Continued Progress in Saudi Economic Diversification

Diversifying the economy away from oil is one of the key goals of Saudi Arabia’s Vision 2030 program. Data from 2022 indicated that progress was being made toward a more diversified economy. Similarly, developments in exports, output, government revenue, and employment show that, across most metrics, further progress was made during 2023, although oil is still the dominant force in the Saudi economy.

Diversification Continued in 2023

The simplest way to track progress with diversification is to look at a time series of the relevant variables and see if they are moving in a direction consistent with a more diversified economy. For example, are non-oil exports as a share of total exports rising? Relying solely on this approach, however, can be misleading. In a year such as 2023, when oil output and oil export revenue declined, the economy can suddenly look more diversified even if there is no growth in the non-oil sector. Similarly, in a year such as 2022, when oil production and oil export revenue are high, the economy can look less diversified even if the non-oil sector has done well. It is therefore important to look through short-term swings in the oil market to identify underlying trends in diversification. One way of doing this is to compare two years when oil export revenue is similar. Below, outcomes in 2023 are compared with 2018 – when Saudi oil export revenue was $232 billion, close to the $248 billion in 2023 – and 2022.

Exports

Export diversification continued in 2023. The share of non-oil exports in total exports of goods and services rose to 33% from 27% in 2022 and 26% in 2018. If petrochemical exports are excluded from non-oil exports on the grounds that these products are closely related to oil, diversification progress is even more evident. The ratio of non-oil, nonpetrochemical exports to total exports of goods and services rose to 22% in 2023 from 15% in 2022 and 13% in 2018. Looking at non-oil exports as a share of non-oil gross domestic product, a broadly similar picture emerges.

The main driver of the expansion of non-oil exports has been the tourist sector. In 2023, revenue from nonresidents visiting Saudi Arabia increased by 43% to $36 billion. Tourism revenue has almost tripled since 2018, the last full year before the kingdom began issuing tourist visas in September 2019. There was also growth in exports of machinery and transportation equipment in 2023, although base metal exports, which grew significantly during 2022, stalled in 2023 as export prices fell. All three of these sectors, however, remain relatively small, accounting for 2% or less of total exports of goods and services.

Output

The composition of Saudi Arabia’s GDP has become more diversified. The share of the private non-oil sector in total nominal GDP increased to 44.6% in 2023 from 39.6% in 2022 and 42.8% in 2018. A similar story emerges for real GDP, which accounts for inflation. However, it is likely that companies owned by the Saudi Public Investment Fund are included in the definition of the private sector, so this data may overestimate the true private sector contribution to the economy.

The correlation between real private sector non-oil GDP and oil revenue has weakened since 2018, suggesting the non-oil economy has become less dependent on the oil sector.

Government Revenue

Revenue from non-oil sources continued to increase as a share of government revenue and as a share of non-oil GDP in 2023. As a share of total government revenue, it reached 37.8% in 2023, compared to 32.4% in 2022 and 32.5% in 2018. Non-oil revenue as a share of non-oil GDP was 18.2% in 2023, 17.5% in 2022, and 14.7% in 2018.

The increase in the share of non-oil revenue in 2023 relative to 2022 reflected the strong performance of the non-oil private economy in 2022 (corporate taxes are paid on the previous year’s performance), continued robust consumption growth, and lower oil revenue. Relative to 2018, the main reason for the increase in non-oil revenue is the higher value-added tax rate (15% compared to 5% in 2018).

Employment

Diversification in the labor market is more difficult to define. Here, labor market diversification is equated to a reduced reliance by private companies on non-Saudi workers and a lower reliance by Saudi nationals on employment in the public sector. These two indicators show mixed results for 2023 compared to 2022, but there has been substantial progress relative to 2018.

The share of employed Saudis working in the private sector increased to 59% in 2023 from 58% in 2022 and 55% in 2018. The share of Saudis in the private sector workforce, however, declined to 22.4% in 2023 (23.3% in 2022) but remained above the 2018 level of 18.3%. The number of Saudis employed in the private sector increased by around 100,000 during 2023, largely due to increased women’s employment, but this increase was swamped by a surge of 750,000 nonnationals employed in the private sector (unhelpfully, most of the increase in nonnational employment is categorized in “other activities” in the official data).

Plotting a Path Forward

Progress has been made in recent years in diversifying the Saudi economy, but there is much further to go before the economy can be considered “diversified.” Oil is still the dominant economic force in Saudi Arabia and will continue to be so for years to come.

The large investments being undertaken by the PIF and other government-related entities to spur growth in new sectors have received considerable attention. Neom garners news headlines on an almost daily basis. Most of these large investment projects, however, are still in their development phase and have not yet contributed to diversification. Indeed, the heavy investments being made during their construction are likely contributing to the strong growth in the employment of nonnationals and the robust growth in imports. The former explains why some labor market indicators show less diversification than two years ago, while the latter means the current account surplus is smaller than might have been expected given the growth in tourist receipts.

A case can be made that progress toward diversification has been driven by legal and regulatory reforms in recent years rather than the high level of public spending. The issuance of tourist visas is clearly a precondition for developing the nonreligious tourism sector. The introduction of the value-added tax and the concurrent strengthening of tax administration have been the drivers of government revenue diversification. Legal and other impediments to the participation of women in the economy have been eased, and women’s employment has increased, particularly in the private sector. Legal reforms, such as the introduction of Saudi Arabia’s new Civil Code and mining law, have set the basis for a more transparent and predictable investment environment.

Well-targeted public sector investment will be important to diversify the economy; some sectors will not develop without upfront public sector investment. But these investments should not be the center of attention. The continued success of the Saudi diversification strategy will more likely depend on the successful implementation of mundane structural economic reforms rather than headline-grabbing public sector investment initiatives. Areas where continued reform efforts are needed include: ensuring newly introduced laws and regulations are implemented and enforced as intended; reducing and simplifying the proliferation of government fees that may act as a constraint to doing business in the kingdom; and strengthening education and training systems to provide Saudis the skills needed for employment in a more diversified economy.