Table of content
Introduction
2
GDP per capita
3
GDP by sector
3
Important role of oil industry in GDP
3
Employment (foreign labor force in Saudi Arabia)
3
Inflation
4
Inward FDI
5
Effort of the government to increase economic development
7
Conclusion
8
Saudi Arabia is one of the world’s fast growing economies with much of its revenue being sustained by oil. The production of oil has been on the rise while taking into account oil prices in the international market, the Saudi Arabia economy is still largely to be sustained by revenues from oil export. The Saudi Arabian economy grew tremendously after the discovery of oil shifting its economic pillars from agriculture to service and oil industry. The state is also making effort to further increase the economic development by engaging in massive investment programs especially in infrastructure and other social amenities. It is projected that the country GDP growth rate for the year 2013 is 5.2 percent. This focus rate is considered one the highest in the gulf region. The key factors identified to drive this growth rate include, strong capacity for loss absorption mainly underpinned by strong profitability and high capital buffer, and low levels of problem loan. In addition, other key drivers for the growth prospects in the country’s GDP include increase in oil process, and the new spending priorities of the government including, social welfare, job creation, housing, and infrastructure.
GDP per capita
GDP per capita is one of the economic development indicators used to measure a country’s income and national output. It is derived by considering the total expenditure for every product produced within a country in a period of one year. Saudi Arabia’s GDP per capita was reported by the World Bank to be $20,540 in 2011. This figure is equivalent to more than three quarters of the world’s average GDP per capita.
GDP per capita
Table 1: GDP per capita
GDP by sector
The three main economic sectors in the country include agriculture industry and service. Industry accounts for the highest percentage of the country’s GDP at 69%; service comes second at 28.9 percent while agriculture makes a less significant contribution at 2.1%.
Sector
Percentage composition
Table 2: GDP composition by sector
Important role of oil industry in GDP
Saudi Arabia’s oil industry plays a central role in supporting its economy and GDP since the industry is the largest such industry in the world. The production of oil in the country accounts for approximately 13% of the global oil production. Having the privilege to exercise supremacy in the global oil industry, the country has strong influence in both oil production and the international oil market. This privilege guarantees the country the rights to dictate the policies and rules governing the market. Therefore oil plays a very important role in Saudi Arabia’s Gross domestic product. It accounts for nearly 55% of the GDP and more than three quarters of the government’s revenues.
Employment (foreign labor force in Saudi Arabia)
The Saudi Arabia labor market has encountered a number of issue that cause structural imbalances. For instance, the labor market depends heavily on foreign laborers the supply of labor has a wide disparity in relation to gender, disparities in payment between foreigners and locals with similar educational levels, and high unemployment for the locals especially the youths. According to data from CIA world fact book, the country’s labor force is composed of 80 percent non-nationals in a total labor force of 7.63 million. In 2010, the unemployment rate in the country was at 10.50 percent.
Jan 2006
Dec 2006
Jan 2008
Dec 2008
Jan 2010
Dec 2010
Unemployment rate
Table 3: Annual rate of unemployment from January 2006
Two dominant features of the labor market in Saudi Arabia are reliance on foreign labor and the unattractive employment conditions targeting locals. The private sector which accounts to over 40 percent of the country’s GDP is known to employ foreigners for the numerous opportunities available. At same time, the private sector tends to offer high wages to foreign laborers compared to nationals and targets nationals for the unattractive employment opportunities. However, on the other hand, the public sector prefers to offers employment opportunities to its nationals. In other words, the public sector is dominated by nationals while the private sector is dominated by foreigners.
Inflation
Annual inflation rate in Saudi Arabia has always been kept at an average rate of 5.0 percent since 2006. It hit its highest percentage ever of 9.9% in 2008 due to the world economic crisis. However, since 2008, inflation index has reduced hitting a low of 4.9% in 2011.
Food and beverage index
Fabric clothing and foot wear
Other services and expenses
Transport and telecoms
Education and entertainment
Overall inflation index
Table 4: inflation index
Figure 1: Inflation index
Inward FDI
Saudi Arabia and other countries in the gulf cooperation council has had difficulties sustaining and let alone attracting inward foreign direct investment. According to the world investment report 2012, there has been a significant drop in collective FDI in the gulf cooperation council. However, since Saudi Arabia has an economic might in the gulf region, the inflow of foreign direct investment has been high compared to other states in the region. Essentially, Saudi Arabia is the top destination of FDI in the Arab world with majority of the foreign investment coming from the US, Kuwait, France, and Japan. The foreign direct investment is further boosted by the growing consumer market in the region. The consumer market is growing at a high rate and this provides an opportunity for foreign goods to be consumed locally. According to data from the central department of statistics revealed that the country’s population grew by 20% from 2004 to stand at 27 million.
The inward foreign direct investment attraction index considers certain determinants in an economy for FDI. These include: market attractiveness, availability of cheap or low cost labor, presence of natural resources, and enabling infrastructure. The above factors are all attractive in the country, thereby making foreign countries invest in various sectors of Saudi Arabia.
Figure 2: Inward and outward flow of foreign direct investment in Saudi Arabia (in billion dollars)
In 2010, the collective foreign direct investment in Saudi Arabia dropped sharply according to the world investment report 2012. This is show in the graph above. The inward flow of foreign direct investment has been on a decline since 2008. However, with increase in trade relations with neighboring countries, the outward flow of foreign direct investment has increased after the 2009 drop. Increase in outflow of foreign direct investment in the country is mainly attributed to the increase in oil revenues. There was a rise in oil prices in 2010, thereby translating to more money for the oil producing country.
According to the world investment report, Saudi Arabia and other states in the gulf cooperation are still making recovery from the cancelation of many projects from multinational corporations. The drop in flow of foreign investment can be attributed to the suspension and cancelation of these projects as a result of the impacts of global economic crisis. Some the projects that were proving successful in the pre-crisis period had to be stalled because of lack of funding for their completion or initiation. The report also mentions that soon after the recovery of the country’s economy from the effects of the economic crisis, the projects were revived. However, further drop of inward foreign direct investment was aggravated by the effects of the Arab spring. The worth of projects in construction canceled in the wake of the uprising within the entire MENA region is estimated to be more than $trillion dollars. One critical area that was boosted in the pre-crisis period is constructions. This is primarily due to the decade of oil boom. Construction is a critical economic indicator in investments since it supports industries such as real estate, petrochemical, refineries, infrastructure, tourism, and housing.
The prospects for increase in inward flow has been projected to remain negative based on data analysis on the Greenfield investments and sales from the cross border M&A within the period between January 2012 and May 2012. There are still uncertainties in both the regional and global levels with regards to investments. This is likely to further impact inward flow of foreign investments negatively. However, the prospects for growth of FDI in the Saudi Arabia are likely to be boosted by the strategic plan to diversify the economy and cut over reliance on oil and gas. This plan is expected to create more opportunities that increase the attractiveness of the country to inward foreign direct investment.
Effort of the government to increase economic development
In response to the economic situation in Saudi Arabia, the government resolved to increasing economic development through various ways. One critical strategy which has been a political priority in the country is the plan to diversify the economy from over reliance on oil revenues. The economy diversification plan is aimed at creating job prospects to a growing population of young professionals in the service industry. It is also aimed at making the economy attractive to foreign direct investment. Prior to the global economic crisis the country only saw the oil revenues as its platform for change, however, the oil boom was cut short by the world economic crisis and the fact that it is not a sustainable energy.
In response to the issues faced in the labor market, the government has moved to introduce measure that will see more Saudis employed in the private sector. One such measure is improving the education and skills level for the nationals so that they can begin to compete for some of the opportunities in the private sector which tend to attract highly skilled foreigners. In addition, since the economy largely depends on the oil industry, most technical employment opportunities target foreigners. However, the government has moved to diversify creation of employment by shifting the economy from the oil sector to service and infrastructure.
Another effort by the government to increase economic development is continued spending in infrastructure, education, and health projects due to the increase in population. The government, in its development plan, also intends to construct six economic cities which are expected to make significant contribution to the country’s annual GDP in addition to creating more than 1 million job opportunities. The surrounding region is marked with growing insecurity and with these development efforts underway, there is need for the country to also invest in security measures to protect its borders from security threats. In response to this need the government of Saudi Arabia signed a pack, in 2010, with the US for a supply of military equipment worth $67 billion. This deal was mainly focused on upgrading its military aircraft and the navy.
Conclusion
Reference list
CIA. (2012, October 16). The world factbook: saudi arabia economy. Retrieved from Central Intelligence Agency: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
IMF. (2011). Regional Economic Outlook, Middle East and Central Asia. International Monetory Fund.
IMF. (2012). Saudi Arabia 2012 article IV consultation. Washington: International monetary funds.
The World Bank. (2012). Data: Saudi Arabia. Retrieved from The world bank: http://data.worldbank.org/country/saudi-arabia
UNCTAD. (2012). World Investment Report 2012: towards a new generation of investment policy. Geneva: united Nations Conference on Trade and Development.
