By Tim Fox
The kingdom needs to manage a fine line between delivering targets and not overrunning costs.
In launching its Vision 2030 document in April, Saudi Arabia made a bold statement about its intention to transform itself into a fully diversified and modern economy and society.
This included converting the Public Investment Fund into the world’s largest sovereign wealth fund, boosting the private sector contribution to 60 percent of gross domestic product (GDP), reducing unemployment to 7 percent from 11 percent, privatising government services, reforming education, and making continued investment in infrastructure.
While welcoming the news, financial markets were understandably uncertain about how this would all be achieved, particularly at a time of numerous challenges in the region. However, two months on we are now starting to see some of the colour and details of this plan delivered through the recent publication of the National Transformation Program (NTP) 2020.
If implemented successfully, 2016 will likely be viewed in the future as a watershed year for Saudi Arabia’s long term economic and social development.
Saudi Arabia’s leadership, led by King Salman bin Abdul Aziz Al Saud and spearheaded by Deputy Crown Prince Mohammed bin Salman Al Saud, have begun to set clear goals for transforming the kingdom’s economy to become more sustainable, dynamic and less dependent on oil. This entails not only reforming the economic landscape, but improving quality of life in the kingdom and reforming the public sector.
The National Transformation Program 2020, approved on June 6, is one of several plans designed to achieve the longer term targets of the 2030 Vision. Where the Vision 2030 outlines the long-term strategic goals for the kingdom, the NTP identifies specific short-term objectives that need to be achieved in order to meet the Vision 2030 goals. For each objective, key performance indicators are identified, and these will be measured and assessed against the targets set. Effectively, the NTP is a five-year stepping stone within the wider 2030 road map, which can be expected to be updated and developed in the years ahead.
For 2016, 543 initiatives have been set out across 24 government departments/bodies. The targets set to 2020 are expected to cost the government SAR 268 billion ($71bn) over the next five years. This cost excludes any contribution from the private sector, although the NTP states that the private sector should cover about 40 percent of the program, implying a total cost of around $120bn.
More initiatives are likely to be added over time, further increasing the cost of the NTP. The government expects the implementation of the NTP to create 450,000 jobs in the non-government sector by 2020.
Saudi policymakers highlighted three key themes for Vision 2030. While very broad in context, they encapsulate some very relevant development and reform objectives that if undertaken could dramatically alter the economic structure of the kingdom by 2030.
The challenge in the medium-term will be in sustaining broad based support to wean the country off some of the comforts that Saudi society currently enjoys. In the short run this is likely to be both painful and difficult, yet in the long run the benefits will outweigh.
The Vision 2030 themes of a “Thriving Economy”, “A Vibrant Society” and “An Ambitious Nation” encompass dynamics that will shift Saudi Arabia’s economic and social dynamics between now and 2030.
We can also identify three broad mechanisms that will be instrumental in driving forward these themes and objectives between now and 2030. First is the development of a diversified and significant industrial and manufacturing sector, which is likely to be the biggest enabler of job creation in the kingdom.
Secondly, will be the various targets around developing human capital. This is likely to be one of the more challenging targets as it requires significant changes, ranging from reforming and realigning the educational system to improving productivity and boosting incentives. Thirdly will be reforming the fiscal infrastructure of the kingdom through the introduction of taxation, releasing value through privatisation and development of credit markets.
The challenge for Saudi policy makers will be in implementing all of these plans, given the need to execute a variety of programs and reform measure across different areas, ranging from fiscal, economic, social and governmental, within a limited space of time. Costs are another concern, especially in an environment of low oil prices and reserve drawdowns.
Saudi Arabia needs to manage a fine line between delivering targets and not overrunning costs. As more granular information relating to the different transformation targets are released, there is a sense that while ambitious, many of the initiatives are achievable, as long as key popular support is maintained.
Given the way this initiative is being driven from the top, and combined with a strong ambition to see it through, there is every likelihood that it can succeed.