Economic Environment of Saudi Arabia - Assignment Example

Economic Environment of Saudi Arabia The sector of petroleum accounts for approximately 55 percent of GDP, 90 percentof export earnings and 92 percent of budget in Saudi Arabia. The private sector accounts for 40 percent of the GDP. Saudi Arabia has approximately 5.5 million foreign workers, for instance, in the service and oil sector, which play a significant role in its economy. The Saudi government supports the growth of private sector so that the country may not over-depend on oil and also to reduce the unemployment rate (Sasson, 31). The Saudi government encourages foreign investors and the private sector to participate in telecom sectors and the generation of power. The Saudi government also tried to diversify its economy and attract foreign investors by signing the 2005 WTO agreement after several years of concession. The high revenue from oil has enabled the Saudi government to have huge budget surplus and Riyadh has been able to assist in infrastructure development, government salaries and education. The score for the economic freedom of Saudi Arabia is 60.6 and this makes it the 82nd freest in the index of 2013. This score is 1.0 points worse compared to last year because of considerable reduction in trade freedom, property rights, corruption freedom and business freedom. It is ranked 8th of the 15 countries in the Middle East and its score is above the world average. The major drivers of the economy of Saudi Arabia is oil and expansionary. The economy of Saudi Arabia has increased at an average rate of 3.5 percent in the past five years. However, there has been a slow progress in the institutional and structural reform. Saudi Arabia has experienced a decline in economic freedom for the last two years. The legal system has remained vulnerable to political influence because of the increased level of corruption. The property rights score is currently below the world average. Apart from some progress in the past years, the regulatory competiveness efficiency and open market strategy is behind the growing economies. Vibrant gains from free flows of investment and trade continue to be undermined by lack of lucidity and bureaucracy. At the end of 2012, the expectation of Saudi Arabia GDP was 8.8 percent as per the financial services company, Al Rajhi Capital. A lot of this expectation was to emerge from the high oil output, energy prices and augmented state expenditure. In 2013, the growth is expected to be average. Local financial groups have estimated that the GDP would expand from 3.3 to 3.5 percent this year because of the ease of energy demands. The stance for non oil sector is viewed as stronger with an expectation of augmentation from 5 to 9 percent (Sasson, 37). While Saudi Arabia’s economy increased in 2013, prices stayed in check. Inflation lingered on 3.6 percent at the end of the year, but this was expected to increase in 2013 if the consumer demand increases, while the outcomes of higher disposable earnings come in. The increase in production of crude oil plus the increase in oil prices has put Saudi Arabia on the track to produce yearly revenue for the energy section. The figures of Riyadh-based Jadwa investments showed that income could attain an annual high of $288 billion in 2012. Al Rajhi Capital reported that the production of oil was much higher than anticipated and it could go up to 8.8m barrels everyday for the first ten months during the year. This is greater that the initial anticipation of 9.45m barrels per day. However, as augmented capacity is experienced in North Africa and the Middle East, with Libya anticipated getting back to optimum production and Iraq also improving on exports, Saudi Arabia may reduce to 9m barrels per day. However, the increasing local demand may need higher output and also consume the export revenues in the years to come. Meanwhile, the construction industry is expected to be quite busy in 2013. Since the government is expected to resolve the scarcity of low-cost housing, this promises to put in 500,000 units to the current stocks and also to invest in industry, education and infrastructure. The construction section is expected to benefit from the funding of capital-works in 2013 and the rest of the coming years (Sasson, 43). With estimates putting the necessity for new homes at approximately 264,000 units annually by 2020, plus widespread infrastructure program, companies in this sector will be working at an almost complete power in the medium term. One of Saudi Arabia’s policy changes in 2012 was evident in mid-November after the government ruled out that private companies had to employ more Saudi citizens than foreigner or else be legible for payment of a yearly levy amounting to $640 for each emigre on staff above the local workers. This is one of the measures that the government takes to solve the issue of unemployment amongst its citizens. The government took this action after it realized that approximately 448,000 Saudi Arabian citizens were looking for jobs, while the foreigners held jobs in 80 percent of the private sector. The need of creating more jobs for the Saudi citizens has become a pressing issue. The MoL estimated that approximately 3 million jobs would be created by 2015 to drain the huge numbers of job seekers and absorb the new pool of workers. This year, inflation has dropped stridently because the external factors that were responsible for its surge in the past years have overturned. Commodity and food prices have also fallen and there have been favorable rate movements. Rents are still the main cause of inflation; however, they have also slipped because of the provision of lower costs of building material and provision of more homes. With the prices of commodities improving and the weakening of the dollar, inflation is expected to fall lower in the rest of the year. Year after year, inflation has been approximately 5.8 percent in the first seven months of the year and has remained at 4.2 percent in July. Inflation in every part of the cost of living index has dropped this year. The most articulate drop was in foodstuffs, where inflation was at one percent in July compared to December’s 11.3 percent. Inflation of rent remained at 13.5 percent in July. While this stays pretty high, it has been dropping for every last twelve months after July 2008’s 19.8 percent. The following are the contributing factors for Saudi’s inflation this year: Global prices of foodstuffs increased in mid last year due to global recession, which was much better than relaxation of obstruction to food exports brought earlier during the year. In July, the prices of foodstuffs were 24 percent lesser than the last peak. The Saudi Arabian retailers have not completely passed this decline; the component of food price of inflation basket has declined by 5 percent from its peak (Sasson, 41). However, this is likely to reveal retailers rebuilding margins because they do not pass the complete extent of food price increment in the past two years for the consumer. The financial crisis also prompted a remarkable strengthening of the US dollar because the investors cut their risky bets and instead invested in the comparatively liquid financial market of the US. Considering the peg of the riyal to the dollar, the increase reduced import costs from outside the US. The rate of global trade and fuel prices have reduced significantly because the world was in recession , with Baltic dry freight index falling by more than 70 percent in the year compared to 2008. Considering Saudi’s dependence on imports, these limited costs have contributed to reducing inflation. Saudi Arabia also has a lower inflation in its trading partners. IMF conducted a study and discovered that inflation in trading partners was the main determinant of Saudi Arabia inflation. The IMF data proved that inflation in advanced economies is expected to reduce to approximately 0.1 percent from 3.4 in 2008. The economic drop has enabled bottlenecks to ease and also prices to lower down. Prices of raw materials for construction has reduced as activities of the private sector eased and this caused stockpiles in Saudi Arabia, which resulted to lower prices. Works Cited Sasson, Jean P. Daughters of Arabia. London: Bantam, 2004. Print. Works cited Read More