By Sarah Townsend
Damning report says kingdom may struggle to grow non-oil sector despite reforms
Low productivity growth and flimsy educational reforms are likely to hinder the implementation of Saudi Arabia’s Vision 2030 plan, a report has warned.
The kingdom has pinned high hopes on its strategy to reduce dependence on oil revenues and develop the non-oil private sector, notes a paper by Capital Economics.
The recent promotion of Mohammed Bin Salman, the architect of Vision 2030, to Crown Prince has provided a fresh impetus to planned economic reforms, it added.
However, while the programme’s scope is “impressive” – with planned privatisations and measures such as a bankruptcy law to improve the business environment – the plan is likely to face stark barriers to implementation, holding back economic growth to a “modest” 2.5-3 percent in the coming years, the report says.
In particular, Capital Economics claims that Vision 2030 fails to place sufficient emphasis on promoting non-oil exports, which would support efficiency gains.
And it “shies away from” a revamp of education and measures to close the wage gap between Saudi nationals and expat workers.
It notes that Saudi Arabia’s dominant oil sector has hindered the development of other high-productivity sectors, causing persistently low rates of productivity growth in recent decades.
This has been compounded by an education system that “fails to equip workers with the right skills”, and the prevalence of large-scale government projects, “which allow firms to make large, low-risk profits on ventures that do little to boost long-run growth”.
One consequence of weak productivity is that Saudi nationals have tended to seek employment in the public sector where wages are higher, thereby throttling future private sector growth, Capital Economics adds.
“The result is that Vision 2030 is likely to fall short of its lofty intentions,” the report warns.
It forecasts only a “modest” boost to productivity growth, from 0.7 percent per annum on average in the previous decade to 1-1.5 percent over the coming years.
Overall GDP growth is likely to remain sluggish at a modest 2.5-3 percent as a result, the report forecast, almost half the rates recorded during the boom years.