Economy & Global Trade
Saudi Arabia’s free-market economy has undergone remarkable changes in a relatively
short period
of time. It has evolved from a basic agricultural society into a regional and global
economic
power with a modern infrastructure.
Petroleum is an integral part of the Saudi economy; Saudi Arabia is the world’s
largest producer
and exporter of oil. In recent decades the Kingdom has increasingly diversified its
economy, and
today produces and exports a variety of industrial goods all over the globe.
The government has an essential role in industrial and economic development. The
Ministry of
Economy and Planning formulates economic and social development plans that set
long-term
economic goals. Additional sectors of the economy are overseen by individual
ministries, such as
agriculture, energy, transportation, communications, and finance.
The private sector is playing an increasingly larger role in the Saudi economy – it
now accounts
for 48 percent of the gross domestic product (GDP). The sector is expected to
continue growing,
especially as Saudi Arabia opens its doors further to foreign investment.
In December 2005, Saudi Arabia joined the World Trade Organization (WTO), a
significant
development that gives Saudi products greater access to global markets, creates
jobs, and
encourages foreign investment.
Building a modern economy
When the modern Kingdom was established in 1932, the Arabian Peninsula was an
agricultural
society that depended on farming and commerce – especially date exports and trade
generated by
pilgrims coming to Makkah and Madinah. It lacked the infrastructure needed to
support the kind
of economic growth envisioned by its founder, King Abdulaziz bin Abdulrahman
Al-Saud.
The discovery of oil in commercial quantities in 1938 changed that. Soon after World
War II,
steady oil exports provided the funds to build a basic infrastructure of roads,
airports,
seaports, schools, and hospitals.
In 1970, Saudi Arabia introduced the first of a series of ongoing five-year
development plans to
build a modern economy capable of producing consumer and industrial goods that
previously had
been imported. The country’s infrastructure was expanded, allowing industry and
commerce to
flourish.
At the same time, the national oil company, Aramco, invested in new production
facilities,
pipelines, plants, and shipping facilities and continued exploring for new deposits
to maximize
earnings from the oil sector, which were needed to fund further growth.
The result has been a steady economic transformation of the country. Today, Saudi
Arabia is one
of the fastest developing countries in the world.
Industrial Cities
While Saudi Arabia’s economic base continues to be dominated by oil, the Kingdom has
taken steps
to diversify the economy.
Today, industrial products make up more than 90 percent of the Kingdom’s non-oil
exports. Saudi
Arabia exports petrochemicals, plastics, metal goods, construction materials, and
electrical
appliances to some 90 countries.
Petrochemical and other oil-based industries are concentrated in industrial cities
in major
urban centers. These plants use natural gas and natural gas liquids that were
previously flared,
as well as refined products from the oil industry to manufacture products that would
in turn
feed non-oil industries.
Concentration on industrial plants in specific areas also facilitates the provision of vital
support services, such as water, power, and transportation.
The Jubail Industrial City on the Arabian Gulf has dozens of factories and industrial
facilities, including a desalination plant, a seaport, a vocational training institute, and
a
college.
The Yanbu Industrial City on the Red Sea has a modern port, refineries, a petrochemical
complex,
and many manufacturing and support enterprises.
The government offered incentives for the establishment of private companies in industrial
cities. The Saudi Arabian Basic Industries Corporation (SABIC), created in 1976, set up
non-oil
industrial facilities that use as feedstock natural gas and natural gas liquids manufactured
by
the oil industry.
SABIC is owned 70 percent by the Saudi government and 30 percent by shareholders from the
six
Gulf Cooperation Council (GCC) countries. SABIC quickly became the backbone of Saudi
Arabia’s
successful industrialization. By 1994, it had 15 major plants operating in Jubail, Yanbu,
and
Jeddah, with an annual production of 13 million metric tons. By 2002, total production was
40.6
million tons of basic and intermediate chemicals, polymers, plastics, industrial gases,
fertilizers, steel, and other metals; this figure is expected to exceed 48 million tons by
2010.
One of the most ambitious economic projects to date is the massive King Abdullah Economic
City
near Jeddah, which broke ground in December 2005. The residential and commercial megaproject
will include a dedicated port, an industrial park, a residential and hotel complex, and
educational facilities.
In 2006, Custodian of the Two Holy Mosques King Abdullah launched similar economic cities in
Rabigh, Hail, and Madinah. Plans are also underway for an economic city in Makkah.
Development Plans
By the 1960s, Saudi Arabia had made major advances in many areas. Roads were
established, a
modern educational system introduced, health care improved, agriculture expanded and
factories
built.
Although the economy largely depended on oil revenues, Saudi leaders resolved to
bring about
basic improvements in the country’s economic structure. The objective was to
diversify the
economy away from oil into other fields.
Achievement of such an economic transformation required deliberate planning and
careful
implementation of a development program with clearly defined objectives. The quest
for economic
development and growth began in earnest with the introduction of the First
Development Plan in
1970. This began a series of five-year plans that continues today.
The first phase of this process was to establish an infrastructure that could
support a modern
economic base. The next was to develop the human resources necessary to help bring
about the
planned economic transformation. Finally, the focus could shift to economic
diversification,
including expansion of the industrial, agricultural and other sectors, an expansion
that is now
well advanced.
The establishment of the physical infrastructure was accomplished in stages during the first
three development plans. As the infrastructure was taking shape, the government launched a
major
effort to expand the industrial base. This was done along with two separate, but parallel,
courses. One aimed at the expansion of the country’s oil industry and the other at
establishing
a modern non-oil industrial sector.
In addition to optimizing revenues from Saudi oil production, the modern oil industry plays
an
equally important role in the development of the non-oil industrial sector by providing the
raw
materials and feedstock that facilitate this growth.
By 1985, with most of the physical infrastructure in place, attention shifted to
diversifying
economic sources.
The Fourth (1985-89), Fifth (1990-94), Sixth (1995-99), and Seventh (2000-04) Plans
all
emphasized strengthening the growing private sector and increasing the efficiency of
the
industrial sector. The Eighth Five-Year Development Plan (2005-09) was devised with
a focus on
increasing foreign as well as a national investment, and on developing human
resources.
Throughout the course of the development plans, Saudi Arabia’s steady but dramatic
industrial
and economic transformation has been accomplished through the careful guidance and
active
support of the government. To judge the success of this effort one need only
consider that in
the 25 years from 1970 to 1995, the non-oil sector’s share of GDP increased from 46
percent to
just over 70 percent and that this GDP tripled, to 125.1 billion U.S. dollars,
reflecting a
growth rate of 8.6 percent in current prices. By 2002, the GDP had reached 186
billion dollars.
Government Support for the Private Sector
The government plays an essential role in industrial and economic development.The Ministry
of
Economy and Planning assists in formulating the five-year development plans that set
long-term
economic goals.
The Ministry of Finance supervises the implementation of the nation’s economic policies. The
Saudi Arabian Monetary Agency (SAMA), the nation’s central bank, oversees the country’s
fiscal
policy.
To facilitate the expansion of the private sector’s role in the national economy, the
government
established five specialized credit institutions, which provide economic opportunities to
many
Saudis who were previously unable to compete in the marketplace. These financial
institutions
have provided loans to citizens for development projects in agriculture, industry, and
construction.
In 1974, the Saudi Industrial Development Fund (SIDF) was the first government
agency set up to
provide interest-free soft loans to enable Saudi businessmen to establish industrial
plants.
These loans can be used to finance up to 50 percent of the capital for a new
factory. SIDF loans
have helped launch thousands of new factories and expand hundreds of existing
facilities.
Since it was founded in 1963, the Saudi Arabian Agricultural Bank (SAAB) has
provided loans for
agricultural projects, farm machinery, and production requirements. The Real Estate
Development
Fund has been financing residential and commercial construction since 1974, with a
unique
program that provides interest-free loans repayable in 25 years. Launched in 1971,
the Public
Investment Fund offers credit to public and semi-public corporations. The Saudi
Credit Bank was
founded in 1973 to provide personal loans for home repair, as well as vocational and
crafts
training.
In addition to the specialized credit institutions, the government offers an array of
incentives
to the private sector. A sweeping reduction in utility and public service fees, implemented
in
early 1992, lowered operating and production costs for private companies, making their
products
more competitive with foreign goods.
Private entrepreneurs are also given access to government information systems specifically
created to help local manufacturers target the best market for their products. Government
agencies such as the Saudi Consulting House, replaced in April 2000 by the broader Saudi
Arabian
General Investment Authority (SAGIA), provide free consulting and support services and
publish
lists of investment opportunities for the production of goods in demand in Saudi Arabia. In
September 2000 SAGIA opened service centers in Jeddah and Dammam in addition to its
headquarters
in Riyadh.
Government tenders also give priority to locally manufactured products and to Saudi
companies.
Saudi industries are exempted from paying customs duties on the import of machinery and
supplies
used in the production of goods domestically.
To facilitate the transfer of technology and expand the operations of the private sector,
the
government also provides various incentives to foreign companies that enter into joint
ventures
with Saudi firms. Far-reaching new investment regulations in 2000, including the removal of
the
need for sponsorship, gave further encouragement to foreign investors.
Banking
Saudi Arabia has a modern banking industry with 13 commercial banks. Saudi banks
provide retail
and corporate banking, investment services, brokerage facilities, and derivative
transactions in
addition to credit cards, ATMs, and point-of-sale transactions.
There are also banks in the Kingdom that provide Islamic banking services. Islamic
banking is a
system of banking that is consistent with the principles of Islamic law (Shari’ah).
It prohibits
usury, the collection and payment of interest, and trading in financial risk.
Saudi Arabia also has a thriving stock market. The total value of shares traded
annually is some
SR 60 billion [US $16 billion]. The Tadawul All-Share Index (TASI) of the Saudi
stock market is
one of the most highly capitalized stock exchanges in the Arab world. TASI was also
one of the
first exchanges globally to set up a full electronic clearing and settlement system
with
immediate transfer of ownership.
The banking and finance sector is overseen by several government agencies. The Ministry of
Finance supervises economic policies. The Saudi Arabian Monetary Association (SAMA) manages
fiscal policy, issues the country’s currency, the Saudi Riyal, and oversees the nation’s
commercial banks.
The government has also established five specialized credit institutions to provide loans to
citizens for development projects in agriculture, industry, and construction – the Saudi
Industrial Development Fund (SIDF), the Saudi Arabian Agricultural Bank (SAAB), the Real
Estate
Development Fund, the Public Investment Fund and the Saudi Credit Bank.
Trade
Saudi Arabia is the 19th largest exporter and the 20th largest import market in the world.
Exports now represent all economic sectors. Topping the list of exports to some 90 countries
are
petrochemicals, plastics, metal goods, construction materials, and electrical appliances.
Saudi Arabia’s commercial sector is growing rapidly. This is mainly due to generous
government
incentives such as the provision of long-term interest-free loans and support services and
facilities. In addition, chambers of commerce and industry in the major cities and regions
promote commercial ventures.
There are some 584,000 licensed firms involved in commercial activities in the
Kingdom. Their
total invested capital is estimated at more than $54 billion.
The sector is overseen by the Saudi Arabian General Investment Authority (SAGIA),
which offers
private entrepreneurs free consulting and support services and publishes lists of
investment
opportunities. In November 2005, SAGIA announced plans to open offices abroad,
including in
China, the United States, Britain, and Germany to attract investment in
infrastructure projects.
The role of the private sector in commerce is substantial – private companies
account for some
48 percent of the nation’s GDP of $248.82 billion. They manufacture, distribute and
sell
domestic products.
Private companies also handle most imports of consumer and industrial goods and the
bulk of the
exports of non-oil products. Saudi Arabia is among the top 20 export and import
markets in the
world, and exports of non-oil products to some 90 countries average around six
billion dollars
per year.
Foreign investment is also growing in the Kingdom. Investors from all over the world are
joining
Saudi partners to set up ventures, attracted by the Kingdom’s political, economic, and
social
stability, modern infrastructure, inexpensive energy supplies, and strategic geographic
location.
On April 11, 2000, Saudi Arabia made it easier for foreign investors in the Kingdom by
introducing a new law giving foreign investors the right to the same benefits, incentives,
and
guarantees offered to Saudi individuals and companies. It also allows foreign investors to
own
property and real estate.
The future of the commercial sector is promising. Saudi Arabia’s membership in the WTO
boosts
commercial activity and provides Saudi products with more opportunities in global markets.
Another positive development is the formation of free-trade zones that Saudi Arabia has
undertaken with several neighboring countries.