Parivartan Sharma / Reuters Muslim men use their cell phones to take photos at the Grand Mosque in Mecca, March 2011.

Kingdom Coming

Saudi Arabia's Economic Road Ahead

Saudi Arabia has embarked on a path of radical transformation. The immediate catalyst has been the prolonged collapse of oil prices and resulting budget deficits (estimated to be near $87 billion for 2016, or about 13 percent of GDP). Looming in the background, meanwhile, is a massive demographic bulge that will bring some six million additional Saudis into the workforce over the next 15 years, roughly doubling the number of Saudis in the labor market. Indeed, demographics, not oil prices, must be understood as the underlying driver of the Kingdom’s change initiative. Population growth is of such a magnitude that, even if oil prices were to rally, the current economic model (in which 80 percent of national household income comes directly from the government, via public sector salaries and assorted handouts) would be unsustainable.

Riyadh recognizes the problem, and it has a game plan: the ambitious Vision 2030 and the National Transformation Program, both of which were unveiled earlier this year. Deputy Crown Prince Mohammed bin Salman, the Kingdom’s dynamic young heir apparent, is guiding the transformation process, and it will shape all aspects of the Kingdom’s political economy for the foreseeable future. 

Dramatic changes have already begun. For one, the government has imposed a new era of austerity. Subsidies have been pared back, public sector salaries slashed, and a limited range of taxes are currently under consideration. Concurrently, intensive efforts are underway to boost the private sector. The objective is to transform Saudi Arabia from a petro-welfare economy to a dynamic, diversified, and competitive market for a broad range of industries, from finance to manufacturing to tourism. Such private sector growth will not only help diversify the Kingdom’s economic base and raise GDP, but also (and perhaps more importantly, from a sociopolitical standpoint) create jobs for Saudis on an unprecedented scale.

As Saudi Arabia grapples with its economic future, it also faces a range of security challenges. On the international stage, Riyadh is mired in a costly and controversial war in Yemen.

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