Deputy Crown Prince Muhammad Bin Salman, second deputy premier and minister of defence who is also the chairman of the Council of Economic Affairs and Development, said the reforms were designed to transform the world’s biggest oil exporter into an investment power and modernise its economy.
Vision 2030
The centrepiece of the “Vision 2030” plan was a decision to sell up to 5% of the state-owned oil company, Saudi Aramco, which is expected to value the whole firm at over $2trn, and be the world’s biggest ever initial public offering.
The money raised from the sale would help fund an expansion of Saudi Arabia’s Public Investment Fund (PIF) to SAR 7trn (£1.3trn, $1.9trn) from the current SAR 600bn.
The prince said in a televised interview with al-Arabiya news channel, which is owned by the Al Saud ruling family, the country also aimed to invest more in mineral mining and expand its military production.
Salman said the kingdom, which hosts millions of Muslim visitors to the holy cities of Mecca and Medina each year, would also become more hospitable to other types of tourists. While a “green card” system would be launched within five years to give greater rights to expatriate workers.
Diversification needed
Beyond these proposals the full details of the reforms remained sketchy though more information is expected when the government publishes its National Transformation Plan (NTP) covering the next five years, which reports have suggested will target 18 sectors of the economy for possible privatisation.
The new reform plan comes just a week after Saudi Arabia tapped the international loan market for $10bn and reports emerged that it planned a first ever sovereign bond issue.
“If they are going to diversify their economy, which they seem committed to do, then diversifying with floatations and international bond issues is probably the best way to do it rather than drawing down on existing investments or international reserves,” said Nicholas Wilson, chairman of Qatar Investment Fund and an investor in the region for several decades.
Growth cut
The announcement of the Saudi reforms came on the day that International Monetary Fund (IMF) cuts its estimate for economic growth in the kingdom and for the rest of the Gulf nations for this year.
Growth across the six nations of the Gulf Cooperation Council (GCC) is forecast to slow to 1.8% in 2016, down from 3.3% in 2015, with fiscal deficits reaching an average 11.6% of gross domestic product due largely to the slump in world oil prices.
“In the GCC, economic activity is projected to slow further. Ambitious fiscal consolidation measures are being implemented this year, but budget balances will deteriorate nonetheless given the sharp drop in oil prices,” the IMF said in an update of its Regional Economic Outlook.
“An additional and substantial deficit-reduction effort is required over the medium term to restore fiscal sustainability,” it said.
The IMF said the oil prices have fallen by nearly 70% since mid-2014 to about $40 a barrel. “Futures markets anticipate oil prices to recover only modestly to $50 a barrel by the end of this decade, though much uncertainty surrounds this forecast,” it added.
