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Saudi Arabia resets with new oil minister and the Vision 2030 economic plan

Saudi Arabia resets with new oil minister and the Vision 2030 economic plan
Published 11 May 2016 

The replacement of Saudi Arabia's longstanding oil minister is emblematic of the new developments around economic growth and political succession in the Kingdom. Former Aramco president, Khalid al-Falih, will now lead the newly expanded Ministry of Energy, Industry and Mineral Resources. He replaces Saudi's veteran oil minister of more than 23 years, Ali al-Naimi. The changing of the guard is significant in that it is closely linked to a new economic reform agenda born of broader shifts in the global commodities market including new competition from North America.

Deputy Crown Prince  Mohammed bin Salman is leading Saudi Arabia's economic overhaul (Photo: Getty Images)

The cabinet shuffle comes hot on the heels of the release of Vision 2030, a bold economic plan to break Saudi's 'addiction to oil' by diversifying national income, boosting foreign direct investment and creating jobs for the nation's growing (and youthful) population.

If this sounds familiar, it's because similar ambitions have been on the books for the last four decades. Saudi Arabia was the first Gulf state to produce a diversification program, in 1970. The newest iteration confirms previous planning efforts have largely fallen short.

By most measures, Saudi Arabia is more reliant on oil income than ever before. The Kingdom's GDP continues to move in tandem with commodity prices, while hydrocarbon rents constitutes more than 70% of government revenue. Though the Kingdom has relatively low extraction costs, ever higher global oil prices are necessary to balance state budgets (currently upwards of $95/barrel). This is due to the high level of rent distribution and social spending including subsidies and sinecures . As an example of the largesse that is frequently associated with 'rentier states' King Salman distributed two month salary bonuses to Saudis after his ascension to the throne in late 2014.

Is this generous rentier state social contract in the process of being renegotiated? Though the Kingdom has foregone more than $86 billion in lost income over the last year due to its 'Walmart strategy', low oil prices have presented the rare opportunity to scale back subsidies and gain control over runaway state finances. Much IMF ink has been spilt over such subsidies. Saudi Arabia has long been associated with fossil fuel waste and thus high expenditure: petrol is sold cheaply and electricity is practically free at 1 cent per kilowatt hour. Overuse and market distortions have seen domestic consumption increase 7% per year, outstripping population growth. State expenditure has climbed post-Arab Spring, inclusive of a 50% increase in spending over the last five years, owing to boosts in the minimum wage, unemployment benefits and generous financial packages distributed to quell protests.

In an effort to curtail the growing deficit (estimated by the IMF to reach 20% of GDP this year), spending on subsidies and the military has been modestly decreased (though Saudi Arabia still spends the highest percent of its GDP on the military than any other country). Additionally, Vision 2030 outlines new measures to bolster the private sector and raise capital through the sale of state assets, including a public listing of up to 5% of Aramco, the world's largest oil company. The replacement of al -Naimi with the chairman of Aramco signals the primacy of the oil giant to the state's future plans.

Importantly, the high profile cabinet shuffles are also indicative of the growing power of the Deputy Crown Prince, the 31-year-old Mohammed bin Salman who heads the Council for Economic Affairs and Development, and is seen to be leading the economic overhaul. [fold] The Deputy Crown Prince is the son of the current ruler, and together with the Crown Prince, are the first grandsons of Ibn Saud to hold the posts. This is a dramatic but necessary departure from the Kingdom's tradition of agnatic primogeniture whereby succession has proceeded horizontally through male siblings rather than vertically through descendants. The transition to the new generation is nominally based on merit as approved through the royal council. However, given the number of grandsons eligible for the throne, lines of succession are subject to revision. Vision 2030 and new cabinet appointments are useful for building prestige and power consolidation around the current line-up.

The new plan will need to succeed for both political succession and economic growth to proceed smoothly. Al Naimi may well be breathing a sigh of relief that it's no longer his job to help ensure such a delicate transition.

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