The Kingdom of Saudi Arabia is classified as a high income non-OECD economy by The World Bank. It is an oil-based economy and the leading producer of oil and natural gas in the whole world. In 2011, oil production is at 10 million barrel per day. As reported in BBC.com, Saudi holds more than 25% of the world’s oil reserves and owns the largest hydrocarbon reserves (http://www.bbc.co.uk/news/world-middle-east-14702705). To date, the country is considered as the world’s leading oil exporter. With strong government control over the major economic activities, the Kingdom’s economy is heavily sensitive to developments in the international oil markets, In particular, the minister gave assurance to the international market that adjustments will be made to oil output in response to market shortages.
The country has membership of international groups/organizations like World Trade Organization, Arab League, Gulf Co-operation Council, Organization of the Islamic Conference, United Nations, Organization of Petroleum Exporting Countries, International Monetary Fund and World Bank.
Saudi Arabia has a total area of 2.15 million square kilometers. With a total population of 28.08 million (data.worldbank.org, 2012), Saudi Arabia is inhabited by Arabs and 8.5 million foreigners. The official language is Arabic; English is spoken in business circles. Its capital city is Riyadh w6ith a population of 4.725 million. Other major cities include Jeddah, Mecca, Medina and Ad Dammam.
Strengths of the Economy of Saudi Arabia
The strengths of the Saudi Arabia’s economy lies on its reasonable GDP growth rate, and large current account surplus.
Increasing GDP growth rate. Figure 1 depicts the growth in the gross domestic product (GDP) of Saudi Arabia. The World Bank reported that in 2008, the economy experienced a GDP growth rate of 4.2%, followed by a drop in the growth rate in 2009 (0.1%). An increase in the growth rate was recorded in 2010 (4.6%) and 2011 (6.8%).
Figure 1: GDP Growth (2008 – 2012)
Source: The World Bank, 2012
The textbook basics tell us that the economy’s GDP is the total value of all goods and services produced within the country during a period of time. It is a key indicator in measuring the health of an economy, that is, it is a sign if the economy is doing well.
A healthy economy is characterized by low unemployment and increase in wage, while an unhealthy economy is characterized by high unemployment and decrease in wage.
The GDP growth rate is the measure of how fast the economy grows. Since GDP is the gauge of the economy’s health, the growth in GDP depicts improvement in the economic health of the country over time. The increasing rate in the growth of Saudi’s real GDP simply indicates that economy’s is doing well in current period and in the succeeding years, ceteris paribus.
Also, the economic real GDP growth in 2011 is double the regional average of 3.5%. Also it exceeds the global average of 3.9%.
Large current account surplus. The current account balance of an economy, as defined by The World Bank, is the sum of net exports of goods, services, net income, and net current transfers. A positive current account balance (surplus) indicates that the economy experience inflow of payments for the goods and services that it produced for a given period. In relation to export and import, the economy is exporting more rather than importing. Figure 2 depicts the current account balance of Saudi Arabia as a percentage of GDP. The data reveals that percentage share of exports in the GDP of the economy is impressively increasing from 5.56% in 2009 to 27.48% in 2011. The increase was due to a near 40% rise in the average price of oil and a 6.3% rise in production.
Figure 2. Current Acount Balance as Percntage of GDP (2008-2011)
Source: The World Bank, 2012
This is further supported by Figure 4 which indicates that as the nominal GDP increase, current account balance also increases. The data is consistent with the Saudi Arabia government’s effort of increasing oil production to meet the demand of the international market. As an exporter of oil, a current account surplus implies that the economy is exporting more oil to the rest of the world. This also suggests that the increase in GDP is due to increasing net exports as shown in Figure 3.
Figure 3. Exports and Imports of Saudi Arabia (% of GDP), 2008-2011
Source: The World Bank, 2012
Figure 3 illustrates that the country’s exports of goods and services as percentage of GDP is at 61.61% in 2011. The increasing trend was recorded after the low economic performance in 2009. Also, the above figure shows that the country’s exports exceeds its imports, implying a net inflow of revenue to the economy.
Figure 4. Nominal GDP and Current Account Balance (2008-2011)
Source: The World Bank, 2012
Further, Figure 4 depicts the increasing current account balance in relation to the nominal GDP. The high value of nominal GDP also captures the increase in the price of oil in the international oil market.
Figure 5. Exports and Imports of Goods and Service (BoP, Current US$)
Source: The World Bank, 2012
The exports of goods, services and income and the imports of goods and services as components of the current account balance of Saudi Arabia’s BoP shows that the economy experiences net inflow, and hence current account surplus.
Weaknesses of Saudi Arabia’s Economy
The weaknesses of the Saudi Arabia’s economy lies on the following: low economic diversification, low GDP per capita, and high unemployment.
Low economic diversification. As reported in BBC.com, Saudi holds more than 25% of the world’s oil reserves and owns the largest hydrocarbon reserves (http://www.bbc.co.uk/news/world-middle-east-14702705). These reserves are extimated to last for 80 years given the production level at present. To date, the country is considered as the world’s leading oil exporter. It is noted from Hammarlund (2012) that oil accounts for 95% of the economy’s exports and 80% of government revenue; and the oil sector accounts for half of the Saudi’s GDP. Given this dependence on only one commodity, changes in the price of oil in the international market likely results to fluctuations and unpredictability in the country’s balance of payments (BoP) as well as public finances.
Low GDP per capita. Figure 6 depicts the GDP per capita growth of Saudi Arabia. It can be viewed as the contribution of the individual members of the population to the annual GDP (Mankiw, 2001).
Figure 6. GDP per Capita Growth (Annual %)
Source: The World Bank, 2012
It is a significant economic indicator as it reflects the average standard of living of the individuals in the society. An increase in the nation’s GDP per capita signifies economic growth while a decrease in GDP per capita implies decline in the economy. Moreover, it serves as yardstick in classifying countries as rich, developing or poor. A regular monitoring of the country’s GDP per capita may also prevent inflation which is a product of an increasing power of the population.
Figure 6 depicts the growth rate of GDP per capita. The figure reveals that though there is an increase in the growth rate of per capita GDP, the increase is considered as low. Also, the rising growth rate just took off after the slump in economic activity in 2009. This implies that the individuals in the economy are enjoying a better standard of living as the members of the society are also enjoying high purchasing power given the quite stable price level (especially from 2009 to 2011) as indicated in Figure 7. The inflation rate is a measure of inflation. It is defined as the rate of increase of a price index like the consumer price index. It is the percentage rate of change in price level over time, usually one year. The rate of decrease in the purchasing power of money is approximately equal.
Figure 7. Inflation Rate (2003-2011)
Source: The World Bank, 2012
High unemployment. The most pressing problem of Saudi Arabia’s government is the increasing level of unemployment as depicted in Figure 8. The unemployment rate in Saudi Arabia was last reported at 10.50 percent in 2010. The unemployment rate can be defined as the number of people actively looking for a job as a percentage of the labor force. The labor force is defined as the number of people employed plus the number unemployed but seeking work. Changes in unemployment depend mostly on inflows made up of non-employed people starting to look for jobs, of employed people who lose their jobs and look for new ones and of people who stop looking for employment.
Figure 8. Unemployment Rate (2008-2011)
Source: The World Bank, 2012
The World Bank Database. Accessed from http://www.worldbank.org
Hammarhund, Per (2012). “Saudi Arabia: Country Risk Factors”. Accessed on November 9, 2012 from http://taz.vv.sebank.se/cgi-bin/pts3/mc1/MB/mblib.nsf/a-w/60D1A8A40ADA0469C1257A0F004E3942/$FILE/Saudi_Arabia_April_2012.pdf
Mankiw, Gregory (2001). Principles of Economics. 3rd ed.
Saudi Arabia Profile. BBC News Middle East. Accessed from http://www.bbc.co.uk/news/world-middle-east-14702705
Saudi Arabia Country Profile. Central Intelligence Agency. Accessed from http://cia.gov
