Saudi
Arabia approves ambitious plan to move economy beyond oil
15-year
plan includes diversification, privatisation of state assets, tax
increases and creating a $2tn sovereign wealth fund
Ian Black Middle
East editor
Monday 25 April 2016
18.06 BST
Saudi Arabia has
approved an ambitious strategy to restructure the kingdom’s
oil-dependent economy, involving diversification, privatisation of
massive state assets including the energy giant Aramco, tax increases
and spending and subsidy cuts.
King Salman bin
Abdulaziz announced cabinet backing for the Saudi Vision 2030 plan in
a brief televised announcement on Monday in which he called on his
subjects to work together to ensure success. Shares on the Riyadh
stock market rose sharply.
Under Salman, who
came to the throne in early 2015, economic strains have been the
backdrop to rising tensions with regional rival Iran, the threat from
Islamic State, the wars in Syria and Yemen, and a sense that the
kingdom’s decades-long relationship with the US is fraying.
Mohammed bin Salman,
the king’s son and deputy crown prince, gave details of the
economic reforms in a pre-recorded TV interview – part of a
proactive media strategy designed to advertise a sense of dynamism
and change in response to oil prices, which have fallen from more
than $100 a barrel in early 2014 to about $40 this month.
Elements of the
long-heralded 15-year blueprint include the creation of a $2tn Saudi
sovereign wealth fund, as well as strategic economic reforms called
the National Transformation Programme.
Bin Salman confirmed
that the kingdom would sell off about 5% of Aramco, which will become
a holding company with subsidiaries listed via an initial public
offering. Oil was a “dangerous” addiction, he told al-Arabiya TV.
“The vision doesn’t need high oil prices,” he added. “We can
live without oil in 2020.”
Aramco is estimated
to be the world’s most valuable company, while the wealth fund
would be the largest of its kind. Overall the plans aim to make the
Arab world’s largest economy depend on investments rather than
energy to fill government coffers in the years to come.
“The vision is a
road map of our development and economic goals,” the prince said.
“Without a doubt Aramco is one of the main keys of this vision and
the kingdom’s economic renaissance.”
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The fund will
include current assets of around $600bn, as well as returns from the
sales of Aramco shares and state-owned real estate and industrial
areas estimated to be worth $1 tn.
Bin Salman, 30, is
not only young in a country long ruled by old men but famously
energetic and assertive. He seems genuinely popular but is also
resented for his unprecedented concentration of power – as defence
minister and chairman of the Council of Economic and Development
Affairs. Critics call him reckless – especially over the war in
Yemen.
Economic reform has
often been discussed before but the sense of urgency has grown since
the government ran a record budget deficit of nearly $100bn last
year. Plans to boost non-oil revenues with taxes will take years to
have an impact, leaving spending cuts and foreign investment as the
main way to bring state finances under control.
In recent years
Saudi Arabia has relied on oil revenues for about 90% of its budget.
Earlier this month it took out a $10bn five-year loan from a
consortium of global banks – its first sovereign loan since 1991.
The new strategy builds on the work of several prominent
international consulting firms, who have been paid $1.25bn in fees
this year.
Subsidy cuts,
already under way, look set to be challenging, with Saudis used to
cheap petrol, water and energy – while polls show they still expect
them to continue. Bin Salman said the reforms are intended to
eliminate housing and unemployment problems and ensure help reaches
those most in need.
Last Saturday, the
king sacked the water and electricity minister, who had drawn
criticism for his handling of price increases, including a suggestion
that citizens upset over high water bills dig their own wells.
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Social factors are a
key driver for the new policy. With half the Saudi population under
25, job creation is vital if the kingdom – which has no national
representative institutions – wants to avoid the social unrest that
has fuelled Arab spring protests across the region. But the
introduction of even indirect taxes may lead to demands for change
that could undermine the autocratic system.
A “green card”
system is to be launched within five years to allow expatriate Arabs
and Muslims to live and work long-term in the country, Bin Salman
said. Tourism – apart from the annual hajj pilgrimage – and
mining would be used to generate new revenues. A holding company for
military industries would also be set up.
Bin Salman had
suggested earlier that what Saudi Arabia was planning was similar to
the Thatcher-era privatisation of state industries in Britain in the
1980s.
Experts and analysts
have called this the biggest economic shakeup since the founding of
Saudi Arabia. “The vision and ambition is out there and the proof
now will be on the execution and the ability to continue to amass
support from society in general and the business community
specifically,” John Sfakianakis, director of economics at the Gulf
Research Centre in Riyadh told the Guardian.
“Due to Mohammed
bin Salman’s age, pace and sense of accountability, society is
embracing these plans. Now is the time for big economic changes that
the country hasn’t embarked on since 1932. The dynamism and
determination to deliver has not been seen before and Bin Salman and
his team know they have to deliver. Economic necessity dictates that
Saudi Arabia reforms now.”
It is unclear
whether the economic shake-up will lead to the kind of social changes
many believe are needed to truly modernise the country: allowing
women to drive, for instance, opening up the legal system, or ending
the kind of human rights abuses that attract far more attention
abroad than in the kingdom itself.
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