RIYADH: Saudi Arabia’s non-oil gross domestic product is projected to grow by up to 6 percentage points by the end of the decade, boosted by Vision 2030 initiatives, according to S&P Global.
The international rating agency said that over the past decade, the non-oil economy, with an emphasis on increased consumer spending in tourism and construction, has strengthened its position as a key element in the Kingdom’s economic diversification strategy.
By 2030, the oil sector’s share of GDP is expected to fall from more than 30 percent in early 2024 to between 24 and 26 percent, reflecting a significant shift away from dependence on hydrocarbons, it predicted.
This transformation is supported by a substantial range of Vision 2030 megaprojects with a collective value exceeding $1 trillion. NEOM, a central component of this vision, is expected to attract almost half of the total investment. Despite potential adjustments to some projects, including NEOM, the overall economic outlook remains favorable, with the non-oil sector continuing to gain importance.
As domestic demand grows due to increased household consumption and a thriving tourism sector, Saudi Arabia is making steady progress towards reducing dependence on hydrocarbons.
The declining share of oil in GDP
Several factors are contributing to the decline in the share of oil in Saudi Arabia’s GDP.
First, the increase in domestic demand, especially household consumption, is gradually reducing the prominence of oil activities. Currently, household consumption in the Kingdom is about 15-20 percentage points lower than in economies with similar GDP per capita, indicating substantial growth potential.
As the nation implements strategies to increase consumer spending, the contribution of the non-oil sector to GDP is expected to increase, further reducing dependence on oil revenues.
The government is also focusing on increasing spending on recreation, which is currently low by international standards.
These changes are expected to reduce the share of the oil sector in the economy, even as oil production increases. The Saudi government has announced plans to increase oil production to 11 million barrels per day by 2028, which could offset some of the decline in oil’s contribution to GDP. However, oil’s overall share of the economy is expected to decline, aligning more closely with non-Gulf oil exporters such as Norway.
The key role of Vision 2030
The Kingdom’s Vision 2030 reform agenda is the main driver behind its non-oil GDP growth, aimed at diversifying the economy by expanding into key sectors such as tourism, entertainment and retail.
Vision 2030 initiatives are already transforming the country’s economic landscape through megaprojects and high-profile reforms aimed at boosting domestic consumption. A central objective of Vision 2030 is to improve the quality of life of Saudi citizens and residents, thereby stimulating consumer spending.
The Quality of Life Programme, a crucial element of the reform agenda, aims to increase interest in cultural, recreational and entertainment activities. By 2030, household spending on entertainment is expected to increase from the current 2.9% to 6%, creating new growth opportunities in the entertainment, tourism and retail sectors.
Social reforms, especially the increasing participation of women in the labor force, are also expected to boost domestic demand. Women’s labor force participation has already surpassed the original Vision 2030 target, rising from 18% to over 35%. This growth is likely to increase household incomes, leading to higher disposable income and consumer spending.
Additionally, the expanding role of women in previously restricted sectors such as sports and entertainment marks a significant milestone in reshaping the labor market and promoting economic inclusion. This transition is further supported by Saudization policies, which emphasize the employment of Saudi nationals and help raise wages.
Tourism and construction sectors
Tourism is becoming a key sector for economic diversification under Saudi Arabia’s Vision 2030 program. The government has set an ambitious target of attracting 150 million visitors annually by 2030, a target that is poised to significantly improve the tourism industry.
The introduction of electronic visas has simplified access for international tourists, and the completion of major tourism projects such as the Red Sea Project and AlUla is expected to further increase tourist arrivals. These initiatives are part of a larger strategy to position Saudi Arabia as a global destination, aiming to diversify the economy and reduce its dependence on oil.
International visitors generally contribute more to total tourist spending compared to domestic travel, providing a substantial boost to the economy. With government-backed efforts to expand tourism infrastructure, including hotels, resorts and cultural attractions, the sector will become a major driver of non-oil GDP growth.
The dual approach of attracting international travelers and encouraging residents to spend more domestically, especially in entertainment and leisure, is expected to significantly increase the share of tourism in the national economy.
The construction sector is another major beneficiary of Vision 2030. Gigaprojects such as NEOM, Qiddiya and Diriyah are transforming the Kingdom’s landscape, creating substantial demand for construction materials and services.
The total cost of Vision 2030 initiatives is estimated to exceed $1 trillion, with NEOM alone accounting for nearly half of that amount. Even if NEOM faces a cutback, as some reports suggest, the ongoing construction of other megaprojects will continue to boost domestic demand, making the sector a key contributor to GDP growth in the coming years. However, the impact of these projects on Saudi GDP may be somewhat moderated by the need to import construction materials and rely on foreign expertise.
Sustainable economic growth
While Vision 2030 is poised to spur strong economic growth over the next decade, the long-term success of Saudi Arabia’s diversification efforts will depend on improving labor productivity.
Historically, Saudi Arabia’s labor productivity has lagged behind that of developed and emerging economies. This is partly due to limited diversification into high-efficiency sectors and an overemphasis on less productive industries such as construction.
As the megaprojects near completion, the initial boost to domestic consumption and economic growth is expected to moderate.
To maintain momentum, Saudi Arabia will need to focus on increasing productivity, particularly in non-oil sectors. The Kingdom’s ability to promote innovation, improve education and develop the skills of the workforce will be essential in driving productivity growth and ensuring long-term economic growth.
Ongoing government initiatives to improve education and training, along with reforms aimed at increasing labor force participation, are expected to improve productivity over time. However, these improvements are likely to be gradual, with the full impact of these reforms taking several years to materialize. Meanwhile, the expansion of the non-oil sector, supported by the Vision 2030 megaprojects, will continue to be the main driver of economic growth.
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