Analysis |

Saudi Arabia Looks Great in PR Videos. Reality Is More Complicated

Saudi Arabia has $7.2 trillion worth of plans for grandiose projects between now and 2030, but it’s by no means certain it can pull them off

A photo of Dr. Zvi Bar'el.
Zvi Bar'el
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Mecca, Saudia Arabia, the site of the Muslim hajj pilgrimage.
Mecca, Saudia Arabia, the site of the Muslim hajj pilgrimage.Credit: Umit Bektas/Reuters
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

The Muslim holy month of Ramadan, which began on April 13, and the Eid al-Fitr holiday that wraps up the month are a time that merchants, importers and the public prepare for during the entire year. In normal times, it’s a month in which food consumption jumps, bank loans hit their upper limits, leisure sites and hotels are at maximum occupancy – and the mosques are packed with hundreds of thousands of the faithful.

This year Saudi Arabia, where Islam’s holiest sites are located has been preparing with major trepidation for Ramadan and Eid and the major pilgrimage to Mecca, the hajj, that follows. Looming over the situation is the prospect of a fourth coronavirus wave.

To combat it, the Saudi government has decided to impose strict limits on movement, thinning out attendance at mosque prayer services, banning admission to holy sites without a special permit and imposing fines of over $2,500 for violations of the rules.

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Security forces and thousands of volunteers have already set up roadblocks on highways leading to the holy cities, and inspectors will be waiting for visitors at the pilgrimage sites to check their entry permits, which are only granted to those who are fully vaccinated. In recent years, Saudi Arabia has invested enormous sums in improving the roads, expanding the sites and monitoring the millions of visitors to the kingdom – including the installation of thousands of security cameras, sprinklers to ease the heat and mobile medical clinics to serve the pilgrims.

The holy places are not only an important income source for the kingdom. They are also an essential component in the economic diversification that Crown Prince Mohammed bin Salman is seeking to create as part of his Saudi Vision 2030 plan to reduce the country’s dependence on oil revenues.

The Vision project includes the construction of the “city of the future, Neom, which is due to be extend across three countries: Saudi Arabia, Egypt and Jordan. It also provides for the doubling of the population of Riyadh, the Saudi capital, and the city’s transformation into an international commercial center that would compete with Dubai and maybe even surpass it as the most important commercial center in the Middle East. The plan also includes the “Saudization” of the kingdom’s workforce.

It is estimated that the Saudis plan on investing $7.2 trillion in these grandiose projects by 2030, but it’s nearly impossible to determine how realistic that figure is – or whether the plan is achievable. This year the kingdom cut the government budget by about 7 percent to curb its budget deficit, which is 12 percent of GDP.

Saudi Arabia owes billions of dollars to foreign companies that built Riyadh’s metro system, part of the infrastructure essential to make the city an international center of commerce. Financing its ongoing expenses and allocating considerable sums to development will require the government to continue to rely on oil as its main source of income in the next few years, but the current price of oil $64 a barrel, is $12 less than Saudi Arabia needs to balance its budget.

The OPEC Plus group – which includes the countries that are members of the Organization of Petroleum Exporting Countries as well as oil-producing countries that are not OPEC members – is currently headed by the Saudi oil minister. It’s still vacillating between the desire of a few of its members to expand production quotas and the option of sticking with current quotas to boost the oil price. Saudi Arabia has recently signaled that it would agree to increase the quotas in a slow and cautious manner, meaning that by July, the quotas would rise by a cumulative 2.1 million barrels per day for the members of the group.

The reopening of a number of leading economies of the world following the recession caused by the coronavirus could increase demand for oil, and the oil price. But if the world powers reach a renewed nuclear agreement with Iran and the oil sanctions imposed on Tehran are lifted, the oil market would get an initial injection of another 2 million barrels a day. Oil prices would then be expected to fall, pushing Saudi Arabia further away from achieving its goals.

Workers at a Saudi oil field.Credit: Ali Jarek / Reuters

To generate additional revenue, Prince Mohammed decided to ask for – or more precisely to demand – that the kingdom’s major corporations freeze the payment of dividends and provide the money for civilian projects. A few huge corporations, including Saudi Aramco, have agreed to the request, but in practice, it means that the government, which is a shareholder in the companies, will also receive less revenue in dividends. In the case of Aramco, that amounts to some $75 billion in lost revenue for the government.

To offset some of the loss, the government decided to sell the minority share it holds in the company’s pipeline project to a foreign consortium led by the American firm EIG Global Energy Partners. This step will bring in $12 billion. But in spite of the size of the deal, it still falls far short of providing the kingdom the amount of foreign investment that it needs.

Last year, Saudi Arabia had $5.5 billion in foreign investment, far less than the $500 billion that Prince Mohammed is hoping for by the end of the decade. To bridge the enormous gap, the government decided on a strategic plan to encourage foreign investment, including legislation giving a 50-year corporate tax exemption to foreign companies that move their center of operations to Saudi Arabia. That’s in addition to an exemption from the law on Saudization and preference in bidding on government business.

At the same time, a regulation adopted last month bans contracts between companies whose center of operations in the Middle East is not in Saudi Arabia and Saudi government ministries or companies. In this way, the kingdom hopes to force foreign companies to open business centers in the country and make Riyadh an international commercial center.

The policy could mainly hurt Dubai, which is currently considered the leading center of international business in the Middle East, but Turkey and Egypt could suffer as well. In the final quarter of 2020, the number of Saudi business licenses granted to foreign investors climbed sharply, to 466, the highest since 2005. But it’s still unclear from the official figures who these investors are and how much they are expected to invest.

The Saudi capital, Riyadh.Credit: Faisal Al Nasser/Reuters

The third leg of Vision 2030, the Saudization of the workforce, also appears to be just an aspiration for now. Granted that the law sets strict quotas on the number of foreign employees that companies may employ along with a ceiling on the ratio of Saudis to foreigners. A new regulation also requires that enclosed commercial spaces such as malls employ only Saudis – a rule that in theory could create more than 50,000 jobs for Saudi nationals. But the provisions, which since 2018 have been imposed on 12 manufacturing and service sectors, are full of exemptions based on need, government connections or because Saudi workers are not interested or are unable to replace foreign workers.

Take for example, the official announcement that the kingdom hopes to fill 20 percent of all engineering jobs and 30 percent of all accounting jobs with Saudi citizens. What the announcement does not say is where all these Saudi engineers, accountants and accounting managers will come from – at a time when the relevant departments at Saudi universities are unable to meet the demand. Saudi citizens prefer to study “easier” professions that provide them with a college degree quickly and easily – and then enable them to get government jobs that don’t require them to work too hard.

But even if a miracle does occur and sufficient numbers of Saudi engineers and accountants are found, in the best of cases, they would take the place of a few tens of thousands of foreigners at a time when there are more than 10.5 million foreign employees and only 3.1 million Saudi workers. Like the entire Vision project, life seems much more promising and prosperous on paper and in the professionally done public relations videos that the Saudis are producing.

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