Economic
and Business Environment in Saudi Arabia
Abstract
Over the
past few years,
Saudi Arabia has
witnessed rapid economic
growth. Saudi Arabia is a major
exporter of oil.
However, the increase
in economic growth
cannot be attributed
to exports alone.
There have been
many factors which
have brought about
this fast paced
economic growth. This
paper discusses the
economic structure, the
trade and business
environment and investment
policies in Saudi
Arabia. The report
makes an initial
effort to show
how the economic
environment and business
environment are linked
to each other
and also what
are the major
benefits and challenges
of investing in
Saudi Arabia.
The structure
of the paper
is as follows:
1. Firstly, we
briefly discuss the
geography, politics and
economy of the
country.
2. Secondly, we
show how oil
resources have played
a role in
transforming the economy.
3. The next
issue we take
up is how
entrepreneurship and economic
development are linked,
which gives the
scope of economic
growth beyond crude
oil as a natural resource.
4. Having defined
the structure of
the economy and
its key features,
we turn to
take a look
at the key
benefits of investment
in Saudi Arabia.
5. Then, we
go on to
discuss some challenges
which a potential
foreign investor must
keep in mind
before deciding to
invest in the
country.
6. We
conclude with a
note on future
prospects for investment.
Introduction
The kingdom
of Saudi Arabia
has a geographical
area of 1,960,582 million sq. km., with
Riyadh as the
capital city. The majority
of the country
is a desert. The
government type is
a Monarchy with Council of Ministers
and Consultative Council.
There are no
political parties as
formal parties are
not legalized. As
per the 2010
data, some of the
economic and development
indicators are summarized
below.
Indicator
|
Male
|
Female
|
Total
|
|
|
|
|
Annual growth rate
|
-
|
-
|
3.8%
|
GDP
|
-
|
-
|
$ 623 billion
|
Per capita GDP
|
-
|
-
|
$24,200
|
Literacy
|
84.7%
|
70.8%
|
78.8%
|
Infant mortality rate
|
-
|
-
|
11.57
|
Life expectancy
|
74 years
|
78 years
|
-
|
Workforce
-Industry
- Services
-Agriculture
|
-
|
-
|
6.49 million ( 35%
foreign workers)
25%
63%
12%
|
Arable land
|
-
|
-
|
1.76%
|
Exports
|
-
|
-
|
$253 billion
|
Imports
|
-
|
-
|
$99 billion
|
|
|
|
|
The
country is endowed
with a number
of resources, primarily
crude oil. The
essential natural resources
are hydrocarbons, gold, uranium, bauxite, coal, iron,
phosphate, tungsten, zinc, silver, and copper.
The exports mainly
consist of petroleum
and petroleum products
while imports mainly
include manufactured goods.
The major trading
partners are China,
U.K, U.S, India,
Singapore, France, Japan,
Taiwan, South Korea
and Japan.
Role of Crude
Oil and Other
Natural Resources
The
Saudi Arabian economy
is an oil-based
economy and has
strong government controls
over all major economic
activities. It is a
well-to-do economy and
has the largest
petroleum reserves in
the world (26% of
the total world
reserves). It is
the largest exporter
of petroleum, and plays a leading
role in Organization of
the Petroleum Exporting
Countries (OPEC). The petroleum sector accounts
for roughly 75% of budget revenues,
40% of GDP,
and 90% of export earnings.
Almost, 35% of GDP comes
from
the private sector. Around four million foreign workers play an
important role in
the country’s economy, mainly, in the oil and
service sectors.
Saudi Arabia is
not only rich
in oil reserves,
but it also
enjoys the privilege
of low extraction
cost.
From
the 1970s
onwards, oil wealth
has played an
important role in
transforming the country's economy
into a modern
state.
It has helped
the country to
have an impressive physical and social
infrastructure. During the past three decades, Saudi Arabia
has spent $900 billion on the construction
of ultra modern roads, ports, air network, educational and health facilities.
Other
raw materials have
also contributed to
the development projects
in the country.
The Ministry of
Petroleum and Mineral
Resources has identified
more than 2000
sites that contain
raw material necessary
for the following
industries: Cement, gypsum,
glass, Chinese ceramics,
red brick, limestone,
and rock wool. These
raw materials have
assisted greatly in
the establishment of
factories, quarries and
other infrastructure which
have boosted the national economy.
The
availability of these
natural resources has
enormously helped the
country in foreign
trade and has
given it a
respectable position in
the world, today. Saudi Arabia's
trade balance has been
favorable in the
past. Due to
a widening surplus
between imports and
exports, this trend
is expected to
continue in the
future. Non-oil exports
are also expected to
play an increasingly
important role in the Kingdom's
international trade as
the focus is
now shifting towards
investment in export-oriented goods.
Business and Economic
Growth
More
business means more
income which means
more economic growth. In
general, entrepreneurship and economic
growth are very
closely and positively linked. An increase in the number of entrepreneurs means
that doing business
in the economy
is profitable and
this in turn leads to an increase in economic growth. The
major force driving
this, is the
propensity to innovate.
As businesses expand
and more firms
enter the market,
knowledge and skill
undergoes the process
of commercialization and
knowledge has a
“spill over” effect,
which creates new and exciting
business and economic
opportunities.
The
Saudi Arab government
has come up
with a Saudi
Fast Growth (SFG)
list. It is an
annual ranking of
the fastest-growing companies
in the Kingdom
of Saudi Arabia. As
economic growth is
a focus for
the Saudi Arabian
Government, the SFG
focuses on those
type of companies
which are stimulating
growth and will
also stimulate growth
in the future. By analyzing the conditions
that help entrepreneurs
prosper and the
practices that have made
companies on the list succeed, Saudi Arabian Government can develop
policies that encourage
new businesses to start-up and thrive.
This knowledge will be vital in stimulating the Saudi economy
in the desired
direction as they are the
economy’s largest employers and measuring
them gives
an opportunity to see how the economy is growing
and how much it
has diversified.
FOREIGN INVESTMENT POLICY
Owing to its
ambitious economic goals,
the Kingdom of
Saudi Arab realizes
that achieving rapid
economic growth requires
not just a
fine trade balance,
but also a steady flow
of technology,
innovation and expertise into the country. Therefore, it
follows a liberal
foreign investment policy.
It welcomes foreign capital and invites it to participate in economic
development projects. The government's policy is to
allow free movement of capital
without any restrictions
on capital mobility.
Also, the State respects private ownership
and has formulated
policies to promote
it.
Moreover, any foreign
investment that fulfills the requirements
of the Foreign Capital Investment Code
is entitled to enjoy all privileges
of national capital and is entitled to the same treatment,
protection , and incentives accorded to the national
capital. The
requirement of the
code is that foreign capital should be
invested in economic
development projects (which, under the
Code, do not include petroleum and mineral projects) and also it must be
accompanied by technical knowledge. Development projects are defined by the
Ministry of Industry and Electricity.
Provided that the share of national
capital is at least 25 percent, industrial or agricultural projects that
fulfill the above requirements enjoy the following benefits:
·
An income tax holiday of up to 10 years from
the commencement of commercial production.
·
Ownership of land according to the regulations
governing land ownership by non-Saudis.
·
For industrial projects, the same privileges
as those enjoyed by Saudi capital under the National Industries Protection and
Encouragement Regulations. These include:
a.
Exemption from customs duties on machinery,
equipment, tools and spare parts imported for industrial products.
b.
Exemption from customs duties on primary
raw materials, semi-finished goods, containers, etc., necessary
for industrial projects (provided that similar
items are not
sufficiently available locally).
c.
Provision by the government of plots of
land at a nominal rate for factories and residential
quarters for workers.
d.
Low electricity
and water rates.
e.
No restriction
on repatriation
of profits.
f.
Preferential treatment for local products in government
procurement in addition to preferential treatment accorded to national products by Arab
League and Saudi
Arabian bilateral trade agreements.
Thus, the
country focuses on
innovation and knowledge.
Quoting, Prince Naif,
The Saudi leadership, he said, is aware of the importance of innovation.
“This is the reason why we have focused on turning our economy into one that is
based on knowledge.”
Benefits of Investing
In Saudi Arabia
Saudi
Arabian economy is
one of the
fastest growing and
also one of
the fastest reforming
economies of the
world. Today, it
is recognized as
one of the
finest places to do business.
The fact that
its ranking has
improved from 67th to 13th position
in a short
period of time,
makes it a
favorite spot for
investors all across
the world. In just three
years, Saudi Arabia has risen from 67th to 23rd position in the World Bank’s
Ease of Doing Business Index and is currently number one in the Middle East.
The country not
only provides excellent
investment opportunities in the energy
sector, but also
offers an international
standard business environment
to help new
businesses explore the
opportunities and advantages
in this country.
Saudi
Arabia offers a
variety of benefits
for businesses to
thrive in the
region. Following are
the main advantages
that a potential
foreign investor can
enjoy by investing
in the country.
1. A
dynamic business environment
and high growth
rate
The
country has grown
at a stupendous
rate in the
past few years,
which has left
many surprised. The
growth rate in the Kingdom
of Saudi Arab has exceeded
even the world
growth rate and
is continuously accelerating.
Even though the
growth is mainly
oil-based, non-oil industries
have also played
an important role
in increasing the
economic performance of the country.
By investing in
infrastructure on a
large scale, the
government has made
sure that the growth
that the country
is experiencing is
sustainable in the
long-run. These conditions,
along with a good domestic
demand can substantially
benefit a foreign
investor.
2. Investment opportunities
Due
to rapid economic
progress and a
liberal foreign investment
policy, there are
ample investment opportunities
in the country.
Of course, it is no surprise that Saudi Arabia offers the world's most
competitive energy prices to investment projects. As such, Saudi Arabia
continues to be a natural choice for investors in all energy-intensive
industries.
But competitive advantage in today's Saudi
Arabia run much deeper than just energy. It's about creating a world-class
business environment that combines an ease of conducting business with low
costs.
The
country also presents
several export-oriented investment
opportunities that can
result in strong
and sustained growth
for a business.
3. Macroeconomic
conditions
The
economy is characterized
by sound and
stable macroeconomic conditions.
It provides stability
and a risk-free
environment for the
foreign investors. Also,
interest rates are
considerably lower in
the region.
4. Market size
The
country provides a
huge market for
businesses to thrive.
Also, there is
the aspect of
ease of access
as the country
has well linked
cities and also
other countries. The
economy provides a
competitive edge as
it allows businesses
Economic Challenges Facing Saudi Arabia
Even
though investing in
the country has
many advantages, it
is not challenge
free. An investor
must keep in
mind these hurdles
before deciding to
invest in Saudi
Arab.
Some
of the key
challenges that the
economy of Saudi
Arab faces are:
1. Diversification
The
Saudi Arabian economy
is an energy-based
economy. In the
past few years,
many attempts have
been made to
diversify and decentralize
the economy. However,
majority of the
attempts to diversify
have been unsuccessful.
2. Land shortage
This
is one of
the greatest challenges
as the government
is finding it
increasingly difficult to
provide land and
proper housing facilities
for the rising
population.
3. Education problem
Educational
reforms are few
and even the
ones that do
exist are incomplete
and insufficient. In this
respect religion comes
as a hurdle
and thus, modernization
becomes difficult.
4. Judicial issues
The
judicial system of
the State remains
backward and lacks
modernization. Even though
efforts are being
made to improve
the situation, the
judicial system still
has a long
way to go.
Also, the system
lacks transparency and
therefore creates further
troubles.
5. Credit crisis
The
recent crisis has
stalled investment in
the region and
it may take
time for the
economy to completely
overcome the crisis.
Conclusion
Saudi
Arabia’s fast-growing economy is creating opportunities for both exporters and investors.
These are further boosted by moves to diversify the economy away from
dependence on oil and gas, economic reform, market liberalisation and a growing
private sector. “Saudi Arabia has become key to the stability
of the world economy and this is reflected in the number of investors who are
lining up to invest in the Kingdom,” said Prince Naif. “Thanks to the economic
reforms, our rankings on various crucial indices have gone up phenomenally in
the last few years,” he said. Thus, Saudi
Arabia is a
good place to
invest, especially if
it is an
energy oriented business.
However, one must
consider the disadvantages
also before investing
in the country.
Even though the
benefits outweigh the
challenges, a particular
business may be
considerably hampered by
the challenges. So,
other than a
few challenges, the
Saudi Arabian economy
is expected to
grow and prosper
in the future.
References
Saudi Arabia best
place for investment - By
SIRAJ WAHAB
