Investing In Saudi Arabia Market
Investing in Saudi Arabia market
Introduction
The Saudi Arabia economy has for long been driven by the performance of the oil market. The entire economy has also been primarily managed by the government leaving little room for the private sector. The existence of many government bureaucracies has also in the past hindered the development of the private sector. The strict Islamic culture has also been a challenge for the operation of the business from the open economies. The period 2003 to 2013 marked one of the largest oil booms in the history of the country. The oil prices in the world market reached an all-time high, hitting above $100 at the end of 2013 (Rugman, 2016). The average household incomes increased by 75% within the oil boom period which improved the purchasing power of the customers.
At the time the country's nominal GDP reached $750 billion, achieving the status of one of the largest economies in the world (Rugman, 2016). As a result, the Saudi economy advanced at very high rates becoming the 19th largest economy in the world (Rugman, 2016). There was a significant investment in the education, health, and infrastructural sectors. The government also increased its reserve to amounts equivalent to 100% of the GDP. In the country experienced some of the highest growths ever. However at the beginning of 2014 the economy took a downturn as the prices of oil started fluctuating. It is important to mention the fact that the Saudi economy has for long been deriving 90% of its revenue from the oil and gas sales and hence the drastic changes after the oil prices started falling (Rugman, 2016). A lot of jobs were lost, and the highly performing industries such as construction declined.
There were reduced resources to fund all the sectors due to the over-reliance on the oil revenues. The spending on the education, health, and infrastructural sectors had to be reduced so that the funds were directed to other areas of the economy (Albejaidi, 2010). The government felt the heat of the low oil prices as the revenues on the oil dwindled, with the increasing need to restructure the government sectors to cope with the situation (Dawisha, and Zartman, 2015). There was a need to adopt a more pragmatic approach to transforming the economy to respond to the drastic changes of the world informed by the rapid shifts in the technological areas (De Bel-Air, 2014). The prevailing circumstances compelled the government to develop a blueprint to take the country's economy to the next level in the face of the reduced revenues from the oil and gas sectors (Nassuora, 2012). The existing economy and the investment environment was not conducive for the much-needed investments across all the segments of the economy forcing the government to move fast to create reforms that were responsive to the needs of the economy.
Literature Review
In anticipation of the transformation to develop the country's economy, it was clear the government had to shift from the earlier concentration in the government led economic model to a private sector driven model which allowed the forces of the market to guide the development path (Sarathy,et al. 2015). According to experts in the government there was a need to adopt a market- based approach where the government had little role in the regulation of the markets, with more emphasis on the supply and demand forces. There was the need for more participation of the Saudi men and women and hence away from an economy that for long had been driven by the contribution of the foreigners (Al Mallakh and el Mallakh, 2015). It is important to state the fact that over 50% of the workforce constituted of immigrants during the period in 2014 .Regarding the total population, the foreigners consisted of one-third of the total population but contributed only 23% of the total household incomes (Ouda, Al-Waked, and Alshehri, 2014). The rationale behind the low contribution by the foreigners to the home benefits is that the immigrants earn relatively low wages in comparison to the Saudi nationals. In fact, some of the sectors such as construction and manufacturing constitute 90% aliens as the workforce (Zamberi Ahmad, 2011). The statistics illustrate that the country has a significant number of foreign workers working in different sectors, which an essential issue to understand for project managers.
Therefore, the plan for the reforms was also to focus on the plight of the foreign workers so that they could earn higher wages than they did at the time. The pundits in the government and the private sector felt there was a need to better the business regulation to enhance the environment for trade, investment and encourage investment across all the segments of the economy (Cuervo-Cazurra, et al., 2014). The general feeling was that such openness would diversify the sources of the government revenues by expanding the bases of income. It was pointed out that education of the country required significant reforms to respond to the country's development agenda (Altaf, 2015). Experts in the field felt that the school system lacked relevance to align with the development needs of the economy as there was a mismatch between the available skills and the needs of the labor market, which required urgent rectification.
The many hurdles in the government were a major factor in slowing down the contribution of the private sector in the development of the economy (Albejaidi, 2010). Experts felt that there was an urgent need to eradicate the bottlenecks to encourage the contribution of the private sector to support job creation and hence economic growth. In the prior arrangement of the high levels of the government there existed duplication of the government functions and therefore the existences of wastages in the government expenditures (Robertson, & Al-Zahrani, 2012). There was a concern the government services had to be restructured to give ensure value for money. Such a measure would ensure the dwindling revenues from the oil would be directed to more sectors than before. Such a strategy would also eliminate the overreliance on the exports so that the economy could generate more resources internally. Therefore there an urgent need to create a blueprint to guide the country in the next phase of development the exploration of other sectors to generate incomes for the government was an even whose time had come (Ouda, Cekirge and Raza, 2013). The involvement of the Saudi nationals had to be increased as a measure to ensure that most of the wealth generated remained in the country to form the capital for investments into the various sectors of the economy.
The identification of the challenges led to the creation of a detailed implementation plan for the proposed plans as a groundwork to achieve the vision 2030. The implementation plan consists of the strategies that emphasize the leveraging the existing resources and the human capital to move the economy forward. The detailed blueprint focused on the sectors that required the attention for economic development (Raphaeli, 2005). Such areas include the education, health, Infrastructure, retail and wholesale sectors, manufacturing, mining, finance, technology among other key sectors. The document is a comprehensive agenda to guide the country on the achievement of the vision 2030 through focusing on the key areas that would align the country with the development needs of the 21st century and in contexts of resources available in the country (Al-Gahtani, Hubona, and Wang, 2007). As such, an overall development of the economy plays an imperative role in ensuring that social and economic needs of a country a country.
The program also aimed to promote transparency in the implementation of the government programs as an effort to win the confidence of the private sector and hence attract more investments into the country (Shaahid, Al-Hadhrami and Rahman, 2014). Increased levels of transparency and accountability would strengthen the achievements of the targets and outcomes, so the government agencies are held more accountable for the implementation of the government agenda. The effort would demonstrate the government's commitment to embrace a different culture in the conduction of the government affairs as measure t win the support of all the people and the international community. Transparency would also be crucial in the government procurement process so that there is little wastage and seal all corruption loopholes so that the available resources could be applied to meet more areas of the government programs (Al Hashemi, et al.2014). The issue of transparency would also be extended in the overhaul of attitudes to make the people acknowledge their roles at the individual level in the uplifting of the country's economy.
The program also emphasized the comprehensive auditing of all the government programs so that there is a continuous improvement of the assessment mechanisms to ensure that the country remains on track for the achievement of the vision 2030. The audit would extend to the investment opportunities in the country to provide reliable information to both the private and international investors to ensure their part in the improvement of the Saudi Arabia economy. The audit would provide the government with the necessary details on the areas that the government needs to improve as a measure to determine the method for resource allocation (Robertson and Al-Zahrani, 2012). The auditing involved the status of the human capital in the country to mobilize resources for the training endeavors.
The program also aimed at developing the initiatives designed to reach the strategic objectives of the Saudi Arabia vision 2030. The government was aware of the fact that the task at hand was uphill and therefore had to create comprehensive endeavors to make the vision a reality. Every state development plan starts with the creation of policies that lay the legislative framework to achieve the objectives. The reformation of the entire court process was crucial which lead to the empowerment of the courts in the 24 different regions as merchant arbitration centers to ensure that all the investment issues are resolved amicably. The collaboration of the governors with judges in the regional court was considered a significant milestone to the arbitration of the investment related matters (Abed, Dwivedi, and Williams, 2015). It was a measure to enhance the confidence levels with the investment climate and therefore encourage the investors to inject more funds into the areas that required the attention to alter the economic fortunes of the country.
In-kingdom total value add (IKTVA) program
The program was formulated as another document to accelerate the objectives of the Saudi Arabia vision 2030 (Bahaddad, AlGhamdi and Alkhalaf, 2015).The report was quite detailed and offered the comprehensive information on the areas that required urgent transformation to put the economy of the country back on track after the fluctuations of the oil prices and hence government revenues (Schwalje, 2014). One of the major proposals of the program is the emphasis on equal opportunities among the males and the female gender to ensure that the country leverage on the diverse skills of all the people (Bradley, 2015). The proposal would ensure that both men and women acquire status in their effort to contribute to the economy of the country. It is essential to note that the country is ranked lowly in terms of providing equal opportunities to women and men, in a society characterized by male chauvinism as a result of religion that significantly influences social decisions.
Equal opportunities in education, training, and employment would position the country to compete globally with the rest of the major nations in the world (Maroun, et al. 2008). The education would be structured in such a way that it responds to the demands of the economic growth of the country. As such, the school curriculum would be created in a way that attracts the diverse talents across the country. The identification of the skills would then act as an essential guide for the country in the areas of economic development to direct the resources. The issue of skills availability has been identified as among the primary factors inhibiting the diversification strategies of the country. The majority of the country’s workforce working in different sectors are foreigners an issue that has affected the flow of foreign direct investments. The majority of the investors are required to outsource labor from other countries, which is in most cases expensive. The provision of equal opportunities can play an imperative role in ensuring that a country’s workforce is developed in an effective manner an issue that plays an imperative role in the process of development.
In the program, the role of the small medium enterprises in the creation of the employment opportunities was recognized as the engine of the economic growth. The sector would also widen the tax revenue base for the kingdom and facilitate the more participation of the private as a major component of the economy. In the program, the entrepreneurship would be encouraged through the liaison with the banks and the financial institutions so that the commercially viable ideas are supported to create opportunities and increase the government revenue the netting of more taxes from the private. The program introduced the privatization of the government services as a measure to improve efficiency and enhance transparency in the management of the public affairs (Baki, 2004). The actions to entrust the private sector with the management of government services would lower the cost of running the government and therefore save funds which could be directed to other critical areas such as education and health.
The program would create channels for the diversification of the economy so that more focus is directed to other sectors such as manufacturing and the service industry to create more centers for the growth of the economy and reduce pressure on the traditional areas of oil and gas. The program would also inject investment capabilities of the country by exploring other areas that had been ignored for long (Mohammad, 2015). All the efforts were aimed at job creation to recover from the effects of the economic downturn after the period following the oil boom of the last fifteen. Based on the global oil prices projections, the price of oil is expected to remain low for an extended period, which is a disturbing issue for the KSA government and economy. As such, there have been increased focuses on diversification strategies aimed at reducing the deficits created as a result of reducing oil prices that consequently reduce the country’s revenue.
It is crucial to mention that the government was keen to focus on the untapped sectors to ensure that they equally contribute to the development of the economy. An area such as mining had been neglected for long, yet the sector retains the potential to substantially alter the fortunes of the country by the year 2030 (Borchert, Gootiiz, & Mattoo, 2014). According to the program formulation, more funds would be directed public investments as a measure to generate opportunities for the Saudi nations and the foreigners alike as the past had seen more resources redirected to recurrent expenditures leaving little funds for investments. As such there had no significant investments in the public projects and therefore stagnate the economy (Al Mallakh and el Mallakh, 2015). The increase in the public investment funds would see the assets increase from SAR 600 billion to SAR 7 trillion by the year 2030 to bring about the much-required stimulation of the economy.
The ARAMCO program also aimed to localize the oil and gas sectors from 40% to 75% so that the accrued profits are held by the local companies and therefore reinvested into the country to further accelerate the rate of economic growth. The investment in the energy sector would be a prudent measure to ease the pressure on oil and gas industry. In that end, there would increase direction of the resources in the wind and the solar energy sectors in line with the spirit of the development of green energy to reduce global warming occasioned by the climate change (Al Mallakh and el Mallakh, 2015). The program advocates for the rehabilitation of the industrial cities through the provision of the incentives to businesses which had either collapsed or experienced little productions due to the changes in the economic terrain (Moser, Swain, and Alkhabbaz, 2015). The program also supported the creation of the special zones for logistics, industrial and finances to accelerate the investment potential and expand government revenues for predictable development patterns.
The program also focused on increasing the level of foreign direct investments (FDI) from 3.8% to 5.7% of GDP. The increase in the foreign direct investments would enhance the contribution of the private sector from 40% to 65% of the GDP so that the industry can play a more active role in the development of the economy (Al Mallakh and el Mallakh, 2015). The program also supported increased emphasis on the application of the e-government on most of the government operations to streamline the processes and make the government more responsive to the needs of the people (Al-Tally, 2014). Finally the program aimed to create an environment in all the sectors of the economy to ensure the existence of favorable factors that would move the country into the top 15 economies in the world. It is essential to note the country is ranked 94th in terms of ease of doing business globally, which is not a good ranking owing to the increased competitiveness across the globe. For this reason, the country has been launching various projects aimed at enhancing its responsiveness to global investors an issue that seen the country improve particularly based on its previous rankings.
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