External Environment of the Saudi Economy, Case Study Example

A country’s economy consists of various elements creating a system that does not exist in a vacuum but interacts with other entities in the global network of the world economy. The given section of the report on the Saudi economy pays attention to the external environment of economic development and its impact on GDP, reflection of the financial sphere of the national budget. Thus, the aim of this paper is to address the aforementioned aspects of the Saudi economy.

The external sector of the Saudi economy demonstrates that the country remains primarily oriented on the oil industry, which makes the entire economy and its external trade heavily dependent on the world and Arab crude oil prices. Consequently, since during 2014 and beginning of 2015 oil prices were low. For this reason, the overall number of Saudi export decreased from SAR 1,409.5 billion in 2013 to SAR 1,283.6 billion in 2014. Thus, the total value of merchandise exports decreased by 8.9 percent. In this regard, the primary reason is not the smaller amount of oil extraction by the country in 2014 but by the fall of prices for oil across the world. In 2013 one barrel could be sold at $106.53, while in 2014 only at $97.18.

The disadvantageous single-industry orientation of economy was demonstrated by the growth of non-oil export in 2014 by 7.2 percent in contrast to 6.1 percent in 2013. The country’s economy remains largely vulnerable to the oil process changes; however, it is on the right path of reforms, since strengthening of the non-oil exports can compensate for the deviations in oil exports. The government addressed this issue in terms of establishing the Saudi Fund for Development (SFD) that runs various programs aimed at diversification and support of non-oil sectors of the economy. In the framework of this program, various processes related to export, financing, crediting and insurance provision are conducted with an overall value of SAR 2.1 billion 2014.

In terms of the import of good, it increased by 3.4 percent in 2014. The first place in the overall import is once again related to the oil industry and includes various electric machines and equipment estimating 26.2 percent of the total import. The second place is transport equipment – 16.7 percent. The third place is taken by all other readymade goods that are not considered to be food – 14.9 percent. Food products are on the fourth place corresponding to 14.1 percent. The rest are the raw materials, jewelry and clothes. Of particular importance is import configuration by its origin. In this regard, the primary group of exporting countries to Saudi Arabia are non-Arab sixteen countries, which include China, USA, Germany, Japan, South Korea, India, France, Italy, Switzerland, UK, Thailand, Brazil, Turkey, Vietnam, Indonesia and Australia.

This group exports 69.8 percent of the total products imported into the Kingdom in 2014. The second group is the GCC countries that correspond to 7.3 percent, while other Arab countries – 2.9 percent. The rest of the world estimated at 19.9 percent. This structure of import is diversified which demonstrates country’s effective economic relations in the global economy and the opportunity to choose between the most suitable and cost-effective good available on the global market.

On the other hand, the dominance of the GCC countries in the export of non-oil goods into Saudi Arabia, except for the convenience of transportation and consequent reduction of costs creates a challenge for the national non-oil sector. In this regard, the government will need to balance the accessibility of the GCC countries’ non-oil sector products and stimulation of the development of the national equivalent. This is particularly the case with U.A.E. that exported good amounted to SAR 31.0 billion, which corresponded to 64.9 percent of the overall non-oil products from the GCC countries.  Of particular relevance in export-import correlations is the exchange rate trend. In this regard, since the American currency had a tendency to strengthening over 2014-15, irrespective of the official exchange rate being SAR 3.75 per $1, the NEER index rose  by 3.3 percent and REER index by 4.2 percent.

In terms of the public financing, the country continues spending money on the reforming of the economy and fulfilling commitments of the previous policies. Therefore, irrespective of the low oil prices, budget expenses were quite high. The expenses were devoted primarily to the structural reforms of education, healthcare, public services and infrastructure, support for research development projects – all aimed at further boosting the national economy. In this regard, education and HR development were allocated 25.1 percent of funds, 35.7 percent on defense and national security, 9.5 percent on healthcare, 9.4 percent on public administration, 5.6 percent on economic resources development, 4 percent on municipal services, 4.9 on subsidies, 2.6 on transport and communications, 1.7 on government specialized credit institutions and 1.5 on infrastructure development. The importance of this diversification of the budget allocation is because it treats country’s economic development systematically paying attention to various aspects investing into people and infrastructure as the primary potentials of the future growth.

The most significant indicator of country’s development is its GDP growth. Unlike the previous year, the GDP growth has decreased to the point of 0.3 percent in 2014, while it was 1.4 percent in 2013. The primary reason for the decline is a higher contraction in the oils segment of economy estimated at 9.4 percent in 2014 in contrast to 6.2 percent in 2013. Although this situation one’s again demonstrates a negative impact of oil-driven direction of economy, the analysis of GDP structure demonstrates that gradually the share of non-oil and private sector industries increases which can further stabilize the dependence of the Saudi economy from the fluctuations of the global oil prices. The report estimated that the private sector contribution to the overall GDP at constant prices increased in 2014 to the point of 39.5 percent, while it was 38.7 in 2013. The contribution of the government sector to GDP also increased from 15.8 percent in 2013 to 16.8 percent in 2014. Moreover, the oil sector contribution has decreased from 46.6 percent in 2013 to 42.1 percent in 2014. However, it remains the predominant source of GDP growth.

Overall, from all mentioned above, it can be concluded that the external environment of the Saudi economy demonstrates the historically conditioned necessity for structural reforming of the economy. In this regard, the country needs to carry on even further with diversification of non-oil sector and making it more competitive on the national and regional markets in order to satisfy national demand with national goods instead of importing goods from the neighboring countries.

On the other hand, diversification of countries exporters gives the country a good choice of the best products and services. It also raises national standards of demand and supply interactions. The analysis of GDP structure demonstrates that although reformation of the Saudi economy is on the way, the primary source of economic uncertainty is the oil sector that is heavily influenced by the global trends and global political situation. Although government invests in various aspects of the economy, its policies should be more harmonized, and various institutions like educational, governmental and private sector should be encouraged to work together rather than within individual agendas.