Saudi Arabia’s Shock Therapy

BEIRUT – Saudi Arabia has long relied on oil to fuel its economic growth and development. Last year, oil accounted for about three-quarters of the Kingdom’s total export revenues and around 90% of government revenue. But the recent collapse in oil prices highlighted what should long have been clear: Saudi Arabia, like the other oil and gas rich nations of the Middle East, needs a more diverse development model.

Since oil prices began to drop in mid-2014, Saudi Arabia has experienced a sharp decline in GDP growth, as well as lower liquidity and credit growth. Fiscal and current-account surpluses were transformed into deficits. This year, the two deficits are expected to reach 13% and 6.4% of GDP, respectively.

Moreover, despite past growth, the Kingdom’s real national wealth has declined. Oil revenues, as is the case elsewhere in the region, were not efficiently transformed into human capital, infrastructure, and the innovative capacity needed to generate productivity growth and diversify economic activity. So, beyond adjusting to the “new normal” in oil prices, Saudi Arabia must design a radically new economic model that addresses structural impediments to productivity and growth.

It is a tall order, one that most governments would pursue gradually. But Deputy Crown Prince Mohammad bin Salman’s National Transformation Program (NTP), announced last June, suggests that Saudi Arabia will take the opposite approach, subjecting the economy to a kind of shock therapy.