Theories have been developed to link domestic investments to the economic growth of countries. However, many scholars focus on foreign direct investment (FDI), which is considered one of the critical drivers of economic performance. Saudi Arabia is one of those states whose growth depends on the presence and use of natural resources. Fiscal policies and activities can be examined to identify how domestic savings and FID help the country. Therefore, this paper aims to address the question of Saudi Arabia’s success in generating domestic savings and attracting FDI. The focus will be on areas of savings, investments, FDIs, fiscal policy, foreign debt and aid, financial development, monetary policy, and inflation.
Savings, Investments, and FDI
Saudi Arabia is an economy driven by natural resources such as gas and oil. Therefore, government expenditure is massively responsible for the country’s gross domestic product (GDP). On the other hand, scholars such as Haque find that the private sector’s GDP is negatively correlated with the supply of money, which means that it plays a small role in the country’s capital savings (Haque 2). However, the situation is set to change because the government has implemented policies to diversify its economy, which will see the private sector make more significant contributions to capital savings and profitable investments.
Between 1985 and 2018, the oil sector’s contributions have declined from 46.02% to 43.84% (Haque 2). Other government sectors have recorded a similar trend where the GDP contribution has fallen from 21.72% to 19.96% (Haque 2). The policy changes to diversify the economy during the same period have resulted in an increase in non-oil private sector contributions toward GDP from 32.25% to 39.54% (Haque 2). Vision 2030 is the primary policy that encourages sufficient investment, especially in the non-oil private sectors.
The critical fiscal policy issues facing Saudi Arabia include the reforms intended to transform the country’s economy. The 2017 budget can be used to illustrate how the reform works. First, the government seeks to reduce the fiscal deficit from 11.7% of the GDP in 2016 to 7.7% in 2017 (Young). Government spending comprises the most significant economic activity. Vision 2030 and the National Transformation Program, established in 2016, play a vital role in economic change. Most importantly, government policies are also intended to develop the private sector. For example, bank credit and market capitalizations have been part of the financial development in the country (Haque 11).
Inefficient allocation of resources will be eliminated using control variables such as investment, trade openness, and government expenditure. In 2019, government spending as a GDP ratio was 35.61% (“Saudi Arabia: Ratio of government expenditure”). Depending on the oil prices and other economic dynamics, the percentage has been fluctuating, but the general trend has declined. The ratio will observe the same trend as projections show that government spending will gradually decrease with continued support for the private sector.
Financial Development and Inflation/Monetary Policy
The fact that the economy of Saudi Arabia has been founded on oil and gas means the country has had a shallow financial system. The argument is that the population did not have a wide choice of financial services. However, the economic transformations will change the situation, and the financial system will deepen. The International Monetary Fund (IMF) published a report in 2018, which highlights the financial depth of Saudi Arabia. In the publication, the efforts to deepen the country’s financial system are outlined, including diversification. Currently, these efforts have resulted in the development of pension funds, specialized credit institutions, investment funds, and commercial banks (IMF 47).
Saudi Arabia did not have a central bank independent of the government. However, the Council of Ministers has made a recent move to approve a new law where the Saudi Arabian Monetary Authority (SAMA) will become an independent Saudi Central Bank (Alshammari). SAMA is currently headed by a governor, a position occupied by Ahmed Abdulkarim Alkholifey. As an independent institution, SAMA is expected to build trust in the financial sector and support the nation’s economic growth.
Foreign Debt and Foreign Aid
Saudi Arabia does not receive foreign aid from other countries. However, it is one of the leading providers of official development assistance to third-world countries. Estimates show that between 1975 and 2010, Saudi Arabia has financed over 472 development projects in 77 nations (Saliba). The amount of money spent during this time has totaled SAR 33,258.99 million (Saliba). In addition to official development assistance, private contributions have also been part of Saudi’s foreign aid.
In conclusion, Saudi Arabia’s economic development has been fueled by natural resources such as gas and oil. Savings and investments have not been critical drivers of financial performance. However, recent reforms are seen to change the situation where the private sector is encouraged to grow. Such transformations attract capital savings and investments in the private sector. It can also be expected that FDIs will improve as the private sector develops. Efforts to change the economy through diversification can also be illustrated by establishing an independent central bank.
Alshammari, Hebshi. “SAMA to become Saudi Central Bank, with Full Independence.” Arab News. 2020. Web.
Haque, Mohammad. “The Growth of Private Sector and Financial Development in Saudi Arabia.” Economies, vol. 8, no. 2, 2020, pp. 1-15.
IMF. Saudi Arabia: Selected Issues. Country Report No. 18/264, IMF, 2018. Web.
Saliba, Issam. “Regulation of Foreign Aid: Saudi Arabia.” Library of Congress. 2020. Web.
“Saudi Arabia: Ratio of government expenditure to gross domestic product (GDP) from 2015 to 2025.” Statista. Web.
Young, Karen. “Reformers are Holding Ground: Saudi Arabia’s New Fiscal Policy.” AGSIW. 2017. Web.