Don’t be taken in by the surge in oil prices

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In primary school, we used to memorize in our geography lessons the locations of oil wells, refineries and ports of exports. We used to read that the Kingdom was very keen on diversifying its revenues by encouraging light industries and searching for other resources. It is unfortunate that this strategic intention lost its way between the strategies of the consecutive five-year economic plans. The oil sector has remained the main source of the national budget (90-95 percent) since the discovery of oil in 1932. This meant that the economic performance of the Kingdom for many decades was tied to the mercy of oil price volatility, up and down, until Vision 2030 rightly emerged early this year to put our economy on the right track by mitigating gradually its dependence on the oil sector.

But oil prices have continued to be volatile. They went down from $114 per barrel in June 2014 to $26 per barrel in early 2016 and moved gradually upward to touch $64 per barrel in late November 2017. On the other hand, economic forecasts expect oil prices to continue to rise to a range of between $70 to $80 by the end of the first quarter of 2018. Futurists in the field base their expectations on the following indicators:

1) The cooperative program and understanding between the Kingdom and Russia, the two largest producers in the market.

2) The continuation of efforts to reduce oil surplus in the market

3) The agreement among OPEC members and some non-members to continue their programs of production reduction up to the end of 2018.

Doubtless, these initiatives are optimistically positive and a comfort to budget makers. However, while we welcome these anticipations, we should not be taken in by the lure of every increase in oil prices and should not be led astray or away from the main strategic focus of Vision 2030 and should not reduce our enthusiasm to fulfill it. This is especially significant since Vision 2030 has become the center point and road map of the Kingdom’s economic, as well as, social, cultural, scientific, technological and developmental initiatives.

Needless to say that we are indebted to this vision, which provides a framework that requires commitment and enforcement regardless of how high oil prices may rise. We should not be taken in by a temporary or even permanent improvement in oil prices. The Saudi economy and development plans suffered for many years from oil-price volatility. Therefore, it is about time to neutralize, for good, the effect of the oil sector gradually and channel its revenues to the National Investment Fund (NIF). This requires that our plans until 2030 and beyond should concentrate on transforming the economy from one that is single-source and oil-based to a knowledge and productive economy that depends on multi-sector productivity (i.e., investment, industry, services, tourism and many others). The private sector must assume its role with higher positive contributions to our national GDP. This was one of the key points emphasized by the Custodian of the Two Holy Mosques, King Salman Bin Abdulaziz, in his speech in the Shoura Council on December 13, 2017.

However, the question that remains to be answered is how to start the process of transformation. I must admit I do not have all the answers, but here are some ideas:

1. Complete adherence to and compliance with the strategic objectives and initiatives of Vision 2030. This should be emphasized throughout the bureaucratic system and sub-systems of government. This rule must apply to all with no exception regardless of oil prices.

2. Gradual neutralization of the role of the oil sector and its effect in the economic wheel/cycle, and direct oil revenues to the NIF for future generations.

3. Design a progressive income tax system that is just and fair. Such a system should be implemented to all with no exception except lower income groups (SR 10,000 or less per month). The new “Citizen’s Account” Program is a good example in this direction.

4. Oil reserves should be preserved for future generations, and should also be rationed for local consumption and industrial use.

5. Provide incentives to non-oil sectors and encourage their entrepreneurial initiatives to reduce their dependence on government contracts.

6. Emphasize the expansion of transformational industries and exports development. The recent establishment of the Export Bank is a good example.

7. Diversification, as an economic concept, should be adopted by individuals and families as a way of life. Individuals have to work hard and double their incomes from other sources. Thus, diversification becomes an individualistic and not only an institutional issue.

8. Last but not least, we need to develop a culture of saving to increase our capital buildup for the economy. This is not an easy task, and requires a total rehabilitation of our consuming behavior.

(The author is a former member of the Shoura Council and Chairman of the UBT Advisory Board.)


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