdul-Aziz on the first year of throne came under huge stress due to falling international oil prices from $100 to below $35 a barrel. Saudi meets 90% of its revenue from its oil sales and budget deficit last year reached to sparkling 15%, and their reserves already declined by $100 billion in one year.

Saudi Arabia is oil driven economy which largely depends on the revenue from the sale of crude oil. However, falling International oil prices is not only the reason, but there are many other reasons to rethink and plan economic reforms.

If we broadly look into the major reasons that forced Saudi monarch to re think and revamp their economy includes;

Firstly, one of the major reasons behind the falling international oil prices is production of shale gas by US firms, which not only made US sufficient in crude oil, but also made US capable of exporting some of its oil and liquefied gas to other countries.

2nd, shale gas productions were capturing world markets and threatened the strong position of OPEC countries/ Saudi Arabia, which forced Kingdom to generate maximum output of crude oil to get rid of low shale oil producers. The Saudi’s were executing plan to produce maximum oil with increased supply, resulting in low crude oil prices. Saudis believe they can afford to sell low price oil for a longer period whereas shale oil producers will have to face shut down. Shale producers are surviving with tremendous pressure, but Saudi Arabia itself is suffering as well.

Saudis believed that by keeping low crude oil prices once again they will capture world oil markets, however after December, 2015 US and UN restrictions were also removed from Iran, and as matter of fact, with the production of more Iranian oil, it looks now crude oil prices will remain low for some longer period. In case, if Saudi Arabia now reduce its crude oil production, it will adversely affect the Saudi economy further, as the gap in the production will be filled by none other than Saudi Arabia’s regional rival Iran. Earlier in 1990 Saudi Arabia had already faced same kind of situation, but prices of crude came back and Saudi government met their deficit by borrowing, this time this realization came into record that they have to change the dynamics of the economy.

3rd, for the last over one year Saudi Arabia is engaged in Yemen War and it is costing Saudi Arabia $1billion each month. Saudi Arabia is sustaining this pressure with the help of their reserves which stands at $ 625 billion.

4th, Saudi Arabian reserves are on decline with every passing month and its large investment on huge importer of military hardware is also one of the major expense. Recent details release by IHS Jane shows that Saudi Arabia was the largest military hardware importer.

The decline in Saudi Arabian reserves forced the government to look into their economic position that is why we are now looking 30 year old son of Saudi King  Deputy Crown Prince Mohammad Bin Salman had took over the charge of new economic reforms to reshape the economy to get on control of low fuel prices. In the early considerations, the main considerations were given to reduce state expenditures, privatization of dozens of state owned institutions, imposition of 5% value added tax, taxes on sugary drinks and cigarettes etc. Privatization plans also include state run institutions other than all essential functions of the state and will also include government airlines, power generation companies, telecom firms and even biggest oil generation firm Aramco is also under their consideration for privatization.

As Saudi government data reveals, total population’s 70% percent are below 30 years of age and most of the Saudi youth is out of job or not will willing to do anything. For the last five years, new thinking and planning is under way to reduce their own unemployment by reducing dependence of foreign labor force. In Saudi Arabia expatriates formed 56% of total labor force which is considered to be highest in many western countries as well and by reducing expatriates local labor force will also be accommodated to reduce unemployment. Last year in November, 2015 Saudi Arabia’s largest construction company Bin Laden Group, one of the biggest group also planned to cut size their labor force by 15,000.

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Saudi reforms become more important in the Middle East especially after the removal of restrictions on Iran, means world will be more open for Iran and multinational firms can also become major stake holders in Iranian markets, whereas Saudi economy if not reformed and multiple source of revenue generation not adopted, economy will further suffer in the coming years.

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