Saudi Arabia Poised to Become World’s Fastest-Growing Economy

Saudi Arabia is poised to become the world’s fastest-growing economy this year, displacing India from the top spot due to weak demand at home and abroad.

The Saudi economy grew by 8.8% in the third quarter of 2022 compared to the same period in 2021, primarily due to a significant increase in oil-related activities. Bloomberg predicts that Saudi Arabia will outpace India in economic growth this year, with growth reaching 7.6%, making the kingdom the world’s leader in economic expansion.

This follows the Reserve Bank of India’s announcement of growth expectations of 6.8% by the end of March last year, with Saudi Arabia taking its place due to rising energy prices. In December 2022, the Saudi Cabinet approved the general budget for fiscal year 2023, with total spending of SAR 1.114 trillion ($297 billion), revenues estimated at SAR 1.13 trillion ($301 billion), and a surplus of up to SAR 16 billion ($4.2 billion).

There are several major factors behind this economic boom:

Saudi Arabia is the world’s largest oil exporter and has been benefiting from rising oil prices in recent months.

The kingdom is also investing heavily in non-oil sectors, such as tourism, manufacturing, and renewable energy, in an effort to diversify its economy.

The Saudi government has also taken steps to reform its economy, such as reducing subsidies and improving the investment climate.

These factors are all contributing to Saudi Arabia’s strong economic growth. If the current trends continue, the kingdom is well-positioned to become the world’s fastest-growing economy in 2023.

The increase in oil-related activities in Saudi Arabia was driven by higher crude oil prices, which averaged $85 per barrel in the third quarter of 2022.

Moreover, the non-oil sector also grew in the third quarter, albeit at a slower pace than the oil sector. This was due to strong growth in the tourism sector, which benefited from the easing of travel restrictions.

The Saudi government’s budget for fiscal year 2023 is based on an oil price of $75 per barrel. If oil prices remain above this level, the kingdom could see even stronger economic growth.

Overall, the outlook for the Saudi economy is positive. The kingdom is well-positioned to become the world’s fastest-growing economy in 2023, thanks to rising oil prices, strong government spending, and a focus on economic diversification.

Saudi Arabia Makes Progress on Economic Diversification

The Arab Gulf States Institute in Washington has recently said that the Saudi government has made significant progress on economic diversification under Vision 2030. The institute cited progress in four areas: exports, output, government revenue, and employment.

Exports

Oil still dominated the Saudi economy in 2022, accounting for 74% of total exports of goods and services. However, this is well below the 84% average share in 2012-13.

The decline in the share of oil in Saudi exports is due to the expansion of petrochemical exports and tourism. The share of petrochemicals rose from 9% of goods and service exports in 2012-13 to 12% in 2022. Travel exports (what Saudi Arabia receives from non-nationals visiting the country) increased from 2% in 2012-13 to 5% in 2022.

Output

The private sector’s share of the kingdom’s nominal gross domestic product (GDP) grew from 37% in 2012-13 to 39% in 2022. The non-oil sector, which includes the public and private sectors, made up 56% of GDP in 2022, up from just under 52% in 2012-13.

Correspondingly, the private sector’s share of GDP in real terms (after adjusting for price effects) was 41% in 2022, compared to 39% in 2012-13. Within private non-oil activities, real estate, retail and wholesale trade, manufacturing (likely mostly petrochemicals), and community, social, and personal services had the most significant growth.

The correlation between non-oil private sector GDP and oil prices remains high but has fallen since 2013. This decline is suggestive of private sector economic activity becoming less dependent on oil prices than in the past.

Government Revenue

Saudi Arabia has made significant progress in diversifying the sources of government budget revenue. Non-oil revenue rose to 32% of total government revenue in 2022, up from less than 10% in 2012-13. The introduction of the value-added tax (VAT) in 2018 and the rate increase from 5% to 15% in 2020 have provided most of the boost to non-oil revenue.

Employment

Diversification in the labor market is more difficult to define than in the three areas considered above. Here, labor market diversification is equated to a reduced reliance by private companies on non-Saudi workers and a lower reliance by Saudi nationals on employment in the public sector.

Across both dimensions, progress has been made, although data limitations prevent a complete analysis. Saudi workers accounted for 23% of total employment (Saudi and non-Saudi) in the private sector at the end of 2022, compared to 16% in 2016 (the earliest year for which data is available).

The share of Saudi workers identified as employed in the public sector fell to 42% at the end of 2022, down from 45% in 2016. While this data understates the number of Saudis working in the public sector as it excludes those working in the military and security services, it also excludes private sector workers not registered with the general organization for social insurance, such as “gig” workers.

The institute concluded that the Saudi government’s economic diversification efforts are having a positive impact on the economy. However, it noted that there is still more work to be done, particularly in the labor market.